1996 Reports

The Japanese business system: Key features and prospects for change

Westney, D. E.

This paper argues that the Japanese business system cannot be adequately understood without extending the focus of analysis beyond the individual firm to the vertical keiretsu, or business group. The vertical group or keiretsu structure was first identified and studied in the auto and electronics industries, where it is most strongly marked, but it characterizes virtually all sectors, service industries as well as manufacturing. Large industrial vertical keiretsu are composed of subsidiaries engaged in three distinct types of activities (manufacturing, marketing, and quasi-related business.) The coordination and control systems are built on the flows of products, financial resources, information and technology, and people across formal company boundaries, with the parent firm controlling the key flows. The paper examines the prevailing explanations first for the emergence and then for the persistence of the vertical group structure, and looks at the current pressures for change and adaptation in the system.