Chapter 17
SEIICHIRO YONEKURA AND HIROSHI SHIMIZU
THIS CHAPTER IS THE STORY of the path followed by an economy that came to be characterized, if not dominated, by a relatively small number of very large firms, the zaibatsu. Part of the story is the burst of growth that followed a long period of isolation, in a country suddenly opened up by the military threat of an invading force—the 1853 incursion of Admiral Perry and his fleet. This was followed by a thorough reconfiguration of the structure of government as a critical step toward elimination of the country's technological lag. The account here will describe the relatively modest entrepreneurial origins that can underlie even formation of such giant enterprises.
The uniqueness of this development process offers a number of significant insights. One illustration is a program undertaken during the Meiji Restoration period, showing how restructuring of the prevailing institutions can affect entrepreneurial activity. There, reformers chose to commute peasant rice payments to the samurai into government bonds and tax the peasants in money to pay the interest on the bonds. The samurai were encouraged to become bankers and investors (with the Tokyo and Osaka Stock Exchanges founded in 1878, almost at the same time as the issue of the bonds). Thereby, the samurai were led to eschew combat and to become entrepreneurs and capitalists.
The growth of the zaibatsu also helps to explain the reputed comparative advantage of Japan in innovation that is incremental rather that radical. For that is also a characteristic of large innovative enterprises in other countries. Their innovation activity tends to be conservative and characterized by effort to minimize risk, presumably because of their relatively complex managerial organizations and the responsibility that is imposed by substantial asset size.
In the history of the zaibatsu, entrepreneurs were the key drivers of development. Under the enormous institutional changes and social upheavals, they developed organizational forms of innovation that enabled young engineers and college graduates to be recruited and assigned to positions of power. Their innovative activity tends to be characterized by efforts to employ new knowledge in their businesses and to make multiple use of scarce resources.
In recent years, entrepreneurship has become a popular and seductive term even in Japan. The word, however, tends to be bandied about somewhat randomly. Some people use it in reference to individuals who set up businesses, others to describe an individual who introduces new technologies or business models. In this chapter, following the pioneering works of Joseph A. Schumpeter, we define entrepreneurship as the ability to carry out innovation that constructively destroys the status-quo and leads to new economic development (Schumpeter 1934). In short, the capacity to “innovate,” we believe, is a core concept of entrepreneurship.
While Schumpeter implied that innovation is not necessarily limited to technological innovation, many previous studies have gravitated toward this aspect of the subject. As Alfred D. Chandler Jr. showed, however, organizational innovation has made an important contribution to economic growth throughout history (1962, 283–323). Chandler asserted that entrepreneurs played an important role in carrying out organizational innovation in the modern business world, thereby laying the foundations for the establishment of large modern enterprises. This assertion has even greater validity for developing countries. Entrepreneurship is deeply embedded in the historical context. Entrepreneurs in different social contexts face different challenges and must utilize different resources. Those in less advanced countries, for example, are likely to access cheap labor more readily than their counterparts in the developed world. However, of necessity, such entrepreneurs are required to develop their businesses in an environment where resources are limited and social and human capitals are generally underdeveloped.
As the latecomer to the modern capitalist world, the need to introduce, rather than to develop, advanced technology and institutional structures, was particularly pressing for Japan, and was precipitated by the desire to catch up with the advanced nations of the West. In this sense, the core competence of entrepreneurship in prewar Japan involved the accumulation of “organizational capability” to facilitate modernization.
Beginning in the late eighteenth century, the Industrial Revolution brought fundamental change to social, political, and economic structures in continental Europe, Britain, and the United States of America. The economic system evolved from feudalism through mercantilism to industrial capitalism. This process was not automatic or smooth; instead, it was a rough and uneven evolution that transpired over the course of a century.
By contrast, social, political, and economic change hit Japan with the force of a hurricane. Japan moved from feudalism to capitalism in a very short space of time. It had insufficient resources for industrialization, however, and its political foundations were still fragile. Moreover, Japan's 200-year-old closed-door policy meant that scientific and technical knowledge lagged far behind that of other nations, and the international community of the day was not particularly receptive to latecomers either. Imperialistic attitudes prevailed and the countries of the West were greedy and possessive.1
In this chapter, we define entrepreneurship as the ability to bring about innovation and discuss the development of Japan's vast business conglomerates, the zaibatsu, an event that occurred during the 1870s when the feudal system had only recently been dissolved and the infrastructure vital to economic growth had yet to be developed. It focuses on the methods employed by Japan's entrepreneurs to achieve organizational breakthroughs and develop big business conglomerates that were then deployed in the development of important institutions in the fields of international trade, shipbuilding, security markets, modern banking, and railways, thereby promoting economic growth in prewar Japan.
The Effectiveness of Entrepreneurship in Accumulating Wealth: The Role and Importance of the Zaibatsu
European trade relationships with Asia have a history that dates back to the Age of Discovery in the early fifteenth century. Direct contact, however, remained peripheral. During the 250 years of the Tokugawa era when Japan's ports were closed to all but a few Dutch and Chinese traders, the economy developed along highly feudalistic lines and, although capitalism had gained some hold, Japan's knowledge of science and technology lagged far behind that of the West.
The First Opium War of 1839 to 1842 marked the beginning of European imperial hegemony in Asia. The incursions of foreign imperialism reached Tokugawa Japan in the 1850s when, on July 8, 1853, Commodore Perry of the U.S. Navy sailed a squadron of black-hulled warships into the harbor at Edo (now Tokyo). Perry brought with him a letter from U.S. president Millard Fillmore addressed to the emperor, demanding the opening of ports and various other concessions from Japan. The U.S. show of force led to Japan's acceptance of the Convention of Kanagawa on March 31, 1854. These events shocked the Japanese authorities into an awareness that the country was technologically backward as compared to the West and that it needed to industrialize if it was to retain its autonomy. This realization culminated in the Meiji Restoration of 1868, the chain of events that led to administrative modernization of the government and to rapid economic development thereafter. The advent of industrialization in Europe was accompanied by dramatic increases in the demand for Asian raw materials, and the Long Depression of the 1870s saw industrialized Europe turning increasingly to Asia in its search for new markets for European industrial products. The depression also affected the way in which Western powers approached this new market, moving from trade and indirect rule to unequal trade and formal colonial control.
The Meiji Restoration was the catalyst for industrializing Japan's feudal economy and triggered the nation's rise as a military power under the slogan “Rich Nation, Strong Army.”2 The Meiji government rushed headlong into the development of national industry in a bid to catch up with the West and safeguard its political autonomy. However, Japan lacked infrastructure, capital, human resources, science, and technology, as well as political stability, all of which were critical to industrialization. Angus Maddison has estimated that Japan's per capita GDP in 1900 was US$677, which was only about one-fourth of that of the UK (2,798) or the United States (2,911) and on a par with Thailand and Mexico (Maddison 1995, 23–24).
While industrialization was a national priority, Japan first needed to tackle its serious resource shortages, a hurdle that needs to be surmounted by any country seeking to develop modern industries. The breakthrough for Japan came in the form of conglomerates, or zaibatsu, an organizational innovation that had the dual benefit of concentrating managerial resources and allowing them to be put to multiple uses.
The policies carried out by the Allied Powers after World War II demonstrate that the zaibatsu had become increasingly active in the national economy. Japan's military resources were mobilized at the outbreak of the war with China in July 1937 and remained in action until Japan was defeated in August 1945. On August 15 of that year, the Japanese government conceded unconditional surrender to the Allied powers.
The Supreme Commander of the Allied Powers (SCAP) then set about reweaving the social, economic, and political fabric of Japan. SCAP implemented various political and social policies, imposing constitutional democracy and introducing land and labor reforms as well as women's rights. SCAP's primary concerns were demilitarization and democratization. Economists working for SCAP produced an analysis of the Japanese economy and argued for fundamental democratization of all economic institutions as a precursor to future peace and normalcy.
In order to achieve the goals of democratization and demilitarization, SCAP began the process of breaking up the zaibatsu, which were regarded as monopolistic and a seedbed for social injustice and fascism,3 by freezing the assets of the four big conglomerates—Mitsubishi, Mitsui, Sumitomo, and Yasuda. In 1946, the General Headquarters (GHQ) of SCAP established the Holding Company Liquidation Commission (HCLC). GHQ transferred the stock of the zaibatsu to HCLC, which in turn sold it off to the public in increments. Then in 1947, GHQ set up an antitrust law that was designed to prevent the reconstruction of the zaibatsu. That year also witnessed a purge of political establishments and business leaders, who were examined by GHQ and the Japanese government and removed from office if found to have actively supported war, nationalism, or fascism. These policies imply that the zaibatsu played a significant role in both the national economy and militarism in the run-up to, and during, the war.
The term zaibatsu, which literally means “financial cliques,” refers to the widely diversified big-business conglomerates that gained significant concentration during the Meiji era. Morikawa defined zaibatsu as “a group of diversified businesses owned exclusively by a single or an extended family (1992, xvii). Table 17.1 presents the zaibatsu of the Meiji era.
Using data relating to the paid-in capital of joint-stock companies in Japan, Morikawa showed that in 1928 the amounts contributed by the subsidiaries of the seven leading zaibatsu, Mitsui, Mitsubishi, Yasuda, Asano, Sumitomo, Okura, and Furukawa, accounted for 16.5 percent of the aggregate figure for all joint-stock companies (1992, xvii). Until SCAP stepped in with its 1947 dissolution policy, these zaibatsu together with newly formed zaibatsu such as Nissan and Nitchitsu had spent years steadily increasing their presence in the national economy. Table 17.2 shows the extent to which these zaibatsu businesses dominated the key industries that fueled Japan's rapid industrialization, contrasting the paid-in capital of fourteen zaibatsu subsidiaries with that of all commercial entities in Japan in 1947.
The prevailing wisdom on zaibatsu, a position that frequently reflects the predominantly Western view of these conglomerates as feudal monopolistic family businesses, can be summarized in the following terms:
1. They established and maintained close relations with government officials and exploited these political and personal connections in conducting business.
2. They further diversified their business activities by capitalizing on their monopolistic financial and political power.
TABLE 17.1
Zaibatsu of the Meiji Era
TABLE 17.2
Paid-In Capital, Fourteen Zaibatsu Subsidiaries
3. This practice went on to become a seedbed of corruption and social injustice that led to social unrest and class disputes.
Strictly speaking, the key to the success of the zaibatsu in prewar Japan lies in the extent to which these firms expanded on early organizational innovations in the process of evolving into modern businesses. Early in the modernization process, the Japanese government had attempted to set industrialization in motion by establishing state-owned enterprises. The increased burden on state coffers and rising inflation, however, forced the Meiji government to switch from direct action to an indirect policy of intervention, and it began promoting private sector involvement in public businesses such as banking, shipping, cotton spinning, and mining. Some merchants responded, but the opportunity was not restricted to the merchant class; instead, it was open both to established firms—those that went into business in the Edo era and survived the social upheaval of the Meiji Restoration—and to those that had only recently launched businesses, following restoration of imperial rule. Only those that were prepared to accumulate the necessary organizational capabilities were able to respond. The core requirement was human resources, since in the face of the rapid introduction of modern capitalism, only flexible and talented people could adapt to external changes and find new opportunities in the flood of economic events.4
Relevant Institutions: Meiji Restoration and Institutional Change
When Douglass North indicated that institutions play a significant role in determining economic performance, both economists and economic historians began turning their attention to formal and informal establishments (North and Thomas 1973).
The Meiji Restoration was one of the most radical institutional changes experienced by Japan before World War II (Lockwood 1954, 3–37). This chain of events was set in motion by the government's abolition of the 200-year closed-door policy, which then led to the modernization of Japan's feudalistic economic, political, and social systems.
The first task for the Meiji government was to revolutionize the political system. Feudal clans were abolished and a centralized, modern political system introduced, with the establishment of local administrative offices in 1871. The cabinet system came into being in 1885, while the Constitution of the Empire of Japan was enacted in 1889. This charter provided for a form of constitutional monarchy that was based on the Prussian model, in which the emperor of Japan would be an active ruler wielding considerable political power that was to be shared with an elected legislature (known as the Diet).
The government then set about reforming the nation's social institutions. One of the most radical changes was the abolition of the four divisions of society, a term used to refer to the social model introduced early in the seventeenth century. The four social classes were warriors (the samurai), farmers, artisans, and merchants. Their abolition promoted social mobility and the utilization of social capital. As will be shown later, many of the zaibatsu entrepreneurs were lower-ranking samurais; the abolition of traditional social divisions gave them the means to mobilize managerial resources and establish their own businesses.
The government also endeavored to transplant from the developed nations of the West advanced science and technology, and political, legal, economic, and social institutions. To assist in Japan's modernization, it hired some 2,300 foreign engineers and teachers with expertise in fields as diverse as agriculture, medical science, law, economics, military, natural science, and engineering.5 A mission comprising political leaders was also dispatched to advanced countries such as the United States, Britain, and France with instructions to study the political, legal, and economic systems of these nations. Many students were also sent overseas during the years 1871 to 1873.6 The resulting inflow of scientific and technological knowledge was to become an important foundation for the industrial development of Japan.
The reforms of the educational system instituted during the Restoration were also to play an important role in entrepreneurial activity in Japan. The goal was to develop human capital, especially in engineering, and skilled labor. Established in 1871, the Ministry of Education founded public elementary, junior high, high schools, universities, and vocational schools under the banner of compulsory education for all. Nine Imperial Universities were created in 1886. Keio University had been founded in 1858 and Hitotsubashi University in 1875. Both these universities provided advanced training in economics, business accounting, and business management. The Imperial Universities, such as the universities of Tokyo and Osaka, together with the Tokyo Institute of Technology, founded in 1881, were to become the main suppliers of vocational school teachers, engineers, and floor supervisors. In fact, many of the entrepreneurs who played important roles in the industrialization of Japan were educated at these universities.7
Japan's commercial law was formulated on the basis of German commercial law and enacted in 1893. Introducing a joint-stock, limited partnership, and general partnership company system, this law institutionalized limited liability for entrepreneurs. The adoption of the commercial law was to result in a rise in the number of joint-stock companies. At the same time, the government began to establish stateowned factories such as Tomioka Silk Manufacturer, under the slogan “rich country, strong nation.” It also set up a new monetary system, introducing the yen in 1871, the country's first standard currency. The national bank acts were laid down in accordance with the U.S. national bank system, and four national banks established in 1872. Many national banks were subsequently established following the amendment of the national bank acts in 1876, and these were to become an important funding source for Japan's entrepreneurs.
These institutional changes provided an environment favorable to entrepreneurs. As has been pointed out extensively in the literature, these changes played a significant role in the industrialization of the national economy. However, it would be facile to suppose that the mass entrepreneurship and vigorous industrial development that ensued were the direct corollary of these institutional changes. In fact, the reverse is true: bureaucratic reform was the outcome of entrepreneurial activity. It was the entrepreneurs who designed and executed the institutional reforms that were to create key infrastructure and transform the national system from a feudal to a market economy.
Entrepreneurial Activity: Organizational Innovation and Zaibatsu
This section examines how multiple uses of scarce resources and the reconciliation of conservative family interests with entrepreneurial ventures led to organizational innovation, by looking at the two largest zaibatsu groups: Mitsui and Mitsubishi. Although the trajectories followed by these two zaibatsu differed, in tracing their histories a certain logic to the organizational innovations pursued by these two conglomerates will become evident.
The origins of the Mitsui zaibatsu, one of the oldest and largest zaibatsu in Japan, date back to 1673 and the opening of a drapery in Tokyo (then Edo) by Mitsui Takatoshi. The Mitsubishi zaibatsu, meanwhile, emerged from the upheaval of the Meiji Restoration. Entrepreneurs in early Meiji lacked capital resources and social infrastructure and were also hampered by Japanese ignorance of contemporary science and technology. However, while the old zaibatsu such as Mitsui and Sumitomo were buttressed by their accumulated wealth and reputation as venerable traditional merchants, the newly developed zaibatsu such as Mitsubishi and Yasuda had no such resources to draw on and were required to procure human and financial assets from scratch. The tasks confronting the old and new zaibatsu were thus very different. This section analyzes the challenges faced by the entrepreneurs of Mitsui and Mitsubishi, the innovations that were introduced by these zaibatsu and the methods they employed to develop their business concerns.
Organizational Innovation at Mitsui
Mitsui Takatoshi was the fourth son of the Mitsui merchant family.8 He was born in 1622 in Matsuzaka city in Western Japan, where he opened a small kimono shop (the Japanese drapery) and later engaged in money exchange. At age fifty he decided to open a kimono shop called Echigoya in Edo, Japan's capital and its most prosperous market. When Takatoshi started his business, the large traditional kimono merchants did not use fixed prices; in other words, all transactions were negotiation based, credit was the only currency, and their clientele was limited to feudal rulers and wealthy merchants. Takatoshi, on the other hand, targeted the rank-and-file middle class and introduced what was a highly innovative style of merchandising for its time. He rejected the ill-defined and ambiguous pricing practices of the established kimono purveyors, attaching affordable, nondiscountable, and fixed prices and accepted only cash. His new style of business quickly gained popularity among the middle classes, and the proceeds from the trade enabled Takatoshi to establish a money exchange service in 1683. His business with the middle classes had given Takatoshi the means to develop a close relationship with the Tokugawa shogunate, and both the draper's shop and the exchange house were later appointed official purveyors to the administration. Takatoshi's businesses grew as Edo flourished, and he went on to open a shop in Osaka, the second largest city in Japan. He died in 1694 at age seventy-three.
By the mid-eighteenth century the population of Edo had passed one million, making it one of the world's largest cities. Takatoshi's sons decided not to split their inheritance; instead, they used it as a collective fund to establish, in 1710, an unlimited liability partnership, the Mitsui Omotokata (a kind of holding company) to regulate the affairs of the extended Mitsui family.9 The Mitsui Omotokata, which consisted of nine families (later eleven), controlled the finances and management of the drapers' shops and money exchange houses; the investments made by the Mitsui family were repaid in the form of biannual cash dividends (a fixed percentage of their business proceeds). Developing rapidly, the family's businesses transformed the Mitsui into one of the most powerful merchant families of the Edo era.
SOCIAL UPHEAVAL AND NEW MANAGERS
By the middle of the nineteenth century, however, the nascent conflict between new economic activities and the feudal system had reached critical proportions, and the excessive debts and rampant defaulting of the samurai and farmer classes had become a major social issue. Serious crop failures, meanwhile, brought famine, and, in 1855, Edo was struck by a major earthquake. Economic stagnation caused Mitsui's draper business to fall behind in its payments, and the money exchange service with the shogunate and otherdaimyos (clans) became a significant burden on its financial resources (Yasuoka 1998).
Mitsui's business concerns were also affected by the social upheavals sparked by the incursion of Western powers. The opening up of several trade ports in the late 1850s plunged the Tokugawa shogunate into financial crisis consequent upon the outflow of gold and a coup d'état of the feudal clans, whose slogan was “Revere the Emperor and Expel the Barbarians.” The shogunate later approached large merchants requesting financial support in its fight against the rebellion. Since the Mitsui family had already committed substantial amounts to the shogunate, however, it decided to seek outside assistance from an entrepreneurial merchant, Minomura Rizaemon. Minomura was born in 1821 and became son-in-law to a relatively small vegetable oil and sugar merchant. He met Oguri Tadamasa, one of the shogunate's top officials, while running a traditional business in Edo and, with the Mitsui family, went on to become an important shogunate financier. Minomura's sharp-wittedness and powers of negotiation had impressed the Mitsui family. It was this that led them to solicit his help in dealing with their financial trials. Through hard negotiation and his accumulated network of political ties he succeeded in reducing—to one-third their original level—the shogunate's financial demands on Mitsui, and, in 1866, the Mitsui family gave him an official position as the chief executive of its money exchange business.
When Minomura joined Mitsui, Japan was in social and political turmoil. It had been forced by the Treaty of Amity and Commerce to open two ports, Shimoda and Hakodate, to the United States in 1853, and then five more (Hakodate, Nagasaki, Yokohama, Niigata, and Kobe) for international trade in 1859, at which point the country began to engage in international trade. Besides the United States, the shogunate was forced to conclude unequal treaties with Great Britain, France, the Netherlands, and Russia, pacts that included extraterritoriality, the loss of tariff autonomy, and most-favored-nation status. The outflow of gold caused by forced international trade resulted in rapid inflation. Japan, like China and several other Southeast Asian countries, seemed destined to become a quasi-colony. The mismanagement of international treaties raised doubts about the shogunate's capabilities and fueled sympathy for those advocating reverence to the emperor and the expulsion of foreigners. Besieged by foreign powers and internal disaffection, the Tokugawa shogunate began to lose political control over Japan. Meanwhile, the new youthful leaders of comparatively remote clans, such as Choshu and Satsuma, were planning to overthrow the Tokugawa shogunate and unite Japan under the emperor's rule.
Although the House of Mitsui was a purveyor to the Tokugawa shogunate, Minomura forewarned of the demise of Tokugawa regime and the emergence of a new government and advised the Mitsui family to provide financial backing to this new government and to renounce Tokugawa. As Minomura had anticipated, Tokugawa Yoshitsune, the fifteenth Tokugawa shogun, returned his political power to the emperor in 1867, and the Meiji government was established the following year. The newly established Restoration government had limited fiscal and political power, but it needed to achieve rapid industrialization and to develop a strong military. Minomura subsequently succeeded in establishing close political ties with the new government under the aegis of Inoue Kaoru, an influential Restoration player, and went on to secure an important position in finance, exchange, and trade. The close relationship with the new government, however, was a financial liability for Mitsui because the government's fiscal foundations were so weak. From the outset, the government faced a succession of financial crises and in 1870, it asked Mitsui to provide 300,000 ryo (the old currency unit) in funding to widen its revenue base. This was an enormous sum, even for the wealthy Mitsui family. Notwithstanding, had Mitsui declined, the government would have fallen, and Japan potentially would have been subjugated to Western control. Minomura elected to sell a number of Mitsui properties in order to free up the necessary funds, thereby wining the trust of the Restoration government and gaining stronger and more powerful political connections for Mitsui.
BUSINESS OPPORTUNITIES AND IMPEDIMENTS TO INNOVATION
With consumer production stagnating and import costs still high, it was imperative for the Meiji government to lay the foundations for a modern capitalistic economy as quickly as possible. The prompt establishment of a stable monetary and banking system was a particularly urgent priority. In order to balance its trade, the government also had to create industries capable of competing with their foreign counterparts. Minomura realized that it would be necessary for Mitsui to restructure its traditional businesses; however, none of its existing managers and engineers understood the importance of modernizing, nor were they capable of executing the necessary reforms. Minomura therefore recruited a number of new staff members from outside the family, men who possessed the knowledge and entrepreneurial skills necessary for developing new business. The new recruits included Takashi Masuda, the founder of Mitsui Bussan (the domestic trading arm of the Mitsui business) and Nakamigawa Hikojiro, a leading reformer of Japan's banking business. The Mitsui family, however, remained skeptical of the changes and opposed the reorganization of their businesses. The traditional merchants preferred holding real estate, which was regarded as a safe asset, to developing new, untried fields of business (Yasuoka 1998, 494). This risk-averse attitude was a problem for the entrepreneurs who required a certain amount of capital investment to fund their new business ventures. With this in mind, Minomura undertook an important organizational innovation—attempting to establish a limited-liability holding company that would allow the capital of the traditional merchants to be harnessed for new ventures. The following section elucidates the process via which these innovations were effected.
In the early 1870s, Minomura conceived a plan to establish a bank and sent seven of its personnel to the United States to study modern banking techniques. New banking regulations established by the Meiji government in 1872, however, required that any national bank be founded cooperatively. Thus it was that, in 1873, Dai-ichi Kokuritu Ginko (Daiichi National Bank), Japan's first national bank, came into being. The bank was capitalized through public subscription and contributions from the House of Mitsui and Ono Gumi, another leading exchange house that had begun operating during the Edo era.
Minomura, however, had not abandoned his plans for an independent Mitsui bank. In order to concentrate Mitsui's financial resources on banking, he believed that it would be necessary to separate the languishing kimono business from Mitsui's portfolio. Japan had no joint-stock company system as yet, and the Mitsui family could not avoid its unlimited obligations to guarantee the liabilities of the shops in its possession. By introducing managerial independence and limiting financial support, Minomura attempted to halt the decline in capital and to clarify the responsibility and accountability of the kimono business.
Mitsui Omotokata, the organization controlling the family's business concerns, had unlimited liability in the draper's shop business (Mitsukoshi); and so, the bank and the Mitsui family might have been harmed had this business failed. Business enterprises in the Edo era had either been general partnerships, that is, associations of individuals, or unincorporated companies, the owners of which were all personally liable for any legal action filed against the company and debts owed. As already stated, no commercial law was enacted until 1893, and there were no laws granting limited liability to the stockholder during the 1870s. The separation of the draper's shop business from Mitsui Omotokata was thus designed to mitigate the risk of failure on the bank that Minomura was planning to establish. He submitted his proposal to the finance minister, Okuma Shigenobu, who granted permission on one condition: that the bank's stockholders would have unlimited liability. Minomura accepted this condition and, in 1876, established Mitsui Bank, the first private bank in Japan. Having accepted unlimited liability in the new bank, Minomura needed to minimize any risk to the Mitsui family posed by the Mitsukoshi business, even while retaining managerial control, and Mitsui thus appointed several of its personnel to the board.
This organizational innovation had two goals: to enhance the individual potential fields of the new businesses while minimizing the business risks of individual firms for the family assets. Since the joint-stock structure had yet to be recognized under existing Japanese laws, there were no regulations governing limited liability, and the entrepreneurs thus hoped to achieve these two goals simultaneously. This organizational setup had the unintentional benefit of furthering the separation of ownership (capital) and management and gave the entrepreneurs a freer hand to develop new businesses.
Minomura's plans for a private bank also included a proposal for the formation of a trading company. Since international trade was new to Japan, expertise in this area was severely limited, and Minomura singled out Masuda Takashi to manage the new trade enterprise. Masuda had served as an interpreter and had worked for the Ministry of Finance following the Meiji Restoration. He joined Senshu-sha, the trading company found by Inoue Kaori, in 1874, the year of its inception.10 When Masuda was hired to establish a trading company for Mitsui, international trade was dominated by the West. Minomura believed that in order to achieve rapid industrialization, it was necessary for Japan to import advanced technology and promote exportation to acquire foreign currency. He recognized that there was money to be made from international trade. When Inoue returned to the political stage in 1876, Minomura offered Masuda the presidency of Mitsui's newly formed trading enterprise: Mitsui Bussan. The Mitsui family was not particularly interested in international trading since the business was totally unfamiliar to these old merchants; their concern was risk. Once again, Minomura—this time with Masuda's assistance—needed to devise an organizational setup that would not impose the obligation of unlimited liability on the Mitsui family.
The newly established Mitsui Bussan was a nominal unlimited partnership between two very young family members of Mitsui (the seventh son of Takafuku, the head of the family, and the third son of his brother, Takayoshi), but it had no ties either to Mitsui Omotokata or to Mitsui Bank. The necessary initial investment came in the form of a loan from Mitsui Bank, instead of from Mitsui Omotokata, which was reluctant to commit resources to the trading company. Masuda became operational president but had no capital commitment to the company. The key undertaking for Minomura and Masuda was to ensure the financial security of the Mitsui family (Takahashi 1968, 14). With sixteen employees, however, Masuda quickly established a head office in Tokyo and three branch offices in Yokohama, Osaka, and Nagasaki. The separation of capital and management also gave him the freedom to promote college graduates from top universities, such as Tokyo Higher Commerce School (now Hitotsubashi University) and Keio University without bothering the family. This locking-in of human resources and advanced knowledge (specifically, English and accounting) was instrumental to the development of the nascent but growing business in international trade (Abe 1995, 110).
Masuda continued to pursue the restructuring initiative following the death of Minomura in 1877. The finances of Mitsui Bank were severely tested in 1885, however, when the Meiji government requested all private chartered banks, Mitsui included, to return the delegated functions to the central bank (namely, the right to print money) together with their paid-in capital, in connection with the establishment of the Bank of Japan. The bank's financial standing had already deteriorated because it had been forced to establish many branches in less economically important locations to carry out its designated public duties. Drastic reform became inevitable.
NEW SKILLED MANAGERS FOR NEW BUSINESS VENTURES
After struggling with this problem for several years, in 1891 the Mitsui family and Masuda decided to appoint a young businessman, Nakamigawa Hikojiro, to reform Mitsui Bank. Nakamigawa had spent three years in London studying Western political, economic, and business systems. After returning to Japan, he became president of Sanyo Railways, a railroad company that was established in 1887. His appointment was supported by Inoue Kaoru, who, as already stated, was a member of the oligarchy ruling Meiji Japan.
Nakamigawa began by introducing new blood, employing undergraduates from Keio University, his alma mater. At that time, many of the bank's administrative and managerial personnel were local government officials; Nakamigawa, however, delegated important managerial decisions to his team of talented young mangers and introduced a performance-based pay system. His second accomplishment was to reposition Mitsui Bank's business domain from public agency to private banking. He believed that the web of associations inside government was preventing Mitsui from sloughing off old traditions and modernizing its businesses. Although Nakamigawa had been recommended by a leading politician, he severed his connections with the Restoration government and set about cleaning up Mitsui's public agency businesses. His goal was to improve the bank's finances by modernizing the business itself.
Both Nakamigawa and Masuda were engaged in a bid to transform Mitsui's businesses from government-affiliated traditional merchants into modern conglomerates and the search for economies of scope, a process that involved taking advantage of the government's privatization policy. Matsukata Masayoshi, who took over as minister of finance after Okuma Shigenobu was ousted in 1881, pursued a policy of financial austerity that ran directly counter to the inflationary policies of his predecessor. These were the years of the so-called Matsukata deflation and were marked by rigid budget constraints, the withdrawal of unconvertible money, and further privatization of public businesses. Many public works and mines were sold to private companies; the majority was snapped up by the zaibatsu.11 In April 1888, the government called for bids for the state-owned Miike Mines, one of the largest coal mines in Japan, which had been under government control since 1873. With the expectation that the energy industry would play a central role in the industrialization of Japan and in light of the fact that Mitsui Bussan had had an exclusive contract with Miike coal since 1879, Masuda was convinced that the mines would be vital both to Mitsui Bussan and to the Mitsui zaibatsu. As government-appointed agent for coal exports, Masuda also understood the potential advantage of acquiring the Miike mines, since he was in a position to assess the exact extent of the deposits at Miike. When Masuda voiced his intention to tender a bid on behalf of Mitsui, Mitsubishi—which had a flourishing steamship business and had already purchased other national coal mines—stated that it would also participate in the bidding. Although Mitsui Bank was immersed in Nakamigawa's reform program, Masuda offered 4,555,000 yen, an unprecedented amount of money at that time. Mitsui's winning bid was only slightly higher than the offer tendered by Mitsubishi: 4,552,700 yen.12
The public was highly skeptical about Mitsui's ability to manage the mines, and Masuda was labeled “insane” for offering such an exorbitant bidding price. Knowing how scarce talented human resources were, however, Masuda said that the price included the cost of Dan Takuma, the chief engineer at Miike. Dan had studied mining engineering at the Massachusetts Institute of Technology and returned to Japan in 1878. After teaching at Osaka Engineering School and the University of Tokyo as an assistant professor, he moved to the Ministry of Engineering in 1884 and began working for Miike Mines. Masuda's plans to buy the mines were hatched at a time when primitive, traditional mining methods remained widespread. There was no incentive to improve efficiency, because cheap labor was abundant. Most of the miners were outcasts and convicts from local prisons. Masuda recognized that the introduction of advanced mining technologies would potentially increase productivity. He was convinced that Dan would play an important role in the modernization process. In fact, Mitsui Bussan accrued enormous profits from the technology-fueled development of the Miike mines. Moreover, like Alfred Sloan at GM, an MIT graduate with engineering background, Dan went on to make a huge contribution to the entire Mitsui conglomerate as the head of Mitsui Holding in the early twentieth century.13
As we have seen from this brief history of the Mitsui zaibatsu, while the traditional merchant families tended to be risk-averse in their attitude toward new ventures, they were forced to rely on entrepreneurs in order to survive in the transitional economy; in fact, disputes did occasionally erupt between family members and the professional managers they hired. Even Mitsui Takayoshi, who championed the reforms put forward by Minomura, sometimes opposed the changes proposed by his protégé (Yasuoka 1998, 497). The development of organizational structures that would reconcile the conflicting requirements of family hostility to risk, especially in untried business enterprises, and the absence of legal provision for limited liability partnerships, became an imperative. Mitsui began disengaging ownership from management and diversifying into new businesses somewhat earlier than other zaibatsu, which, as Berle and Means pointed out, is an important element of the modern corporate structure (Berle and Means 1932). This separation had the unintended effect of allowing the Mitsui zaibatsu to hire and promote young and talented personnel with a good grasp of the new business modalities and technologies in trade, finance, and mining, without fanning family anxiety. Mitsui actively recruited accomplished human resources with new knowledge from outside the company and charged them to adapt to the changes occurring in the wider environment. Several of these professional managers, Masuda, Nakamigawa, and Dan, for example, also promoted college graduates to further the development of the conglomerate. Nakamigawa, in particular, hired many graduates from Keio University to modernize and develop Mitsui Bank (see table 17.3). These young businessmen went on to diversify Mitsui's operations into department stores, paper manufacturing, textiles, and so on.
Running counter to the multidivisional organizations being developed in the United States, Mitsui developed a holding company type of conglomerate. From the point of view of transaction cost theory, this structure appears costly since each individual subsidiary was required to have redundant indirect functions, such as corporate strategy planning, personnel, general affairs, financing, and so on (see Williamson 1975 and Chandler 1962). Rationally, the multidivisional structure (the M-form), centralizes the indirect functions of each division and makes it possible to allocate managerial resources for an entire organization and thus to eliminate redundant costs. However, organizational structure is not always determined by rationality; it is often dictated by dependency on historical paths.
TABLE 17.3
Salaried Managers Promoted at Mitsui
Mitsui's choice of the holding company structure was motivated by three factors. The first was the conflict between family traditionalists and the new business entrepreneurs. The Mitsui family's aversion to risk dated back two hundred years, but in order for the family to survive the Meiji Restoration and the social and economic upheaval that accompanied this transition, it was necessary to bring in talented entrepreneurs from outside the company. The entrepreneurs, on the other hand, saw the Restoration as a great opportunity to launch new businesses. The second contributor to Mitsui's decision was the paucity of knowledge of modern business and technology, which left the old merchants with no choice but to give their managers a free hand to embark on new business ventures; so it was better for the entrepreneurs to be separate from the holding company. Finally, the range of business opportunities available in early Meiji was enormous, ranging from banking to railroads, trading, mining, shipping, shipbuilding and textiles, among others. However, the competition among old and new business groups was fierce, as was evidenced by the bidding for the Miike mines. The emphasis was on speed, and it was thus easier for the zaibatsu to establish subsidiaries under the holding company form than to internalize through divisions.
Mitsubishi: Multiple Uses of Resources14
Mitsui and Sumitomo established their business in the Edo era, going on to become giant conglomerates and to play significant roles in the industrialization of Japan. Mitsubishi, meanwhile, constitutes a comparatively new zaibatsu, since its first business was not founded until 1870. It took the company just fifteen years, however, to become one of the biggest business conglomerates in Japan.
Mitsubishi, however, faced challenges different from those faced by the zaibatsu whose businesses dated back to the Edo era; because it was a late entrant, Mitsubishi lost out to Mitsui and Sumitomo in important areas such as banking and mining.
This section examines how Mitsubishi succeeded in becoming one of Japan's four largest conglomerates in such a short space of time. Mitsubishi tried to avoid competition by breaking into new business areas. The company also diversified, making multiple uses of scarce resources accumulated in its core business.
SHIPPING BUSINESS: NEW GROWING DEMAND
Iwasaki Yataro was born in 1835 in Kochi Prefecture (then Tosa province), a region located on the south coast of Shikoku. He had humble status as a result of his father's position as a master-less samurai, but he became a follower of Yoshida Toyo, a politician committed to innovating the clan's political and economic bases, and was promoted rapidly, becoming a high-ranking official in the Tosa clan by 1870. That year, Yataro was assigned to operate the Tosa clan's shipping business, in which position he learned international trade. He then borrowed three ships from the clan and commenced shipping operations between Osaka and Tokyo and Kobe and Kochi. In 1873, Iwasaki bought the ships from the Tosa clan and established his own shipping firm, which he named Mitsubishi Shokai. He headquartered the company in Tokyo, and since no other company had moved into the shipping business, was able to gain a competitive advantage against his forebears.
At that time, the Meiji government was attempting to convert its fleets from sail to steam to expedite the industrialization and modernization of the economy. Foreign shipping companies had begun to open regular lines to Japan (Mishima 1981, 41–42). A British company, Peninsular and Oriental Steam Navigation (P&O), for example, had opened regular services between Nagasaki and Shanghai in 1859 and introduced the Yokohama, Shanghai, Hong Kong route in 1867. A French shipping company, Messageries Impériales, meanwhile introduced large steamships and opened a new route between Yokohama and Shanghai in 1867. Pacific Mail Steamship, an American company, opened a new route from San Francisco to Shanghai via Yokohama in 1865 and introduced a new service between Yokohama and Shanghai via Kobe and Nagasaki. Clearly, mass transport on land and sea would be essential to industrialization. The Meiji government thus established a shipping company in 1870. This state-run shipping company was unsuccessful, however, and was dissolved after ten months because of poor management (Mishima 1981, 43–44). The government established a new shipping company to provide regular services between Tokyo and Osaka in 1871. This company also failed and was dissolved in 1875.
Beginning in 1874, Yataro developed his shipping business by capitalizing on military demand. The modernization policy of the Meiji government had abolished privileged social classes and the samurai class in particular. In 1873, for example, the government announced that samurai stipends were to be taxed on a rolling basis, and this policy led to a series of samurai rebellions that culminated in 1874, when three thousand samurai, led by Eto Shinpei, rose up against the government in Saga (Kyushu). The government asked Mitsubishi for the use of its vessels in dispatching government forces to Saga, and it was owing to the swiftness of the Mitsubishi fleet that the Meiji government was able to subdue this insurrection.
The punitive expedition to Taiwan by Japanese military forces in 1874 was the first overseas deployment of the imperial Japanese military. The government decided to send 3,000 soldiers to Taiwan, and since its goal was to develop the domestic shipping industry for international trade, it ordered Mitsubishi to transport these men to Taiwan, awarding the company thirteen vessels for this purpose, which Mitsubishi was permitted to retain once the Taiwan expedition was completed. Mitsubishi's shipping capacity thus expanded, and the company opened an international route between Yokohama and Shanghai, becoming one of the largest shipping firms in the country.
Mitsubishi's shipping business grew through the aggressive use of discounting. In the growing process, Iwasaki promoted a number of professional managers who had graduated from top universities with a view to internalizing the advanced knowledge necessary to developing Mitsubishi's business concerns (see table 17.4).
Mitsubishi had supported large urban business interests and used its government subsidies to dominate the shipping industry. However, Mitsubishi now had many rivals in the shipping business. Foreign vessels had commenced operating out of Japan and several zaibatsu groups were moving into the field. Price competition intensified. Moreover, the growth of Mitsubishi was accompanied by a rise in anti-Mitsubishi sentiment. Opponents criticized its relationship with the Constitutional Progressive Party, one of the main political parties, which was the recipient of Mitsubishi funding. Then, in 1883, Shibusawa Eiichi, an industrialist who later established Shibusawa zaibatsu, launched a shipping company in partnership with Mitsui: Kyodo Unyu Kaisha (Joint Shipping Company), to compete with Mitsubishi.
TABLE 17.4
Salaried Managers Promoted in Mitsubishi
The aggressive price war between the two shipping companies—a battle that lasted for two years—damaged the financial standing of both firms. The government proposed that these two firms merge on equal terms to form a new company. Agreement was reached and in 1885, a new company, Nippon Yusen Corporation (NYK), was born. Iwasaki Hisaya, Yataro's eldest son, became the first shareholder, and though Mitsubishi had theoretically lost its shipping company, in practice, it had won the pricing war against Kyodo Unyu Kaisha and secured the managerial initiative in the newly established company.
The shipping business played two important roles in Mitsubishi's development. As stated at the beginning of this section, key businesses, like mining and finance, were already dominated by veteran businesses such as Mitsui and Sumitomo when Mitsubishi founded its shipping business in the 1870s, but the older zaibatsu had no hold on marine transport. With the government's support, the shipping business enabled Mitsubishi, a comparatively new zaibatsu, to accumulate capital and to grasp business opportunities for diversification.
DIVERSIFICATION: MULTIPLE USES OF RESOURCES
From the mid-1880s, Yataro began to diversify and to shift the focus of Mitsubishi's business from shipping to heavy industry. He began by internalizing businesses that were complementary to shipping, and then spun off the internalized resources once they became independently capable of servicing the main business. This process brought unused managerial resources to light. In Penrose's words, the diversification of Mitsubishi was based on the utilization of unused resources (Penrose 1980).
In the 1880s, coal was the main fuel for vessels, and the shipping business needed to maintain ample supplies. The growth of the industry, however, raised questions about the feasibility of securing sufficient coal resources and in April 1881, Yataro began operating a mining business in Wakayama to supply the Mitsubishi fleet. The supply of coal from Wakayama was not enough to meet the demands of Mitsubishi's growing shipping business, however. At the time, Mitsubishi was also buying coal from the Takashima coal mine in Nagasaki, and in March 1881 Yataro decided to bring this mine into the Mitsubishi fold. The Takashima coal mine was bought by Mitsubishi with the assistance of Fukuzawa Yukichi because Yataro anticipated that the business would not only provide a stable supply of energy for the Mitsubishi shipping arm, but that it could also profit handsomely from the exportation of excess. Yataro's predictions proved correct, and Mitsubishi began shipping its spare coal to Shanghai, Hong Kong, and Singapore. Yataro overcame one of the obstructions hampering the Mitsubishi shipping business and created a complementary and synergistic relationship between coal mining and shipping through backward vertical integration.
Another stumbling block for Mitsubishi was the lack of a ship repair facility at its main port, Yokohama, and the company was thus forced to send damaged ships to Shanghai or London for repair. Yataro therefore established the Mitsubishi Engine Works in partnership with Boyd & Co., which financed half of the capital for the ironworks in 1875. In 1876, the Engine Works began taking repair orders from other shipping companies. In December 1879, Yataro acquired Boyd & Co.'s interest in the Mitsubishi ironworks, and while the Mitsubishi Engine Works were not used for shipbuilding, it did become the largest privately owned ship-repair dock in Yokohama and one of Mitsubishi's most important.
Mitsubishi then began surveying the shipbuilding business. The Tokugawa shogunate had established a ship-repair dock in 1857 and, in 1863, had constructed facilities for building battleships in Nagasaki. The Meiji government bought Kosuge Ship Repair Dock, which was established 1868 with the introduction of advanced ship-repairing technology from Britain. These facilities, known as Nagasaki Shipyard, became an important center for shipbuilding. However, with the locus of the shipping business shifting from Nagasaki to Kobe and Osaka, the government decided to privatize its Nagasaki shipping concerns. In June 1884, Mitsubishi, at that time competing with Kyodo Unyu Kaisha, made a successful bid to lease the premises from the government. Shoda Heigoro invested to upgrade the dockyards and their plant facilities so that the Nagasaki Shipyard could build large and technically advanced ships and Mitsubishi deployed advanced engineers from the Mitsubishi Engine Works to Nagasaki. It also employed new graduates from the Tokyo Technical School (later the Tokyo Institute of Technology) and Imperial College of Engineering (later the University of Tokyo). These skilled engineers and the upgraded facilities at Nagasaki Shipyard gave Mitsubishi's shipbuilding business the leading position in the industry.
Mitsubishi later began offering fringe services to the shipping business. From the outset, the company had faced stiff competition from foreign shipping. One of its rivals, P&O of the United Kingdom, was increasing its market share by moving into the financial sector and had won a transport contract with Osaka's wholesale association. Yataro believed that if Mitsubishi also offered financial services such as documentary bills (i.e., bills attached to bills of landing, assuring their payment), it could increase its own market share. He launched this service for shipments between Tokyo and Osaka in March 1876, then extended it to cover every branch in Japan in 1879. In 1880, Iwasaki Yataro established the Mitsubishi Exchange Office (Mitsubishi Kawase Ten), later called Mitsubishi Bank, which became the main bank of the Mitsubishi conglomerate. Yataro also developed another peripheral service with its warehouse and cargo business. By developing a transport network that covered Japan and providing financial services to shippers, Mitsubishi connected dispersed markets and remote regions such as Tohoku and Hokkaido with the central markets and Osaka. In other words, Mitsubishi extended the market frontiers of Japan.
In addition, Yataro attempted to develop a marine insurance business, but the government refused permission since the peerage association of the former clan lords had already begun establishing such insurance agencies, utilizing the capital of old feudal lords and court nobles. Nonetheless, Mitsubishi was invited to join the business by Shibusawa Eiichi, one of the organizers of this project, who believed that the company would be one of its largest customers. Mitsubishi decided to participate and provided 11,000 yen in capital (more than one-sixth of the total capital); it also became the first shareholder. The business, named Tokyo Marine Insurance, began operating in 1878.
ADVANCED KNOWLEDGE AND FURTHER DIVERSIFICATION
As the scale and scope of the business grew, it was necessary for Mitsubishi to expand its pool of human resources with advanced expertise in the new growing businesses. It began by employing foreign engineers and introducing advanced technology from abroad. A British engineer sent by Boyd & Co., for instance, played an important role in introducing advanced technologies at the Mitsubishi shipbuilding plants (Iwasakike Denki Kankokai 1979, 2:200). Foreign engineers additionally played a leading role at Nagasaki Shipyard. Mitsubishi also sent its engineers to Britain and the United States to learn advanced technology.
As already stated, Yataro also hired new graduates from the Tokyo Technical School and the Imperial College of Engineering. He additionally established two schools that were intended to supply human resources to Mitsubishi's growing businesses. His first school, the Mitsubishi Merchant Ship School in Tokyo, was opened in 1875 with government assistance. It was designed to produce skilled crew. In 1878, Yataro established a business school, Mitsubishi School of Commerce, also in Tokyo. He was convinced that there was a shortage of workers capable of understanding the new business environment and of leading innovation in emerging sectors and believed that Mitsubishi needed to take responsibility for producing the human resources that would be needed for its business concerns. At this school, one hundred students studied English, mathematics, bookkeeping, economics, history, and geography. Iwasaki Hisaya, Yataro's oldest son, was one of them. Although it closed after six years owing to the financial constraints of competing with Kyodo Unyu, the Mitsubishi School of Commerce did make a contribution to human resource training. Toyokawa Ryohei, the senior lecturer at Mitsubishi School of Commerce, was instrumental in the hiring of many entrepreneurs for Mitsubishi. It was he who, in 1875, recruited Shoda Heigoro, a teacher at Keio University. Shoda introduced cost accounting for Mitsubishi's shipping business, a practice that was unheard of at the time. He was also involved in the establishment of Tokyo Marine Insurance and Meiji Life Insurance and supported three Iwasaki entrepreneurs, Yataro, Yanosuke, and Hisaya.
The shipping business was central to Mitsubishi's concerns, and Yataro diversified with a view to establishing complementary ventures. Diversification took the form of both backward and forward-vertical integration, which was a rational strategy given the scarcity of available resources. Yataro's death in 1885 altered this trajectory. His eldest son, Hisaya, was still young, so Yataro's younger brother, Iwasaki Yanosuke, took over Yataro's position at Mitsubishi. Yanosuke positioned the Nagasaki Shipyard and Takashima Coal Mine at the center and created a new diversification strategy with the slogan “From the sea to the land.” His first major step was to buy the Nagasaki Shipyard, which, at the end of the 1880s, was primarily used for repairs; Yanosuke wanted to use it for shipbuilding.
Yanosuke bequeathed the presidency to Yataro's oldest son in 1893. Hisaya had studied at the University of Pennsylvania from 1886 and returned to Japan in 1891. Although both Yanosuke and Hisaya acceded to the presidency of Mitsubishi by succession, it does not follow that Mitsubishi's pattern of promotion was based solely on family lineage. Hisaya had studied English, accounting, law, and economics at Mitsubishi School of Commerce. After assuming the presidency of Mitsubishi, he modernized Nagasaki Shipyard, investing huge amounts in infrastructure and equipment and recruiting advanced engineers, and installed advanced equipment so that the shipyard could produce large, custom-built vessels. The first vessel built at the Nagasaki Shipyard was a 206-ton vessel for the coal mines. By the end of the 1900s, the shipyard had become one of the most advanced shipbuilding facilities in the world. In 1905, Mitsubishi established Kobe Shipyard. Many industrial firms were spun off from the two shipyards, as Mitsubishi developed related businesses, such as Mitsubishi Ironworks in 1917, Mitsubishi Internal-Combustion Engine Manufacturing in 1920, and Mitsubishi Electric in 1921, all of which were to become important elements of the parent company.
There was a certain pattern to the diversification strategies employed by Mitsubishi. The company started by internalizing complementary resources to gain competitiveness in its core business. This accordingly took the form of vertical integration. Second, when these internalized businesses reached the point at which they could provide services to non-Mitsubishi firms, they were spun off from the core business. In other words, when unused resources emerged, the core business began to provide services to other firms. Top management spun-off noncore businesses to create independent enterprises that would enable newly empowered entrepreneurs to make strategic decisions and increase their commitment to the businesses under their command. This diversification into related areas made the best use of available resources, especially when they were scarce, scattered, or had been taken by forerunners. It is worth noting that in early Meiji, Mitsubishi had entered fields such as silk manufacturing and copper mining, neither of which was closely related to any of its existing businesses. None were successful, however. It was the businesses with links to existing ventures that contributed to the development of the Mitsubishi conglomerate.
ORGANIZATIONAL INNOVATION: MULTIDIVISIONAL FORM
Much of the previous literature on the Mitsubishi zaibatsu has pointed out that the strong entrepreneurial leadership demonstrated by Iwasaki Yataro, Yanosuke, and Hisaya played an important role in the company's development.15 In 1875, Mitsubishi made it clear that the Iwasaki family would have managerial control and responsibility for all its business concerns (Iwasakike Denki Kankokai 1979, 2:152). In clear contrast to Mitsui, the Mitsubishi entrepreneurs faced no obstacles in allocating family capital to new ventures.
However, as Mitsubishi diversified, it became difficult for the family to monitor and control individual concerns. With this and the restructuring of the central office in mind, Yanosuke established the Mitsubishi Sha in 1886. Even though Yanosuke was the power behind this organizational change, he introduced divisional managers to monitor individual businesses. The problems were aggravated by further expansion in the mid-1890s, and in 1893 Mitsubishi reorganized its portfolio, giving financial and managerial autonomy to the coal-mining and mining arms. The coal mine, mining, and shipbuilding businesses were turned into limited partnerships. Mitsubishi adopted a multidivisional form to control diversified business, as is discussed by Chandler (1962). Based on this organizational shake-up, individual divisions were converted to joint-stock companies, and the central office became a holding company in 1917. As Morikawa (1981) has indicated, this transformation allowed the respective firms to raise capital and avoid business risks, and their leaders were given managerial autonomy over strategic decisions.
Conclusions
Entrepreneurship is the ability to carry out innovation that leads to economic growth. In 1853, Japan opened its society after a period of seclusion that had extended over two centuries. It needed to achieve rapid industrialization in order to catch up with the West. It had little or no industrial and social infrastructure, however, and its knowledge of science and technology lagged far behind that of the developed world.
Note again that the government played a crucial role in this process. There was a substantial group of innovative entrepreneurs in the Meiji period. As we discussed, many of the zaibatsu entrepreneurs were lower-ranking samurai. There were four social classes, which originated in the mid-sixteenth century, namely samurai, peasants, artesian and merchants. This social class system was generally rigid and immobile in the Edo period, though there was a certain level of social mobility among rank-and-file people. The nation enjoyed a period of peace and prosperity for more than 250 years. Under this period of peace, samurai became courtiers, bureaucrats, and administrators in the Edo period. The class system was abolished in 1869 with the fall of Tokugawa regime. This was one of the important institutional changes that promoted entrepreneurial activity. The abolition of the class system gave the nation a great social mobility. Based on this increased mobility, the lower-ranking samurai developed their personal networks and entered into new businesses. Regardless their ex-social class, the able managers and skilled engineers were recruited and assigned to positions of power in the fields of growing businesses. The Meiji government adopted a strong industrialization policy and promoted the industrial development of firms, luring skilled engineers from Britain and France with the promise of high salaries. The educational reforms instituted by the Meiji government to provide highly skilled engineers and business experts were also important institutional changes for entrepreneurial activity. The government set up public manufacturing facilities, including shipyards and ironworks as well. These institutional changes provided an environment favorable to entrepreneurs.
However, it was the entrepreneurs that were the key drivers of the transformation from feudalism to industrial capitalism. Entrepreneurs such as Minomura Rizaemon and Iwasaki Yataro internalized scarce resources and developed vertically integrated enterprises by putting the resources thus accumulated to multiple use.
The Mitsui families were leading traditional merchants who went into business during the Edo era and faced stagnation in the immediate aftermath of the Meiji Restoration. Mitsui was compelled to reform its traditional ways by the deep-seated changes in society that came with the Meiji Restoration; it brought in capable entrepreneurs such as Minomura and Masuda to implement radical change. In the process of reconstructing the Mitsui business, these entrepreneurs frequently ran counter to the family's interests and risk-averse preferences, but the absence of mature financial markets necessitated the use of family capital. They thus developed a style of corporate governance that would permit capital resources to be utilized without imposing unlimited liability obligations on the family. This style of governance sheltered other businesses from risk and encouraged investment in new ventures. Based on organizational innovation, the entrepreneurs empowered college graduates, with advanced expertise and business acumen, to make strategic managerial decisions.
As the late Edo latecomer, Mitsubishi did not encounter such problems. It did, however, have to compete with its predecessor and operate with scarce resources. Mitsubishi tackled these challenges by establishing a shipping business—a field free of competitors—as its central concern. Its lack of resources led the company to buy public assets from the government and to internalize resources that were complementary to its core business. Once these resources had reached a certain scale, the company began to diversify. The roles played by Mitsubishi's leaders, including Iwasaki Yataro and Iwasaki Yanosuke, in the rapid expansion of the company have been discussed. It is, however, important to note again that their managerial decisions were based on economic reasoning. The pattern of Mitsubishi's development was the result of diversification and multiple uses of accumulated resources.
A key strategy central to the success of both zaibatsu was the creation of organizational structures that enabled young engineers and college graduates to be recruited and assigned to positions of power (Yonekawa 1984). Mitsui and Sumitomo had also delegated some limited managerial authority over daily administrative tasks to their employees during the Edo era, but they retained control over strategic managerial decisions. As industrial businesses grew in scale and scope, it was necessary for top management to promote capable engineers and managers to make use of new advanced knowledge. The entrepreneurs thus adopted a multidivisional structure that would give such personnel the necessary authority to make key decisions, and the big business conglomerates began promoting college graduates. Until the 1920s, the main businesses of the zaibatsu were shipbuilding, ironworks, and coal mining. In the decades that followed, new conglomerates increased their competitiveness in industries such as automobiles and chemicals by employing engineering graduates with knowledge of new technologies in these growing industrial sectors. They were operating in different fields from their predecessors, but the techniques they employed were identical with those espoused by Mitsui and Mitsubishi.
It is noteworthy that throughout the Meiji era, not only the zaibatsu families but also their entrepreneurial managers could get both financial and social rewards from their business activities. For example, Yanosuke Iwasaki, the second president of Mitsubishi and one of the richest men in prewar Japan, became the fourth president of the Bank of Japan and devoted his time to national financial policy. Nariaki Ikeda, the general manager of Mitsui Holdings after Takuma Dan, became the fourteenth president of the Bank of Japan and served the Konoe cabinet as the minister of both Finance and Commerce and Industry from 1938 to 1939.
Zaibatsu have been significant players in the Japanese economy since the Meiji Restoration. They reached their zenith in terms of size and influence in the 1930s. The five zaibatsu holding companies (Mitsui, Mitsubishi, Sumitomo, Yasuda, and Fuji) were dissolved by GHQ as a part of the “democratization and demilitarization” policy after 1946. With their holding companies shut down, in the 1960s the zaibatsu began restructuring their businesses (known as keiretsu) by developing cross-share holdings, and their economic influence remains strong in many industrial and financial sectors of Japan.
The organizational innovations that enabled the promotion of skilled personnel in new business ventures and the multiple uses of resources that led to their rapid growth in scale and scope played an important role in the Japanese economy at a time when tremendous new business opportunities were widespread and the resources to understand and exploit these opportunities were scarce and dispersed. The zaibatsu was the organizational innovation adopted by Japan at this particular stage in its economic development.
Appendix: Japan
Figure 17.1. Map of Japan.
Notes
1 For more information on the economy of the late Tokugawa period, see Lockwood 1965, 17–44.
2 On the slogan, see Samuels 1994.
3 For further information on the zaibatsu dissolution, see Bisson 1954. Regarding the economic reforms following World War II, see Teranishi and Kosai 1993 and Nakamura 1981 .
4 Examples in other countries of family-controlled conglomerates that have grown rapidly by concentrating national resources can be found in South America, India, and, more recently, Korea and Russia. These business groups are observed to have emulated the strategies employed by Japan's zaibatsu in the transformation to industrial capitalism. For more information on comparative studies of family business conglomerates, see Yasuoka 1985.
5 On the foreign engineers, see UNESCO Centre for East Asian Cultural Studies 1975.
6 For information on the governmental project to send students abroad in this period, see Takahashi 1968, 351–55.
7 For details on vocational education and development, see Hayashi 1990, chap. 12. Both Hayashi and Hirshmeier (1964) point out that a new positive image of business emerged during the Meiji era.
8 About the Mitsui zaibatsu, see Yasuoka 1982, 1998; and Roberts 1973.
9 On the Mitsui business and role of Omotokata, see Yasuoka 1998.
10 For details on Senshu-sha and the founding of Mitsui Bussan, see Nihon Keieishi Kenkyu Sho 1978.
11 On the privatization of public works and mines, see Kobayashi 1977.
12 For information on this bid, see Nagai 1989.
13 For details on Alfred Sloan, see Sloan 1963. In 1914, Dan became head of Mitsui Holdings, succeeding Masuda Takashi and leading Mitsui to become Japan's largest conglomerate. In 1932 he was assassinated by right-wing nationalists, in front of the newly built general office.
14 For details on the Mitsubishi zaibatsu, see Mishima 1981, 1989.
15 For example, see Mishima 1981, 210–12.
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