Partial Ownership Induces Customised Investments Under Repeated Interaction: An Explanation of Japanese Manufacturer‐Suppliers Relationships
| Date | 01 August 2001 |
| Published date | 01 August 2001 |
| DOI | http://doi.org/10.1111/1467-9485.00203 |
| Author | Hodaka Morita |
{Journals}sjpe/48_3/c164/makeup/c164.3d
PARTIAL OWNERSHIP INDUCES CUSTOMISED
INVESTMENTS UNDER REPEATED
INTERACTION: AN EXPLANATION OF
JAPANESE MANUFACTURER-SUPPLIERS
RELATIONSHIPS
Hodaka Morita*
ABSTRACT
A dominant manufacturing firm often holds partial shares of its suppliers, and
the suppliers are willing to make investments customised to the manufacturer.
Furthermore, this type of manufacturer-suppliers relationship is often long-term
and stable. This paper provides an explanation for this phenomenon by modelling
repeated interaction between a downstream manufacturer and upstream suppliers.
In the model, the manufacturer could avoid, by partially owning a supplier, hold-up
problems which would arise from the supplier's customised investment. The model
distinguishes between two sources of appropriable quasi-rents, and yields new
empirical predictions concerning the relationship between appropriable quasi-rents
and vertical integration.
II
NTRODUCTION
The relationship between Japanese manufacturing firms and their suppliers has
several distinctive features, which have often been regarded as crucial sources of
the strength of Japanese manufacturing. This paper focuses on the following
three features. First, a dominant manufacturing firm typically owns partial
shareholdings of their suppliers.1Second, suppliers make investments that are
customised to their purchaser.2Third, the relationship between manufacturing
Scottish Journal of Political Economy,Vol.48,No.3,August2001
#Scottish Economic Society 2001,Publ ishedby Blackwell Publishers Ltd, 108 Cowley Road, Oxford OX4 1JF, UK and
350 Main Street, Malden, MA 02148, USA
345
*University of New South Wales
1Aoki (1984) pointed out that major Japanese corporations such as Nippon Steel, Toyota,
Nissan, Hitachi, and Matsushita invested a significant fraction of their total financial
investment in their subsidiary firms. Similarly, Dyer and Ouchi (1993) found, through their two-
year study of the Japanese and US automobile industries, that Japanese auto-manufacturers
take significant partial ownership positions in many key suppliers; for example Nissan owns
33% (on average) of the shares of its major supplier partners.
2Dyer and Ouchi (1993) pointed out that Japanese suppliers were willing to invest in
customised equipment such as dies, moulds and jigs, locate their plants quite close to the
manufacturer, and invest in customer-specific human capital (e.g. let their own engineers
develop significant partner-specific knowledge).
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