Parent-subsidiary relationships in Japan: some observations from financial statement data.

Most of the interest in Japanese companies has been on prestigious, large firms such as Toyota Motor, NEC, and Honda Motor. These firms have been widely regarded as very efficient and effective, especially for expanding market share in world markets. A less-known fact, however, is that many subsidiaries or spin-offs have been assisting their parent firms in many ways. It should be noted that subsidiary companies in Japan are legally independent entities that issue their own stock and are listed on the stock exchange. In manufacturing industries, most of these subsidiaries work either as parts suppliers for their parent firms or as manufacturers of products complementary to their parent's. (Nishiguichi, Toshiburo, & Brookfield, 1997). Unlike U.S. firms which tend to treat spin-offs and subsidiaries as somewhat independent companies, Japanese parent companies incorporate their subsidiaries as integral parts of their strategic operations (Dyer, 1994; Rajan & Liker, 1994).

Major manufacturers such as Toyota Motor, Nissan Motor, and Nippon Steel have extensive parts supplier networks, and many suppliers are subsidiaries of these huge manufacturers (Lincoln, Ahmadjian, & Mason, 1998; Woronoff, 1983). These groups of manufacturers and parts suppliers are often called vertical keiretsu. Examples are the Toyota keiretsu and Honda keiretsu. They are referred to as "vertical" because interfirm relationships in these manufacturer groups are hierarchical (Tabeka, 1998; Hugh & Rosovsky, 1976).

There are also horizontal keiretsu groups, e.g., Mitsubishi and Sumitomo, that include vertical keiretsu groups as well as other manufacturers and financial institutions. Horizontal keiretsu groups contain companies of almost equal status, so that the relationships among firms are equal or horizontal. A horizontal keiretsu can have manufacturers that have developed networks of parts suppliers. The parent-subsidiary relationship in vertical keiretsu is often considered to be more hierarchical than that in horizontal keiretsu or non-keiretsu companies (Miyashita & Russell, 1994).

The relationships between Japanese parent and subsidiary firms are widely seen as dependent: subsidiary companies, which tend to be exclusive parts suppliers for parent firms, depend largely on their parents for business and survival. The parent-subsidiary relationships, therefore, tend to be hierarchical. Parent firms usually have overwhelming bargaining powers over their subsidiaries. In fact, it has even been claimed that subsidiaries tend to sacrifice their own profits to help their parent firms become profitable during periods of economic downturns (Sasaki, 1981).

However, few studies have empirically examined the parent-subsidiary relationships. This study investigates these relationships by comparing strategies and performance of parent and subsidiary corporations, using financial statement data. This study also examines the impact of keiretsu relationship on the parent-subsidiary relationship.

Keiretsu and Parent-Subsidiary Relationships in Japan

Keiretsu relationships …