How strong are networks?

Industry relocation and industrial districts in Japan

Ana Colovic

University of Paris – Dauphine

Research centre DMSP

Place du Maréchal de Lattre de Tassigny

75775 Paris cedex 16, France

phone: 33 1 42014382/ 33 6 89668405

email: ana.colovic@dauphine.fr

Abstract

This paper studies how the relocation of industries affects industrial districts in Japan. The

aim of the paper is to discern factors, which influence the adaptability of different types of

industrial districts. Data were collected through case studies. A qualitative methodology

based on interviews with entrepreneurs and local government officials was applied. Results of

the fieldwork conducted in eight industrial districts in Japan over the six-month period show

that company towns and traditional districts encounter more difficulty to adapt than urban

and regional industrial zones. This is partly due to the nature of inter-firm networks found in

these districts. Vertical inter-firm networks seem to hamper districts’ capacity to adapt, while

horizontal network forms, which consist of similar small firms seem to facilitate it. Based on

the results of the study, implications for policy makers are outlined and discussed.

Introduction

Since twenty years or so there has been a growing interest in industrial districts among

scholars in disciplines such as economy, geography, organization science and sociology. The

reason for this was the fact that regions characterized by industrial districts showed above-the-

average performance.

Industrial districts are defined as concentrations of industrial firms, most of which are small

and medium-sized enterprises (SMEs), in a limited geographic area (Piore and Sabel 1984).

Although districts were considered at first as a homogenous phenomenon (Becattini 1987),

subsequent research has shown that there are actually important differences among districts

(Markusen 1996, Paniccia 1998, Benko and Lipietz 2000) and that different forms can be

distinguished.

Regardless of these differences, the great majority of districts are characterised by a certain

degree of cooperation among manufacturing firms. As Marshall (1920) argued, the most

advanced forms of cooperation between firms can be found within industrial districts. In fact,

in industrials districts firms engage in different kinds of cooperative relationships, forming

inter-firm networks. Network is a particular form of organization that consists of a ‘collection

of actors (N≥2) that pursue repeated, enduring exchange relations with one another and, at the

same time, lack a legitimate organizational authority to arbitrate and resolve disputes that may

arise during the exchange’ (Podolny and Page 1998: 58). Richardson (1972) was the first to

underline that networks are a particular form of inter-firm organizational arrangement, having

their proper characteristics. Speaking of ‘the dense network of co-operation and affiliation by

which firms are inter-related’ (1972: 883), Richardson stresses that by engaging in

cooperation, firms accept a certain degree of obligation to each other and thus a form of

insurance towards the future behaviour. This differentiates networks from market relations,

since the latter suppose no obligation between firms as to the future.

In Japan, there are numerous industrial districts agglomerating large numbers of firms, of

which most are SMEs. Even though many Western scholars have studied Japanese economy

and its extraordinary performance since the 1960s, attributed to institutions such as

obligational contracting and just-in-time production system, little attention was paid to

industrial districts in Japan. This is rather surprising, since Japan is one of the most

representative cases of an industrial organization by districts. Furthermore, Ito and Urata

(1992), argue, in their influential paper on the Japanese industrial SMEs, that industrial

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agglomerations are the key characteristic of the Japanese industry. With several hundred

industrial districts, Japan is, with Italy, a model for this phenomenon.

Globalisation and relocation of industries towards the lower production cost countries are

today affecting industries all over the world. A great proportion of industrial districts are

suffering from the hollowing-out of their industries. Although this process is taking place in

all developed countries, Japan is probably one of the most affected. This is due to its

closeness to Southeast Asia and especially to China, which attract companies from all over the

world. In addition, the cultural proximity between Japan and these countries facilitates

significantly the implantation of Japanese large firms in the region. Since the early nineties,

the process of relocation of industries is affecting all industrial districts in Japan.

Following the basic assumption that initial conditions in Japanese industrial districts are not

the same and that there are different district forms it is interesting to study different evolution

patterns of Japanese districts since the beginning of the relocation process. Thus, this paper

will attempt to answer the following question: How does the industry relocation process affect

different kinds of industrial districts in Japan?

The aim of the paper is to estimate, based on the empirical evidence, the adaptability of

industrial districts following a radical change in the environment. In particular, the study

wishes to analyze how the characteristics of a district affect its evolution pattern and its

capacity to survive and transform.

The paper is organized as follows. The first section presents the four major types of Japanese

industrial districts and their characteristics. Section 2 outlines the research methodology and

the scope of the study. Section 3 focuses on the results of the study, in other words, the

evolution of Japanese industrial districts in the industry relocation process. In section 4 these

results are discussed and explanations are sought in the theoretical literature. Section 5

outlines policy implications and discusses the efforts of the Japanese government in vein of

preserving industrial districts and transforming them into innovative clusters. The last section

concludes.

1. Industrial districts in Japan

In Japan, there are 550 industrial districts (MITI 2000) agglomerating thousands of

manufacturing firms, most of which are SMEs. The well-known role of Japanese industrial

concentrations is the formation of pyramid-like hierarchical subcontracting structures, which

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are the part of the so-called keiretsu system. However, not all districts are characterised by

such vertical inter-firm networks. In some districts, firms engage in many-to-many types of

networks forming horizontal structures. In other districts, a mixture of vertical and horizontal

relationships can be observed.

In total, based on the production and location characteristics, four major types of industrial

districts can be distinguished in Japan: company-towns, urban industrial zones, regional

industrial zones and traditional districts (Japanese Small Business Research Institute 1998).

The four major types of Japanese industrial districts and their main characteristics are

presented in table 1.

table 1. Typology of industrial districts in Japan

District type

Company town Urban industrial zone Regional Traditional

Industry

Location

Number of large firms

Networks

Examples

Specific (automobile,

electric machines)

Medium-sized cities

One

Vertical

Hitachi-city, Toyota-city

Various

Large cities

None

Horizontal

Ota ward, Higashi Osaka

Various

Medium-sized cities, regional

industrial centres

Several

Vertical and horizontal

HamamatsuSuwa

TraditionalConsumer goods

Small citiesMedium-sized

citiesLarge cities

None

Vertical

Fukui, Tsubame, Kiryu

Company towns

Company towns or more precisely company-castle-towns (kigyo joka machi1) are districts

formed by firms in industries such as automobile or electrical machines. The most

representative examples of such districts are Toyota-city in Aichi prefecture and Hitachi-city

in Ibaraki prefecture (see the map in the appendix). In such districts, there is only one large

company and virtually all manufacturing firms produce parts for that firm. The large firm

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‘controls’ the entire district, not only by employing the great proportion of the work force but

also by exerting influence on local administration and by owning facilities such as

supermarkets and hospitals.

Suppliers or subcontracting companies are organized in two or more tiers. The subcontracting

network takes the shape of a pyramid, with large companies at the top and the grass-roots

entrepreneurial firms at the base of the pyramid. Within this keiretsu system, large firms and

their suppliers are supposed to maintain long-term relationships based on repeated

transactions. The particular relationship, often called ‘parent-child’, is created between

principals and their subcontractors. Large firms transfer technology to subcontractors and are

ready to provide different kinds of aid. In return, subcontractors respond quickly to demands,

they are ready to constantly reduce their costs and to improve the quality of their work.

Nevertheless, competition is also maintained between suppliers (Gerlach and Lincoln 1992,

Japanese Small Business Research Institute 1998, 1999).

Large firms place orders to the first-tier suppliers and stimulate their growth by providing

technological and managerial assistance. On their turn, first-tier suppliers reproduce the same

kind of relationship with the second-tier suppliers which are their own subcontractors and so

on until the bottom of the pyramid. The base of the pyramid consists of hundreds or thousands

(in the case of Toyota-city) of very small size firms. It is in such conditions that the efficient

production systems, like just-in-time could have been put into work. In fact, all pyramid levels

had to learn to work in a synchronised manner to reply to high demands of these systems.

Urban industrial zones

Urban industrial zones are districts situated in big cities, such as Tokyo, Osaka or Nagoya.

Representative examples are Ota and Sumida ward in Tokyo and Higashi Osaka city within

the agglomeration of Osaka. These metropolitan industrial districts are extraordinary, both

due to their scale and by the proportion of micro firms. They are in a sense a unique

phenomenon (Whittaker 1997).

In these areas a greater diversity of industries can be found. Large firms are typically absent

and districts are formed exclusively by very small firms. The density of town factories in

urban industrial zones is the highest in Japan. In Higashi Osaka for example there are 160

factories per square kilometre (Higashi Osaka city 2001). Entrepreneurs and their families

usually live above the factory and work long hours.

A significant number of firms are subcontractors, but their clients are not necessarily large

firms. In fact, subcontracting relationships are also set up between small firms. One form of a

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subcontracting relationship takes place when workers become independent and receive orders

from their former employers. SMEs receive different orders from their clients. However, due

to their small size, they do not possess all the necessary equipment and competences to

respond to all demands. Therefore, firms set up a ‘system’ or a network with neighbouring

firms and the competences possessed by different firms complement each other. Small firms

engage in multifaceted relationships, forming horizontal network structures. They transfer and

share orders, equipment, information and co-operate in other ways. Interpersonal relationships

and social ties play an important role since it is by the means of these ties that work flows

between firms. Clients are outside the districts, and district firms usually work for several

different companies. The structure found in urban zones is therefore more flexible than the

one found in company towns.

Regional districts

Regional districts share some of the characteristics of company towns and some of urban

industrial zones. Examples of such districts are Hamamatsu in Shizuoka prefecture where

different large companies such as Honda, Yamaha, Suzuki and Kawai co-exist and Suwa in

Nagano prefecture, which is the district of Seiko-Epson, Kyocera and Olympus.

In these districts there are usually several large companies, each with its pyramid-like supplier

network. The presence of several large firms facilitates the accumulation of know-how and

knowledge transfer in different fields of specialization. However, districts are not completely

governed by these large firms. In addition, the shape of the pyramid structures is not as

straightforward as it is in company towns. The reason is that some subcontracting SMEs

subcontract for two or more large firms. For example, in Hamamatsu, some metal parts

producers supply Honda, Yamaha and Suzuki.

These districts contain also relatively independent firms, among which some produce parts,

some design and some are Original Equipment Manufacturers (OEM). Small firms are larger

and more spacious than in urban industrial zones. They can produce in larger volumes. They

are also more independent from other small firms in a sense that they can process in-house the

work that would have been outsourced in Tokyo and Osaka. Firms form horizontal networks

and some undertake Research and Development together. Some medium-sized firms that

develop their own products emerge as new leaders in the district.

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Geographically-based or traditional districts

The fourth district type are the geographically-based (Japanese Small Business Research

Institute 1998) or traditional districts, in textile, ceramics, house ware and other consumer

goods industries. These districts are called sanchi2 in Japanese. Some of them are several

centuries old and have made the glory of their regions. There are still numerous traditional

districts in Japan, but their number is constantly decreasing. Some of the examples are Fukui

in Fukui prefecture, Kiryu in Gunma prefecture and Tsubame in Niigata prefecture. Most

traditional districts are auto-sufficient in terms of production, which means that firms

collectively possess all the necessary resources and competences in specific industries. For

example, in the textile district of Kiryu, firms can produce any type of yarn, all types of cloth,

including embroidery, jacquard and others, they can apply all kinds of colour and there are

sewing firms which produce clothes and other kinds of products.

These districts present some similarities with Italian districts in similar industries (like Prato

for example), but also show differences, which are mostly due to divergences in distribution

systems in Italy and in Japan (Okamoto 1993). In traditional districts, wholesale firms

typically control production by acting as intermediaries between producers and final clients -

apparel makers and stores. Manufacturing firms are small and have few links with each other.

Since commercial firms control the entire system, most producers are not aware of which

firms actually belong to the same production network. In fact, the majority of manufacturing

firms deal only with wholesalers and other commercial firms. Thus, networks take the vertical

shape, since there are important differences in power between trading companies and

manufacturing firms. Division of labour within the district is one of district’s main

characteristics. Firms are narrowly specialised in one or a few production processes.

2. Research methodology, sample and data

Given the lack of research on Japanese industrial districts and their evolution, a qualitative

methodology was applied. Moreover, as Bogdan and Biklen argued, the scientific research

‘involves rigorous and systematic empirical inquiry; that is, which is data-based. Qualitative

research meets these requirements’ (1982: 39). In fact Japanese districts can not be well

studied and understood if we do not take into account the elements of the local context in

which firms are embedded and qualitative methodology is the most adapted for including

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local context in the study. Qualitative data enable rich descriptions and explanations, based on

the processes embedded in local context.

Data were collected through a field study. The field study was performed in eight industrial

districts in Japan. A case study approach was applied (Yin 1984, Eisenhardt 1989). Eight case

studies, corresponding to eight industrial districts were conducted over the six-month period

from October 2002 to April 2003. Additional elements were gathered in 2004. The sample

was determined with respect of the criteria of heterogeneity, as suggest Glaser and Strauss

(1967) and homogeneity, following the guidelines set by Yin (1984) who insists on the logic

of replication, that is, on choice of cases as similar as possible to enhance the validity of the

research. Thus, all four types of districts were covered (heterogeneity) and two cases were

chosen for each district type (homogeneity). The cases studied are Hitachi and Musashi

Murayama as company towns, Ota ward in Tokyo and Higashi Osaka as urban industrial

zones, Hamamatsu and Suwa as regional districts, Kiryu and Taito ward in Tokyo as

traditional districts. The sample of districts studied is presented in table 2.

table 2. Cases studied

Company-castle town

Hitachi city

Musashi Murayama

Urban industrial area

Ota-ward

Higashi Osaka

Regional industrial zone

Suwa

Hamamatsu

Traditional district

Kiryu

Taito-ward

To summarize, case studies were chosen in such a manner as to cover all four major types of

industrial districts in Japan. They should therefore reflect well the Japanese case. However,

even though the study examines only the Japanese case, there might be some similarities in

districts’ evolution patterns in other developed countries.

Data were collected through semi-structured interviews conducted in Japanese with

entrepreneurs and local government officials in industrial districts. They lasted from 45

minutes to two hours and a half. In total, 42 interviews were conducted. An interview guide

was developed before the data collection. It was subsequently modified to include new topics

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that emerged during the field study. Interviews did not follow strictly the order of themes in

the interview guide in order to preserve the natural and logical sequence of conversation.

Nevertheless, all the topics contained in the interview guide were covered. The main topics

were the following: activity of the firm and its main characteristics; inter-firm cooperation and

networks; industrial district as the environment of the firm; nature of ties between actors;

major problems in the district and future perspectives; actions taken in order to adapt and

survive including efforts by firms and government activities. Naturally, interviews with local

government officials were somewhat different. Local government officials provided an

overview of the situation in the district and proposed their view on how the district evolves. In

addition, all government officials wished to put forward their own actions in vein of helping

SMEs in the district.

All interviews were recorded, transcribed in Japanese and then translated, following the

guidelines for qualitative data analysis set by Miles and Huberman (1984). The text was then

coded in order to condense the data, identify useful parts, classify and group passages that

deal with the same topics. After coding, the text was prepared for analysis.

In addition to interviews, auxiliary data, such as reports, statistics and company brochures

were collected and observations were made in factories and districts. These other data sources

enable triangulation of data (Denzin and Lincoln 1994), which enhances the internal validity

of the results.

Data analysis was organized in two stages. First, each case was analysed separately through

an intra-case analysis. At this first stage, conceptual grouping matrixes (Miles and Huberman

1984) were used. In these matrixes the text dealing with the same concepts was grouped

together. A comprehensive reading of all matrices generated the first results at this stage. At

the end of each analysis, a district profile, summarizing key elements related to district

characteristics and evolution of the district was proposed.

The second stage consisted in a cross-case analysis. Cases were compared in order to

distinguish similarities and differences across different cases. At this stage the Qualitative

Comparative Analysis, developed by Ragin (1987) was applied. This method consists in

comparing cases for several variables, which are chosen in a way to cover as much as possible

the significant factors. Coding the cases for the chosen variables and discussion of observed

and unobserved configurations led gradually to discerning patterns across cases.

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3. Industry relocation and districts in Japan

The results of the study that refer to industry relocation and evolution of Japanese industrial

districts will be outlined in this section. Based on the results of the study different evolution

patterns can be distinguished.

Evidence of industry relocation was found in all eight districts studied. Therefore, industry

relocation can be regarded as a common condition for all cases. This fact makes the cross-

case comparison possible and meaningful. In the continuation of this section, major findings

for the four types of industrial districts will be presented and illustrated with evidence from

the case studies.

Industry relocation and company towns

In company towns, characterized by a dominance of one large firm and subcontracting

activities, a significant decrease in number of manufacturing SMEs can be observed. In

Hitachi, for example, the number of SMEs has decreased from 1000 to 700 in the space of

less than ten years.

Parent firms leave numerous subcontracting SMEs without orders. In some cases orders

decline gradually, in others they cease from one year to the other. In Hitachi city an

entrepreneur whose firm used to supply exclusively Hitachi and is now left without any order

said: ‘We went from only Hitachi to zero Hitachi’. Even though this SME worked for many

years as a first-tier supplier for Hitachi, manufacturing components and micro motors, the

orders from Hitachi have stopped completely. To make the situation even worse, the SME

that trusted blindly its parent company, even provided training to a factory in South East Asia

at Hitachi’s request only to find out later that this factory will replace it as Hitachi’s supplier.

This example is drastic, but it is not an exception. Similar examples can be found across the

entire district.

In Musashi Murayama, Nissan closed its huge plant in 2001, within the context of the Nissan

Revival Plan3 leaving local firms without work. Manufacturing firms are not the only

affected. The Murayama plant employed thousands of people and there were many service

firms such as supermarkets, bars, restaurants and maintenance firms. Most of the service firms

closed when Nissan left the district.

In these circumstances, some SMEs try to find new clients and orient their production to meet

other needs. However, finding new clients is a very difficult task for firms in company towns.

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On one hand, small firms lack information, contacts and commercial skills. Until recently,

they had no need to seek for clients, they were certain to receive constant orders from their

parent company – Hitachi in Hitachi-city and Nissan in Musashi Murayama. Going outside

the district, in search for clients is therefore a difficult job. On the other hand, large firms

from outside the district hesitate to place orders to company towns’ SMEs, since company

towns are considered as a ‘reserved territory’.

Some SMEs try to invest in building new competences and acquiring new skills. Some efforts

towards innovation can also be observed. In Hitachi-city for example, a group of ex-

subcontractors developed a bioreactor by joining forces. They were helped by the newly

established Centre for industrial support, created by the government in 1999 with the aim of

helping subcontracting firms to overcome the crisis. Nevertheless, successful product

developments remain rare and are insufficient to overcome the crisis.

There are also attempts to create cooperative relationships between SMEs. SMEs are

beginning to understand the advantages of horizontal networks but the lack of previous ties

makes setting up of such networks rather difficult. In fact, SMEs have established

relationships only with their clients and their own subcontractors, within the keiretsu system.

Setting up a network with confrere SMEs means building something new from the start,

therefore many firms do not even try, and those that do encounter problems.

All these elements point out that the overall adaptability of company towns in the industry

relocation process is weak.

Industry relocation and urban industrial zones

Like company towns, urban industrial zones are hit by industry relocation. Since large

Japanese firms transfer their production abroad, fewer orders arrive to town factories in large

cities.

In these districts, characterized by enhanced relationships and horizontal networking among a

myriad of small firms, entrepreneurs seem to engage even more in inter-firm cooperation. In

urban zones, typically there are numerous horizontal inter-firm networks aiming at sharing

equipment, orders and joint production. Nowadays, entrepreneurs are trying to make use of

their networks to put forward Research and Development (R&D) projects. Since urban SMEs

are very small, they lack resources to conduct R&D projects separately. During the times of

work abundance in Japan, they did not need to invest in innovation, but today, they have

realized that the only way to survive is to build high skills and rare competences in new fields,

in which competition from Asian firms is still relatively low. Thus, they focus more on

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exploring new competences than on exploiting existing ones. Inter-firm networks are seen as

means of acquiring and building such new competences that are valued by the radically

changing environment.

An interesting example of joint innovation is the Higashi Osaka Satellite project. In Higashi

Osaka, around forty firms join forces in order to design, develop and produce a satellite, under

the leadership of a local entrepreneur who manufactures difficult-to-produce parts for Boeing

airplanes and NASA. This project was first considered as a utopia, but has gradually gained

popularity and recognition. The proof is that both local and national government have decided

to provide financing and other kinds of support. An interesting point is that the group tried to

build a partnership with university researchers, but this partnership failed. Entrepreneurs say

that university researchers did not work at the same pace as entrepreneurs, they were rather

slow and did not show enthusiasm. This example is rather revealing, since one of the major

difficulties and challenges in Japan nowadays is to build durable partnerships between

members of the academia and the industry.

To summarize, although the overall situation in urban industrial zones is severe, the enhanced

efforts of local SMEs suggest that the adaptability of these districts is generally greater than of

company-castle towns. This is probably due to the massive existence of horizontal inter-firm

networks that endure even in industry relocation periods.

Industry relocation and regional districts

As mentioned earlier, in regional districts there are typically several large companies with

their subcontracting networks, but there are also some independent small and medium-sized

firms. These districts, like all other districts in Japan are suffering from the relocation

processes, due mostly to the departure of large firms’ production from the district.

Like in company towns, subcontracting SMEs are getting fewer orders and some are left

completely without work by their parent companies. Most firms are not prepared for such a

change and prove difficulties in finding new clients. To illustrate this situation a former

Yamaha’s supplier in the district of Hamamatsu said: ‘it is as if they released the goldfish

from a bowl. We, the goldfish, must now learn to swim in the open sea’.

However, the situation seems to be somewhat better than in company towns. Since there are

several large companies in the district, SMEs receive more information on business

opportunities, potential clients, technology and trends. In addition, it is easier for them to find

new clients and obtain orders from outside the district. Still, vertical network structures seem

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to restrict SMEs since these firms develop a particular ‘subcontracting’ mentality and sense of

belonging to the parent company. They also have weak commercial skills.

In regional districts, there are not only vertical networks but also horizontal network forms.

Within these networks, SMEs are multiplying efforts in innovation. Moreover, they enter

completely new fields, such as nanotechnology or biotechnology. Upgrading existing and

acquiring new competences are considered as key elements in new conditions. Since vertical

subcontracting networks are being gradually dismantled SMEs seem to understand that they

can no longer rely only on subcontracting to survive.

Leading medium-sized firms emerge as new leaders in these districts. They typically conduct

several R&D projects and engage in inter-firm cooperation.

These elements indicate that the capacity to adapt to the changing environment is greater in

regional districts than in company towns.

Industry relocation and traditional districts

In traditional districts the situation seems very difficult for SMEs. China has been offering

consumer goods at very low prices and wholesale companies that control traditional districts

are abandoning local Japanese producers.

In traditional and consumer goods industries very few SMEs undertake innovation. Some

producers conduct market analyses to collect data on consumer tastes and fashion trends, but

overall, these efforts are rather rare.

Some manufacturing firms try to shorten the distribution channels by establishing direct

contacts with apparel makers, stores and end users. Evidence of such efforts can be found

both in Kiryu, a textile district and in Taito ward in Tokyo, which produces shoes, leather

goods and accessories. However, the Japanese distribution system is very complex and most

stores are used to dealing directly only with trading companies. Thus, department stores, for

example, usually refuse to buy products from manufacturers.

Another problem is that Japanese consumers are attracted by branded products and favour

especially European luxury brands. Trading firms possess licences of these brands and thus

control the market. Even though local producers manufacture goods, most of them do not

have their own brands, but produce goods that match the design and style of licensed brands

of trading companies.

Nevertheless, some firms manage to avoid trading firms and sell directly to apparel makers

and stores. The movement towards shortening and simplification of distribution channels will

probably continue in the future, which might have positive consequences for manufacturers.

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There are also some efforts in creating entrepreneurial networks, but since the system was

controlled by commercial firms for a number of years, entrepreneurs in traditional industries

tend to regard other manufacturing firms as rivals rather than partners. Another new trend is

that some producers set up their own production networks and control them. It seems that in

such networks, some forms of co-operation between producers are possible.

Apart from these isolated efforts, the adaptability of these traditional districts seems very low.

Thus, the results of the study indicate that regional and urban industrial districts seem to show

stronger adaptability than company towns and traditional districts.

4. Discussion

The results of the study presented in the previous section indicate that there are significant

differences between districts as to their adaptability to the radically changing environment.

Some districts prove to be more flexible than others. In this section, the factors that emerge

from the field study will be examined and explanations as to their influence on district

evolution will be sought in the existing theoretical and empirical literature when relevant.

Low adaptability to industry relocation

The results of the study suggest that the capacity to adapt seems particularly weak in company

castle-town type districts and in traditional ones. Why is it so?

Based on the data from the field study I argue that the weak adaptability of these districts is

the result of the following three conditions: vertical networks, exploitation rather than

exploration and ‘strong’ ties between the actors.

Vertical networks. In company castle towns inter-firm networks are typically vertical and

SMEs have no cooperative relationships between them. SMEs have direct relationships with

their principals or clients and with their subcontractors. Conversely, they have no links

between similar SMEs. Thus, relationships are organised exclusively around transactions and

have no other dimensions. In traditional districts, even though the structure of production

chain cannot be easily distinguished, the basic dimension of inter-firm networks is also

vertical (or semi-vertical) since the entire system is controlled by wholesale companies or

other commercial firms. In fact, trading companies detain power and information over

manufacturing firms. Due to this asymmetric structure, SMEs are reduced to executing orders.

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This situation hampers building equal-to-equal network structures with confrere SMEs and

thus restrains firms within a closed framework. Once the clients stop placing orders, it is

extremely difficult for SMEs to find other work.

Exploitation of existing competences rather than exploration of new ones. As March (1991)

argued, exploitation corresponds to existing, static competences, while exploration

corresponds to dynamic competences (Teece et al. 1997), that is, it aims at transforming

existing skills and acquiring new ones. Exploitation enables to achieve high levels of

efficiency in determined domains of specialisation, while exploration supposes innovation and

entering new fields. Both in company towns and in traditional districts, firms were used to

exploiting existing competences rather than exploring new ones. They were pushed to

upgrade existing skills in order to respond to constant cost reduction demands. Very few of

them have invested in R&D activities and thus in acquiring completely new skills. Even

though firms could survive with the existing competences in the past, nowadays, with industry

relocation, these competences are not sufficient. That is the reason why firms in these districts

encounter difficulties to adapt.

“Strong” ties between SMEs and their clients and absence of social and “weak” ties between

SMEs. Granovetter (1973) distinguishes between strong and weak ties between actors. He

argues that weak ties are more beneficial for actors than strong ones. In fact, strong ties tend

to link persons within a restrained framework, while weak ties enable to attain a larger

number of individuals. This distinction is close to Burt’s (1992) structural hole, defined as a

non-redundancy relationship between two actors. It is also coherent with the paradox of

embeddedness, described by Uzzi (1997), who argues that embeddedness is indeed beneficial,

as Granovetter (1985) advanced in his influential paper on the relationship between the

economic action and the social structure, but points out that embeddedness is beneficial only

to a certain point, from which it becomes restraining. Thus, embeddedness takes the reversed-

U form (Uzzi 1997). In company towns and traditional districts manufacturing SMEs are

actually linked too strongly to their clients, they are over-embedded in their relationships.

Thus, they are completely blocked in more or less closed structures. On the other hand, they

were not linked by weak ties to other SMEs or to other firms in general. That is the reason

why they could not attain a greater number of firms.

Medium to high adaptability to industry relocation

Compared to company towns and traditional districts, adaptability seems greater in regional

and urban industrial districts. The reasons for this can be found in similar elements as those

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discussed above. Again, three major points can be distinguished: horizontal networks,

exploitation and exploration and presence of ‘weak’ ties in the sense of Granovetter (1973).

Horizontal networks. Horizontal networks can be found both in regional districts and in urban

industrial zones. Obviously, they are more developed in urban zones due to the absence of

large firms, but they are also present in regional districts. Moreover, during the last several

years, these horizontal forms are proliferating. Horizontal networks are important because

they are less restrictive for member firms. In addition, in these networks, there are no major

differences in power between firms, which means that everyone can express freely its opinion,

propose ideas and set up co-operation. Member firms’ competences complement each other,

forming groupings of skills that can respond to a wider range of orders than individual small-

sized units. Inter-firm co-operation can take different forms and is not restricted merely to

transactions.

Exploitation but also exploration. In these two kinds of districts, even though the great

proportion of firms work as subcontractors, they invest more in acquiring new competences.

Some even try entering completely new fields. New technologies and complex products (like

satellites in Higashi Osaka) are attracting increasing interest of SMEs. SMEs join forces

through networks in their efforts to explore new competences and build new capabilities.

Innovation and dynamic competences might seem as the only solution and a logical one in the

process of industry relocation. However, firms could also opt to refocus on their core

competences and restrain from risky investments, such as innovation and new product

development. Thus, the decision to put efforts in innovation is not as straightforward as it

might seem. It proves that SMEs in these districts are ready to take risks in order to evolve in

new conditions

Presence of ‘weak’ and social ties. In urban zones and regional districts, all SMEs are not

blocked within a single subcontracting network. In regional districts, many SMEs subcontract

for two or several clients, which makes them more receptive to different information and

enables them to have ties with different firms. Moreover, there are some completely

independent firms that do not subcontract at all. They typically form partnerships with

confrere SMEs and are linked to them by ‘weak’ ties. In urban zones, the great majority of

firms do not belong to any subcontracting network. Rather, they engage in horizontal inter-

firm networks with the neighbouring firms. Both in regional districts and in urban zones,

firms are linked by social ties.

15

Networks, competences and ties

The analysis of the factors influencing the adaptability of a district in the process of industry

relocation leads to a set of conclusions, which derive directly from the results of the study.

Factors influencing the adaptability of industrial districts in the process of industry relocation

are presented in table 3.

table 3. Factors influencing adaptability of an industrial district

Factor Positive influence Negative influenceNetworks

CompetencesTies

HorizontalStatic and dynamic

Weak

VerticalOnly static

Strong

Vertical versus horizontal networks. The first factor influencing the evolution pattern and

adaptability of a district is the nature of inter-firm networks. According to the results of the

study, in the process of industry relocation, the predominance of vertical networks in a district

has a negative influence on its capacity to adapt. Conversely, the predominance of horizontal

inter-firm networks has a positive influence on the adaptability of a district.

Exploitation versus exploration. The second element refers to March’s (1991) distinction

between static and dynamic competences, that is, exploiting existing competences versus

exploring new ones. Thus, the study suggests that in the process of industry relocation, the

existence exclusively of exploitation of existing competences in a district has a negative

impact on its capacity to adapt. Conversely, the presence of exploration in a district has a

positive impact on its capacity to adapt. In other words, in the industry relocation process,

dynamic competences (Teece et al. 1997) become crucial.

Strong versus weak ties. The third factor that affects positively the adaptability of an industrial

district in the industry relocation process refers to the nature of ties between actors. In

particular, Granovetter’s (1973) distinction between strong and weak ties is applied. Thus, the

results of the study show that the predominance of strong ties between firms in a district has a

negative impact on its capacity to adapt. Conversely, the predominance of weak ties between

district firms affects positively district’s adaptability.

Based on these findings, policy implications can be proposed. They are presented in the

following section

16

5. Policy implications

So far, there is no consensus among scholars and politicians as to the role of the government

policies in the economic development of Japan. Some authors argue that policies played an

important role for Japanese firms and especially SMEs (Matsushima 2001). Others argue that

the Japanese government has never taken extremely strong decisions designated as a

governmental intervention. Even MITI’s peerless ability supporting Japan’s high growth was

defined as just a ‘rolling consensus’ (US Department of commerce 1972), ‘minimalist rather

than dirigist’ or ‘in perfect coordination’ (Okimoto 1989) between the Governement (MITI)

and the Industry (private parties).

In a previous paper Colovic and Tayanagi (2004) propose a comprehensive reading and

analysis of the Japanese industrial policy and in particular the recent cluster plans. The basic

points of this analysis will be presented here. Based on the results of the field study,

recommendations to the policy makers will be made.

Review of the Japanese industrial and SME related policies since the 1990s

Japanese industrial policy has fundamentally changed during the 1990s. Due to the drastic

change of the Japanese industrial structure since mid-1990s, the main driving force of the

SMEs motivation has drastically changed as well. The major factor in the background of such

change was the serious recession striking the Japanese industry. At the beginning of 1990s

Chinese economy started to enhance its industrial capacity and value on a large scale. As a

result, serious phenomena of hollowing-out of industry have struck almost all industrial

districts in Japan.

In the past, SMEs were able to survive as subcontractors in the hinterland of the Japanese

economy. Since recently they are struggling to survive with their self-support and self-

responsibility (Small and Medium Enterprise Agency 2000). Within industrial districts

agglomerating numbers of manufacturing SMEs, this kind of new situation could be observed

especially in the last decade.

Compared to such a serious situation in the industry, the transition of the governmental policy

has been brought about slowly and gradually. Although some important announcements of

new laws could be seen from the second half of the 1980s to the early 1990s, they aimed

primarily at protecting SMEs and industrial districts against the hollowing-out of industry.

However, such series of protective measures had been in the way of SMEs pursuing self-

17

support and self-responsibility rather than making way for them. In Japan, promotion policies

for SMEs have tended to fall into misapplied egalitarianism through conventional and

hierarchical organization of local industrial associations such as the Local Chamber of

Commerce and Industry. While the subsidization based on egalitarianism caused

organizational problems like moral hazard to majority of SMEs, a small number of SMEs

trying to take up a more innovative behaviour were regarded as eccentrics or outsiders to the

local community. These eccentrics or outsiders had to wait until the second half of the 1990s

for the emerging new industrial policy to promote such innovative behaviour. In 1995, the

Temporary Law Concerning Measures for the Promotion of the Creative Business Activities

of Small and Medium Enterprises was enacted. This was the explicit opening of the

fundamental change.

Two-pronged policies of the Ministry of Economy, Trade and Industry - METI (former

MITI), the SMEs promotion policy implemented by the SME Agency (one of the bureaus

controlled by METI) and the industrial location policy by METI itself, were finally starting to

integrate to one stream. In 1999, under the new Law on Supporting Business Innovation of

Small and Medium Enterprises, METI established the JANBO (Japan Association of New

Business Incubation Organizations) as part of its industrial location policy. It was to support

and promote regional platforms, which are one-stop coordination systems for various regional

actors such as SME managers, university professors, entrepreneurs, business consultants,

local officers etc.

Thus the base of the SME promotion policy finally caught up the actual situation at the end of

the 1990s. Moreover, METI started implementing the so-called Industrial cluster plan since

2001. Parallely, the Ministry of Education, Sport, Culture, Science and Technology (MEXT)

designed its own cluster plan called the Intellectual Cluster Plan, which has been put into

work since 2002.

The cluster plans

Clusters and districts are very similar phenomena. While districts exist both in traditional and

in advanced industries, clusters are organized in high-tech industries and suppose innovation.

During the last ten years or so, there has been increasing interest in developing clusters in all

developed countries. The triggers for such interest were policy recommendations, set by

institutions such as the OECD on one hand and the need to find new directions for industrial

development in a globalizing world on the other. Industry relocation is thus one of the key

elements pushing cluster development.

18

First of all we should consider why the two governmental plans to promote regional clusters,

the Industrial Cluster Plan by METI and the Intellectual Cluster Plan by MEXT finally came

to be implemented in the beginning of the 2000s. In the background, both METI and MEXT

started to use the expression ‘Cluster Plan’ at the same time. There had been emphasis on the

importance of networks within the regional human resources such as collaborative works of

SMEs or University-Industry relationships through the 1990s. However, the term ‘cluster’

tends to catch up the global fashion trend rather than the actual tendency of the past transition

of industrial policy. Applying the word cluster, the national government and the policy-

makers have actively started to propagate the new industrial policy to the more general public,

not only regional actors but also executives and managers of large companies.

As mentioned in the previous section, the drastic change of the Japanese industrial policy was

brought throughout the 1990s. However, both new Cluster Plans don’t always share the aim

with the series of past reforms of the industrial policy. In parallel with the change of the

industrial policy in the 1990s, decentralization of political power has accelerated significantly.

In this situation, the necessity of a new policy to establish the national advantage based on the

regional advantage has emerged as Porter (1990) suggested.

As a result of the whole change, the central government was pressed to reform its past

framework of the top-down region’s industrial policy toward a new bridge between regional

advantage and national advantage. The Industrial Cluster Plan emerged within such context.

The main objectives of the Industrial Cluster Plans are: 1) revitalization of the regional

economy, 2) creation of the new business to foster globally competitive industrial clusters and

3) improvement of regional competitiveness. Under the objectives METI designated 19

regional projects all over the country as the first runners of the Industrial Cluster Plan since

2002. While the projects do not involve only high-tech clusters but also traditional industries

such as ceramics or metallic cutleries, the common factors are called the “Triple-helix” of

strategies, 1) cross-sectoral networks, 2) technology, based on regional advantage, 3) business

innovation and incubation.

MEXT’s Intellectual cluster plan was implemented within the wave of the university-

industry-government relationship (U-I-G) policy from the second half of the 1980s. In this

context MEXT had mainly worked to expand the budget for universities, which at first aimed

at improving facilities and human resources for technology transfer and patent strategy.

However, the framework of the U-I-G policy has broadened for almost the same reasons as

the objectives of the Industrial Cluster Plan. In 2001 the Science and Technology Basic Plan,

which targets the strengthening of the Japanese advantage of science and technology in the

19

next 5 years including the Intellectual Cluster Plan, was adopted by the Cabinet. Under the

catchphrase of the plan, “Creation of Japanese versions of Silicon Valley”, the Intellectual

Cluster Plan aims at creating the regional advantages based on advanced research and

technology organizing U-I-G networks around universities. This aim overlaps with the

Industrial Cluster Plan of METI so that MEXT and METI are just starting to organize the

interface and cooperation between two plans.

Policy recommendations

As we can see, the Japanese government is making considerable efforts to create high-tech

industrial clusters. However, we can ask whether clusters can be created by a policy? If we

look at districts and clusters around the world, we can see that the great majority of them were

created spontaneously, that is, by auto-organization of actors. This suggests that only the

bottom-up emergence is successful. Even though in theory industrial agglomerations can be

generated, most attempts fail. The most important reason for this is that the mechanisms of

such agglomerations are extremely difficult to grasp and produce. And without these

mechanisms (such as knowledge-intensive exchange cooperation through networks), there are

no real clusters. Nevertheless, the government can have a role to play in detecting promising

firms and projects and in supporting them. The role of the government is to make things easier

for local actors.

The results of the study presented in this paper show that horizontal inter-firm networks, a

combination of static and dynamic competences and ‘weak’ ties (Granovetter 1973) between

agents enhance viability of industrial districts. Policies aiming at building clusters or other

types of industrial agglomerations should therefore support the creation of these elements.

Policies should provide help for the existing efficient horizontal SME networks and for the

emerging ones. Moreover, as we could see in the case of the Higashi Osaka satellite project,

durable partnerships and networks between universities and firms are needed for innovation

and R&D. A successful policy should therefore support such networks.

Innovation has become a necessity in order to survive in the relocation process. Policies

should provide financing for knowledge-intensive activities and acquiring dynamic

competences. What is even more important is that experts should be employed to evaluate

innovative projects that apply for the government funding.

Finally, policies should put accent on relatively independent firms and looser networks within

industrial districts. As we have seen, weak ties enable to attain a greater number of individual

(and thus firms), which brings more business opportunities for firms.

20

Conclusion

In this paper I studied how industrial districts in Japan evolve in the process of relocation of

the Japanese industry. The results of the study show that initial conditions and characteristics

of districts have a significant impact on their capacity to adapt to the radically changing

environment. Urban and regional industrial zones seem more capable to adapt than company-

castle towns and traditional districts. Three elements seem to be the key to this higher

adaptability: horizontal networks, dynamic competences and weak ties between district firms.

These key elements should be taken into account by policy makers when designing district

and cluster-related policies.

This research is limited to the Japanese case. Nevertheless, I believe that similar conditions

can be found in other developed countries, or will emerge in the following years. As

mentioned earlier, since Japan is probably the most affected by the industry relocation

process, lessons can be learnt from the Japanese case.

Acknowledgments

The author wishes to thank the Japan Foundation and the Japan Society for the Promotion of

Science for supporting this research.

Notes

Kigyo joka machi means literally enterprise-castle-town. This expression alludes to the term joka machi or castle-town that refers to feudal towns governed by lords called daimyo.2 Sanchi can be translated as industrial district.3 Nissan Revival Plan is a plan aimed at restructuring Nissan. It was introduced following the arrival of Carlos Ghosn as the new president of Nissan in 1999.

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Appendix: Map of Japan

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