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Rethinking Relationship-Specific Investments: Subcontracting in the Japanese Automobile Industry

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  • Yoshiro Miwa

    (Faculty of Economics, University of Tokyo)

  • J. Mark Ramseyer

    (Harvard Law School)

Abstract

According to modern contract theory, how firms structure their trading patterns and governance structures will depend both on the size of any relationship-specific investments they make, and on the feasibility of detailed contracts. Suppose contracts are hard to draft and enforce, but firm A must invest heavily in a capital asset whose value depends on Afs continued trades with firm B. If A makes this investment on its own, B may try to restructure opportunistically the terms of the contract ex post. To mitigate the risk of such hold ups, predict contract theorists, A and B may negotiate a variety of governance mechanisms they would not otherwise choose. In the extreme, they may even decide to merge. The puzzle to this theory is less in its logic. It is more in its empirics. Over the past two decades, scholars have looked hard for evidence of governance arrangements driven by large relationship-specific investments. Although they find some evidence of such arrangements in idiosyncratic industries like public utilities, aerospace, and defense, they find less evidence in more gordinaryh industries. Within this context, the Japanese automobile industry has played an important symbolic role: an gordinaryh industry thought to be structured by extra-contractual governance arrangements driven by substantial relationship-specific investments. In this article, we re-evaluate that ordinary industry. Despite examining a variety of data on ties among suppliers and assemblers, we find less evidence of large relationship-specific investments than most accounts imply, and less evidence of extra-contractual governance arrangements driven by such investments. Perhaps, we suggest, the time has come to reconsider whether relationship-specific investment theory explains quite as much as we have thought.

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Bibliographic Info

Paper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-70.

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Length: 29 pages
Date of creation: Apr 2000
Date of revision:
Handle: RePEc:tky:fseres:2000cf70

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Cited by:
  1. Steele, Scott R., 2009. "Expanding the solution set: Organizational economics and agri-environmental policy," Ecological Economics, Elsevier, vol. 69(2), pages 398-405, December.
  2. Keith Head & John Ries & Barbara J. Spencer, 2004. "Vertical Networks and US Auto Parts Exports: Is Japan Different?," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 13(1), pages 37-67, 03.
  3. Evelyn Anderson, 2003. "The Enigma of Toyota's Competitive Advantage: Is Denso the Missing Link in the Academic Literature?," Asia Pacific Economic Papers 339, Australia-Japan Research Centre, Crawford School of Public Policy, The Australian National University.
  4. Jonsson, Sara & Lindbergh, Jessica, 2010. "The impact of institutional impediments and information and knowledge exchange on SMEs' investments in international business relationships," International Business Review, Elsevier, vol. 19(6), pages 548-561, December.
  5. repec:hal:cesptp:halshs-00624280 is not listed on IDEAS
  6. Yoshiro Miwa & J. Mark Ramseyer, 2001. "Apparel Distribution:@Inter-firm Contracting and Intra-firm Organization," CIRJE F-Series CIRJE-F-103, CIRJE, Faculty of Economics, University of Tokyo.
  7. repec:hal:journl:halshs-00624280 is not listed on IDEAS
  8. Scott E. Masten, 2002. "Modern Evidence on the Firm," American Economic Review, American Economic Association, vol. 92(2), pages 428-432, May.

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