KIERETSU model in Japanese industry and its implications

Abstract

Executive Summary The most common Japanese meaning of keiretsu is close to the English verbs “link”, “affiliate with” or “connect to”. In corporate culture, keiretsu refers to a uniquely Japanese form of corporate organization. A keiretsu is a grouping or family of affiliated companies that form a tight knit alliance to work towards each other’s mutual success. There are 2 most ways to classify keiretsu. One classification is Yoko (horizontal) and Tate (vertical). A horizontal keiretsu is a group of very large companies with common ties to a powerful bank, united by shared stockholdings, trading relations. The vertical or pyramid keiretsu is made up of one very large company and hundreds or thousands of small companies subservient to it. The keiretsu are a result of the Ministry of International Trade and Industry’s reformation of the economy after the Occupation of the allies. Shortage of capital in the economy was one of the main reasons why MITI promoted the development of the main banks. There has been a lot of research in the field of understanding how a keiretsu operates and whether it adds any value to a firm which wants to affiliate itself with a keiretsu. This study tries to answer the following questions in this regard: ??Does affiliating to Keiretsu guarantee excellent results? ??Does affiliating to Keiretsu guarantee stability in results? ??Does the Capital Structure of Keiretsu firm have some impact on the firm? ??Is there something to learn from the Japanese Keiretsu System? Our analysis is based on 97 Japanese companies, categorizing them into old keiretsu, new keiretsu and independent firms across four industries. The Hexagon Criteria evaluates both the corporate governance as well as operational performance parameters for the firms. Our study has resulted in following conclusions: 1. Independent firms show better performance over the decades across industries indicating that affiliation to Keirestu doesn’t ensure better profits and in fact lowers the same. 2. Affiliation to a keiretsu has however provided stability of returns over the independent firms. This is referred to as ‘Mutual Assurance Scheme’ in earlier studies. 3. Clear differences in capital structure of Keiretsu and Independent firms indicate easier access of debt to Keiretsu firms over Independent firms. Moreover, our analysis when applied to an Industry in different stages, we see that it is beneficial for a firm to follow keiretsu model in new industry or turnaround industry while following independent route in a mature industry. Similar conclusions can be drawn at the economy level in emerging & developed.