Annals of Business Administrative Science 8 (2009) 1–20
Available at www.gbrc.jp

Online ISSN 1347-4456 Print ISSN 1347-4464©2009 Global Business Research Center

A New Model of Japanese Industrial Districts
Combining Supplier-Side and Purchaser-Side Logic

Nobuyuki INAMIZU
Manufacturing Management Research Center
Faculty of Economics, the University of Tokyo
E-mail: noboo@nona.dti.ne.jp

Takahisa WAKABAYASHI
Graduate School of Economics, the University of Tokyo
E-mail: taka17@deluxe.ocn.ne.jp

Abstract: This paper proposes to combine supplier-side and purchaser-side logic in a newmodel of Japanese industrial districts. We interviewed large retail firms that were purchasers forindustrial districts and 21 small-scale firms located in Tokyo’s Ota Ward and Joto area that were
the suppliers. Our interviews clearly highlighted the importance of business practices called“Kouza” and “Chouai.” Large enterprises on the purchaser side deal only with kouza-holding
firms (direct suppliers) and chouai-saki, which coordinate sub-suppliers. The assumption ofsuch business practices implies that firms holding kouza within the industrial district are anecessity for purchasers to enjoy economies of agglomeration.
Keywords: economies of agglomeration, local markets for special skills, kouza

1. Introductionindustrial districts, and the Marshall strain uses
small-business theory to explain the mechanisms

There are two strains of theory that explain industrial

behind the functioning and continued existence ofdistricts: the Weber strain uses location theory toindustrial

explain the mechanisms behind the formation of

Takahashi, 2007; Matsubara, 1999; Sumiya, 1971;

districts(Inamizu,

Wakabayashi&

1Inamizu and Wakabashi

Yamamoto, 2005). To explain the formation ofshown little regard not only for generalizations fromindustrial districts, Weber clearly differentiatedindividual cases and the theoretical development

simple geographical economies in terms of factors,

consequent thereon but also for the relevance ofsuch as transportation costs and labor costs, andpurchasers’ logic.

advantages arising from the agglomeration of

In order to clarify purchasers’ logic, we

companies itself. Marshall was highly interested ininterviewed large retail firms serving as purchasers

the surprising continuity of industrial districts overfor industrial districts and 21 small-scale firms

long periods of time even after they had lost theirserving as suppliers in Tokyo’s Ota Ward and Joto

geographical advantages. In other words, a disputedarea, since Inamizu et al. (2007) had reviewed thepoint in industrial district research is the elucidation

existing studies and pointed out the problem notedof the mechanisms of economies of agglomeration,

above. Our interviews clearly showed that it was theas distinct from geographical economies.

business practice of large manufacturers andAt the same time, Japanese industrial district

distributors to deal only with suppliers andtheory, which has flourished since the latter half ofsubcontractors having kouza as suppliers, and that thethe 1990s, has resulted in notable research on thepresence of such kouza has come to signify thehistory of the so-called local industries. Thus,

trustworthiness of the suppliers. As a result, such

Japanese industrial district theory has not clarified

firms place strict demands on suppliers andthis distinction between geographical economies andsubcontractors, such as (a) examining the latter firms

economies of agglomeration. In addition, muchwhen they open kouza, and (b) terminating the kouza

research covers individual cases and does notwhen problems arise due to late deliveries or frequent

adequately discuss the degree to which such cases

failure of merchandise. Furthermore, there is clear

may be generally applied.

evidence of the business practice known as chouai, in

Following the method of Inamizu et al. (2007),

which one of these firms holding kouza is designatedwe first summarize the mechanisms behind thethe chouai-saki, and charged with coordinating andeconomies of agglomeration that are cited mostliaising with other small-scale suppliers to manage

commonly in Japanese industrial district theory. We

production and delivery times; in return, thepointtheorychouai-saki receives a sizable commission. Thus, forrepeatedly stresses that local markets for special

purchasers, the presence within the industrial districtskills must exist within the industrial district if

of firms holding kouza becomes a necessary

small-scale manufacturers (suppliers) are to enjoy

condition of enjoying economies of agglomeration.

out

Japanese industrial

districteconomies of agglomeration. Such a positionIn

clarifies that Japanese industrial district theory has

addition,amutually

reinforcing

relationship exists between the following two
2

A new model of Japanese industrial districts

required conditions: (a) Since the presence of local

2.

Disputed

pointsinindustrial

markets for special skillsmakes it possible for

district research: Classical industrial

kouza-holding firms to accept relatively larger
purchasers’ orders in comparison to their own

district theory

capabilities and yet maintain their kouza, these firms
Now, let us examine the two strains of industrial
tend to locate in areas with local markets for special

district theory. 1 In particular, let us clarify theskills; and (b) local markets for special skills tend to
disputed points in industrial district research byform in the vicinity of kouza-holding firms sincerevisiting the classical works of each strain: Weber
outsidesuppliers

acceptingordersfrom(1909) and Marshall (1920).

kouza-holding

firms

can

securestable—if
In his Theory of the Location of Industries,

small—volumes of business. By examining theWeber analyzes agglomeration (concentration ofpurchaser-side logic instead of merely the suppliereconomic activities or organizations involved in suchside as done in the past Japanese industrial district
activities in certain geographical areas). Consideringresearch, we will elucidate the complete mechanismthat firms’ locations were decided first to minimize
behind economies of agglomeration in industrial
transportation costs, Weber proposed economies in
districts for the first time.
expenses as well as economies in labor costs as
Furthermore, (i) purchasers and kouza-holding
factorsfirms

areseparateorganizations

andcontributing

todeviations

from

the

(ii)
considerationofminimized

transportation

kouza-holding firms are chosen individually by eachcosts. Then, he developed and studied models of how
purchaser (i.e., such firms differ by purchaser). Thus,
industrial agglomeration developed because of thesethis model can explain the following importantfactors.
characteristics and phenomena related to industrial
Weber’s contribution is in his differentiation
districts that have been pointed out in Japanese
between agglomeration resulting from minimizationindustrial district theory: confrere trading, structuresoftransportation

and

labor

costs

(incidentalof social division of labor akin to mountain chains,
agglomeration) and agglomeration resulting fromand location of purchasers outside industrial
economies in expenses (economies of agglomeration),
districts. These points will be discussed as topics for
which

arise

from

agglomeration

itself(pure

future research at the end of this paper.
agglomeration).

While

the

formereconomies

originally are specific to certain geographical areas,
the latter economies of agglomeration are not; this is1

3

See Inamizu et al. (2007) for details of the following
literature review.

Inamizu and Wakabashi

because they can arise wherever agglomerationinternal economies (economies gained from growthoccurs (Aoki, 1960). In other words, these can bein the size of a single company) and externalconsidered as economies that can be enjoyed only

economies, naming industrial districts as classic

after agglomeration has taken place.

examples of external economies. Since Weber’s

In

ChapterContinued:

The

10

(“Industrial

Concentration

Organization,of

agglomeration theory covered both growth inSpecializedbusiness size

andagglomeration of multiple

Industries in Particular Localities”) of Book IV ofbusinesses together (Aoki, 1960; Fujikawa, 1999;

Principles

discussed

Hoover, 1937; Itoh, 1970), it included advantages

localized industries. First, regarding why localizationfrom internal economies such as adoption of more

(agglomeration of a number of small firms of theefficient machinery and production organizations

same industry in a specific geographical area) occurs,

resulting from expansion of a firm’s size within the

Marshall enumerated a wide range of geographicalscope of economies of agglomeration. However,factors and proposed that numerous fortuities could

differentiation

affect such localization. He thus chose to focus on theeconomies is very important. Since only the affectedsurprising persistence of industries for whichfirm can enjoy the benefits of internal economies,

localization had already occurred. Noting that “Whensuch economies cannot attract other firms to the

an industry has thus chosen a locality for itself, it isvicinity. In contrast, it is believed that external

likely to stay there long” (Marshall, 1920, p. 271), heeconomies, which other firms can enjoy, are theproposed the following as primary factors of

economies capable of attracting other firms to the

localization: (1) growth of subsidiaries, (2) formation

vicinity (Aoki, 1960).

ofEconomics,

Marshallof local markets for special skills, and (3) adoptionThis

betweendifferentiationinternal

betweenandexternal

geographicaland spillover of new technologies. In particular, ineconomies and economies of agglomeration implies

Industry and Trade (Marshall, 1923), he called thethat the economies of agglomeration (external

adoption of new technologies based on local markets

economies) proposed by Marshall will not necessarily

for special skills a “special industrial atmosphere”

be enjoyed by firms whose agglomeration occurs dueand proposed that this atmosphere itself was ato geographical advantages. In fact, according toprimary factor behind the maintenance of localized

Saxenian (1994), whose research compared Routeindustries over long periods of time. In other words,

128 with Silicon Valley, the regional industrial

like Weber, Marshall clearly differentiates between

structure of Silicon Valley is based on the local

simple geographical economies and economies ofcommunity and on professional and information

agglomeration.

networks, into which were built human networks that

Unlike Weber, Marshall differentiates between

surpassed the Valley’s frameworks of company and4A new model of Japanese industrial districts

Figure 1. Results of searching “sangyo shuseki” (industrial district)

20

80

Book
hits 15

60

10

40

5

20

0

Journal
hits

0
1980

1985

1990

1995

2000

2005

Year
Books

Journalsfunction and formed a culture of innovation. On thefirms to their vicinity, the focus of the analysis

other hand, Route 128 has the regional industrial

should be on external economies that canstructure of a collection of vertically integrated firms,

attract.
(3) Since existing industrial districts will notamong which there are almost no apparent relationsornecessarily generate and sustain external

work-related. As a result, although firms located ineconomies automatically, there is a need toRoute 128 enjoyed internal economies, the district did

seek out the conditions for generating and

not advance to the formation of local markets forsustaining external economies.

ofmutualdependency,

eithersocialspecial skills or a culture of technological innovation
Although in speaking of external economies,
as seen in Silicon Valley. Although Route 128 did
there is a tendency to point out only economies from
witness the formation of an industrial district, local
infrastructure improvements, such as railroads andmarkets for special skills did not form, and neither did
roads(Hoover,

1937;

Isard,

1956),

external

a culture of technological innovation develop there.
economies also include those gained by multiple
In light of the above discussion, we should befirms through direct interaction with each other.
able to summarize the points of dispute in industrial

3. Reconsidering Japanese industrial

district research as follows:

district theory(1) There is a need to analyze economies ofagglomeration as distinct from geographical3.1. Rarity of generalization and theoretical

economies.

development(2) Since internal economies cannot attract other

Since the 1990s, industrial districts have attracted
5Inamizu and Wakabashi

attention for their possible contributions to increasing1998), frequently covers the history and current

the competitive advantages of firms located in themcircumstances of such districts in detail from the(e.g., Porter, 1990; Porter, 1998). In Japan inperspective

particular, as shown in Fig. 1 even when accounting

enterprises. Therefore, the research tends to fall into

for biases of search systems,2 it is a fact that literature

the pattern of specific analysis of individual caseon industrial districts has increased rapidly since thestudies,latter half of the 1990s. Amid a lengthy economic

theoretical development in accordance with the threedownturn, there were lively movements attempting topoints of dispute summarized in the preceding

revitalize regional economies by creating industrial

section. Although simple comparison is difficult due

districts across Japan (e.g., Matsushima, 1998;

to substantial changes in the numbers of journals

Ogawa, 1998; Ohashi, 2000) and lively discussion onindexed, literature on local industry seems to havetransferring technology from universities to regional

peaked in the 1980s. Since it places such old wine

industrial clusters (e.g., Ishikura, Fujita, Maeda,(research on local industry) in new bottles (research

Kanai, & Yamazaki, 2003).

on industrial districts), Japanese industrial districtofwithout

small

sufficientandmedium-sized

generalizationortheory seems to lean toward coverage of localities.

This timing may have led to research in Japaneseindustrial district theory being focused on the Jonan

However, it is not that all preceding research

district of Tokyo (Seki & Kato, 1990; Watanabe,merely begins and ends with the history and current

1998; Whittaker, 1997) and the Higashi Osaka districtcircumstances of industrial districts. For example, in(Ueda, 2000, 2004a, 2004b). These districts can be

examining the cases of five local industries,

seen as leading examples of urban industrial districts

Yamazaki (1977) showed that while the origins of thein Japan. Research on Okatani in Nagano Prefecture,social division of labor apparent throughout local

which features an agglomeration of the precisionindustry are fairly old and that the background behindmachinery industry (Seki, Tsujita, 2001) and on

the formation of such industries differs fairly

Tsubame in Niigata Prefecture, a leading example ofconsiderably by locality, the following sevena rural industrial district (Iga, 2000; Seki, Fukuda,

characteristics serve as functional and fundamental
reasons for sustaining local industries in the long2

Total number of hits per year generated by the term. The
authors conducted a general bibliographic search in the
National Diet Library Online Public Access Catalog User
Guide (NDL-OPAC) and searches of indices of journal
articles, using the keyword sangyo shuseki (“industrial
district”). The search was conducted on April 21,
2007. Care is required concerning the generalbibliographic search because the number of journals
indexed has undergone substantial changes. While 3100
journals were indexed in June 1996, today the number
has risen to 9891. In addition, the term sangyo shuseki
was almost never used until the 1970s.

term. They are (1) lack of economies of scale, (2)technical divisibility of production processes, (3)availability of low-cost labor, (4) a social division oflabor that makes new entry easy with small amountsof capital, (5) a social division of labor that functions
to diversify risks and keep them to minimal levels, (6)6A new model of Japanese industrial districts

massive increase in the benefits of locating in a

volume of orders received that fluctuates constantly

locality as the external economy’s advantages

under factors such as economic and seasonalincrease during the development of local industries,

variations) have enabled firms located withinand (7) adaptability and elasticity of the socialindustrial

division of labor that influence the formation of

agglomeration (Watanabe, 1997). When demand

product structures suited to the times. In particular, hefluctuatescited Marshall in explaining the external economy asarrangement of production equipment must flexibly

described under characteristic “6.”allow for such changes, but from a cost perspective,

districts

toquantitatively

enjoy

and

economiesofqualitatively,

Accordingly, in this paper, we will identify andthe extent to which a single firm can respond to suchclassify matters on which there is consensus inchanges is naturally limited. However, it is believed

Japanese industrial district theory, bearing in mind

that a firm located within an industrial district canMarshall’s industrial district theory. Before doing so,

secure subcontractors, organize, and manage thewe will first define key concepts. In this study, we

production and processes of such subcontractors,

define industrial districts, according to Marshallbearing in mind the fluctuations in demand.

(1920), as the location of a number of small andAs pointed out by Marshall, a precondition for

medium-sized enterprises of the same industry in a

the above responses to be possible is the presence

certain geographical area. In addition, we define

within the industrial district of local markets for

economies of agglomeration, according to Weber

special skills. When this precondition is met, even in(1909), as cost savings enjoyed from use of an

response to large or high-level jobs that a company

industrial district that are greater than those that could

cannot handle on its own, the company can procure

be enjoyed without using the industrial district. Since

the skilled labor it needs from local markets for

we are defining industrial districts according to

special skills, enabling it to accept orders with

Marshall (1920), these economies of agglomeration

confidence that it can meet delivery schedules anddo not include internal economies. Below, we classify

fulfill quality expectations. However, it must be notedthe claims of Japanese industrial district theory fromthat skilled labor can be absorbed by firms not justthe perspective of external economies—in particular,

through employment relationships but also througheconomies arising from the presence of local markets

subcontracting relationships. In fact, in order to meetfor special skills.

delivery times, firms sometimes hire skilled laborers
from outside as immediate reinforcements or they

3.2.

Consensus

opinionsinJapanese

may subcontract work to small firms (Watanabe,industrial district theory: Supplier-side logic1997). In Ota Ward, thanks to the large numbers ofRelatively low levels of unstable demand (i.e.,

confreres located nearby, firms can accept orders for7

Inamizu and Wakabashi

jobs in which their own capabilities are weak or that

Higashi Osaka area, since demand for dies is heaviest

they would not be able to accept alone due towhen user firms develop and introduce new products

delivery-time or quantity considerations (Watanabe,

and most tool and die firms are positioned upstream1997). In this way, firms in Ota Ward are able to focus

in the supply chain, demand fluctuations areon their own areas of specialization, while responding

sizable. As a result, the parent company took one ofwith flexibility to qualitative and quantitative

the following two steps depending on the conditions:fluctuations in demand.

(i) when economic conditions were poor, the parent

Incidentally, the fact that local markets forcompany would encourage employees to become

special skills are maintained without verticalindependent and start their own firms by presenting

integration into a single firm means that the ranks ofthem with used machine tools in lieu of severance

skilled laborers and small firms are undergoingpayment, which served to eliminate or reduce fixed

constant renewal. A number of studies point out thiscosts. They would then assist these former employees

mechanism—aby means such as sending some of their work to themmechanismthatpromotes

independence and entrepreneurship.

or introducing customers; (ii) when economic

For example, it is said that in Tokyo’s Jonan area,

conditions improved, the parent company would

the route toward independence was observed byoutsource subcontracting work to these newly

which skilled machinists with nearly 10 years’

independent firms (Kato, 2006).

experience as factory employees shift from monthly

There is therefore consensus in Japanesesalaried work to a subcontractor system. In thisindustrial district theory about the presence within

system, they receive a fixed percentage of laborindustrial districts of local markets for special

charges for orders received. Usually, they start out byskills. For small and medium-sized manufacturers in

renting some of the space in new factories as

industrial districts, this is a required condition for

self-employed persons, then move to renting

economies of agglomeration.

semidetached or detached factory space and, finally,

4. Overlooked purchaser-side logic:

move into plants owned by their own companies. It
was fairly easy to go into business for oneself because

Business practices in Japanrental factories and installment purchases of

4.1. Awareness of the issues involved

machinery were available and subcontracting work

Based on Inamizu et al. (2007), we pointed out thatfrom one’s former employer as well as orders

the ability to receive orders for work that fluctuatesobtained through one’s network of associates were

quantitatively and qualitatively by using local

also readily available (Watanabe, 1979, 1997).

markets for special skills has been surveyed andAlternatively, in the tool and die industry in the

researched
8

inJapaneseindustrial

district

A new model of Japanese industrial districts

theory. However, there is a substantial difference infocused on the concept of kouza, it can be said thatmeaning between the ability to receive orders andYoshida did not address the logic of purchasers who

actually receiving such orders. This is because inopen these kouza.

order actually to receive an order, the purchaser must
actually place an order. Since its surveys and research

4.2.

Surveysubjects

andexamination

have targeted the small and medium-sized enterprises

methods

in industrial districts—that is, the supplier side—very

Accordingly, in this survey we conducted interviews

little research in Japanese industrial district theory

as outlined below, to address the problem pointed out

has discussed the other side of the equation: logic andby Inamizu et al. (2007).

economies on the purchaser side. To begin with, the(1) Over the period November 2006–April 2007,

kinds of conditions under which local markets for

we interviewed 21 small firms located in Tokyo’s Ota

special skills are maintained also have not been

Ward and Joto area, asking them about theirelucidated3.

transaction relationships and kouza. We interviewed

An exception is the research by Yoshida (2002)

management or persons in corresponding positions in

into kouza, which expresses the relationships between

each company, from one to three times each. Most ofpurchasers

industrial

these firms were small firms in the machine and metal

districts. Holding a kouza means that a firm has

industries, while some belonged to the chemical

formally registered with and been approved by a large

industry or light industries. In terms of size, seven of

enterprise as a supplier and trades with the large

the interviewed firms had from one to nine employees,

enterprise directly. Seeing kouza-holding firms as the

11 had from 10 to 49 employees, two had from 50 toones that organize and coordinate division of labor in99

the relatively horizontal division of labor in Ota Ward,

employees. Most of these were kouza-holding firms

Yoshida (2002) focused on the concept of kouza as ahaving kouza with large enterprises.

andsuppliersin

employees,

and

one

had

100

or

more

means of clarifying the divisions of labor within(2) We also interviewed a person formerlyindustrial districts 4 . For this reason, although heresponsible for the administrative system and the3)

person responsible for planning of locally produced

Theoretical research is more advanced outside Japan. For
example, Krugman (1991) attempts to clarify themechanisms for maintaining local markets for special
skills by modeling interdependence between laborers
and firms.
4)
Originally, with the exception of Yoshida (2002) research
did not attempt to confirm whether companies holdkouza. Within the scope of our study, in Japan large
manufacturers and large distributors do not designatecompanies other than kouza-holding firms as chouai-saki,
and as such the holding of kouza may be considered atacit requirement. In fact, similar concepts have beenasserted repeatedly in Japanese industrial district theory

since Sumiya (1971), who focused on the functions ofwholesalers in Tokyo’s Joto area. These have beenreferred to by various names, including “systemorganizers” (Yamazaki, 1977), chukakugata (“corefirms”) (Watanabe, 1997), juyo hannyu kigyo(“demand-input firms”) (Itami, 1998), and “linkage
firms” (Takaoka, 1998). Yoshida (2002) confirmed thatkouza-holding firms corresponded to the “core firms”
cited by Watanabe (1997) and that kouza-holding firms
based on the volume of work subcontracted per company
fulfilled the role of Itami’s “demand-input firms.”

9

Inamizu and Wakabashi

products in a large retailer. We interviewed the person

comprehensive examination of firms prior toformerly responsible for the administrative system for

issuing kouza, instead of focusing solely on

approximately two hours and interviewed both

relevant products and transaction details, andpersons together for approximately two hours as(b)well. We asked them primarily about transaction

example closing kouza in the event of failure

relations with suppliers and about kouza.

to meet delivery times or expected quality.

strictsubsequentexamination,for(5) In some cases, this evolution has progressed
4.3. Fact findings

further into the business practice known as

The results of these interviews made it clear that bychouai. In this business practice, an enterprisenature large manufacturers and distributors in Japan

dealing with a large number of small firms

employ the business practice of dealing directly only

will designate one kouza-holding firm as thewith suppliers and subcontractors that have kouza or

chouai-saki, charged with coordinating andnumbers (i.e., kouza-holding firms), and furthermore

serving as a liaison with other small firmsthat the extent of this business practice is as outlined(with only one order form issued, to the

below:

chouai-saki) and with managing delivery
times and quality control, in return for a(1) First, when supplier and subcontractor firms are
sizable commission.
formally authorized by large enterprises as
trading partners, they are registered and

The business practice whereby large enterprises

assigned supplier numbers. These are kouza.

on the purchaser side deal only with kouza-holding(2) These kouza numbers were intended originallyfirms reduces risk for the company since it is dealingfor use in identifying suppliers when issuing

directly with kouza-holding firms that have passed

various forms such as order forms andstrict examinations both before and after being

statements of delivery.

granted kouza and that can provide guarantees on(3) However, in actual practice the presence of atheir transactions. Also, by designating as akouza has come to signify credit. That is, evenchouai-saki a kouza-holding firm that can provide asmall firms can borrow operating funds fromguarantee on the transaction, a large enterprise will

financial institutions by showing them orderseek to avoid risk even in a case in which an orderforms with kouza numbers issued by large

cannot be handled by kouza-holding firms alone. In

manufacturers or large distributors.

addition, dealing with a chouai-saki alone in a case(4) Since these kouza have come to have credit

that ordinarily would involve dealing with a number

implications, the large enterprises that issueof small and medium-sized enterprises provides

them have also come to carry out (a)benefits in reduced administrative costs and improved10

A new model of Japanese industrial districts

efficiency.

quantities, and delivery times and providing technicalassistance; and (iii) some production functions such

4.4. Purchaser-side logic

as assembly, processing, fitting, and packing.

This business practice on the purchaser side implies

Furthermore, kouza-holding firms serving in thethat the following mutual relationships may exist

role of linking large enterprises with small firms

between firms inside and outside industrial districts.

within the industrial district face the risk of losing

First, for many individuals and small firms thetheir kouza if they fail to pay close attention toprocess of examination for opening a kouza is itself

delivery times and quality defects at all times. For thisvery difficult. For this reason, skilled laborers andreason, when accepting an order large enough tosmall firms can receive orders for work from large

excite concerns about meeting delivery times suchenterprises only via kouza-holding firms that alreadyfirms will, as noted above, hire skilled labor fromhave supplier kouza or numbers. As a result, an initial

outside the company as immediate reinforcements or

requirement for securing work is a relationship with asubcontract

kouza-holding firm.

1997). Whatever the case, due to the need to manage

work

to

small

firms

(Watanabe,

Next, although a large enterprise on thedelivery times and the possibility of defective work,

purchaser side needs to be flexible in organizing thesuch firms will, in general, choose neighboring

trading partners it uses in accordance with the needs

companies and plants since they are easier to manage.

of each job, as it will order work that varies bothIn such cases, the kouza-holding firms that fillquantitatively and qualitatively, being such is difficult

the role of linking large enterprises with small firms

under this business practice. On this point, when awithin the industrial district benefit as well fromkouza-holding firm is located inside the industrial

being

district the purchaser can reduce the costs associatedorders. Originally, it is difficult for small firms suchwith distribution, administration, and production foras those making up industrial districts to securesuch work that varies quantitatively and qualitatively

orders. Furthermore, due to their small size such firms

by its use of such a kouza-holding firm as aare strongly affected by fluctuations in demand,chouai-saki. This is because when a kouza-holding

which can become a factor affecting such companies’

firm serves as a chouai-saki it assumes (i) distribution

continued existence. To such small enterprises,

functions such as purchase, sale, replenishment, andholding a kouza—that is, the existence of a

distribution of products completed within thecontinuous transaction relationship with a large

industrial district; (ii) production control functions

enterprisewith regard to subcontractor firms within thetransactions—is highly significant for purposes ofindustrial district, such as designation of designs,

business stability. Furthermore, Yoshida (2002)
11

able

to

insteadsecureofrelatively

conducting

onlystablespot

Inamizu and Wakabashi

points out the following four points as additional

they can avoid transaction risks, and (b) they do notbenefits available to kouza-holding firms: (1) the highneed to cover directly costs related to processes such

likelihood of being able to receive orders from large

as distribution, administration, and production.

enterprises not limited to existing transactions, (2) the(2) Small and medium-sized enterprises on theability to carry out sales activities with easier access

supplier side can derive the benefits of having theto large enterprises, (3) the ability to gain the trust of

kouza-holding firms and chouai-saki assume theother small and medium-sized enterprises in the area,difficulties of the level of credit required and ofand (4) the ability to familiarize themselves withresponding to fluctuations in demand and managing

various management methods in areas such asdelivery times when dealing with large manufacturers

document preparation and quality control. All ofand large distributors on the purchaser side.

these can be considered conducive to securing orders.

(3) The kouza-holding firms that link large

Japanese industrial district theory has looked

enterprises on the purchaser side with small andonly at the presence or absence of ordering

medium-sized enterprises on the supplier side canrelationships and the distribution of labor withinderive the benefits of being able to secure relatively

industrial districts, without directly addressing thesestable orders by holding kouza with such large

Japanese business practices of kouza and chouaienterprises.

(Takaoka, 1998). For this reason, it has left largely

5. Conclusions

untouched the issues of why and how firms inindustrial districts receive business orders from

5.1. An integrated model of support foroutside these districts. In addition, even when

economies of agglomeration

focusing on the existence of firms that serve as points

Based on Inamizu et al. (2007), we have proposedof contact between firms inside and outside industrialthat the point of dispute in research into industrial

districts, the theory has not discussed sufficiently the

districts rests in elucidation of the mechanisms of

mutual relationships between and roles played bymaintenance and development of economies offirms inside and outside industrial districts. However,

agglomeration. We have also discussed supplier-sidea look at business practices involving kouza-holding

logic abstracted and generalized from Japanesefirms and chouai-saki makes it possible to summarize

industrial district theory. Further, we conducted anthese matters as outlined below.

independent survey to clarify purchaser-side logic,

(1)

By

using

kouza-holding

firms

and

which the existing research has not adequately

chouai-saki that provide guarantees for transactions,

examined. Although, because of the limited subjects

large manufacturers and large distributors on theof the survey reported on in this paper, it may bepurchaser side may derive the following benefits: (a)advisable to avoid too easy generalizations from our12

A new model of Japanese industrial districts

Figure 2. Three primary actors in industrial district

Industrial District(a) Large Firms(b) Kouza holding
Firms

Order

(c) SMEs

results, we would like to conclude by proposing a newcase may belong to category 3 (small firms serving as

model of industrial districts through a combination of

subcontractors) in another, and vice-versa.
Japanese industrial district theory has studied the

supplier-side and purchaser-side logic.
A look at the business practices pointed out inlogic of economies of agglomeration from thethe preceding section shows the need to analyze

supplier side. Costs restrict the ability of individual

industrial districts by differentiating between thefirms to reorganize production facilities flexibly infollowing three actors: (1) first- and second-tierresponse to demand that fluctuates quantitatively andenterprises that place orders with firms in industrial

qualitatively. However, location inside an industrial

districts, (2) kouza-holding firms that act as liaisons,district makes it possible for a firm to respond toand (3) small firms that receive orders fromfluctuating demand by using local markets for special

kouza-holding firms (see Figure 2).5 Of these, it isskills. In short:thought that industrial districts consist primarily offirms in categories 2 (kouza-holding firms) and 3

Required condition from the supplier side:(small firms). On this point, it must be noted that

Local markets for special skills must be present

since kouza-holding firms vary by purchaser, a firm

within the industrial district.

belonging to category 2 (kouza-holding firms) in one
This paper can be said to have elucidated
5

Figure 2 depicts a simplified labor-distribution structure
in an industrial district. In actual transactions, small firms
receiving subcontracting orders from kouza-holding
firms also frequently subcontract operations to otherfirms themselves.

somewhat the logic of economies of agglomerationfrom the purchaser side. Large manufacturers and13

Inamizu and Wakabashi

Figure 3. Required conditions of economies of agglomeration

Required

Requiredcondition on

condition on

supplier sidepurchaser side

Local market for

Kouza holding

special skills

firms

large retailers on the purchaser side employ theRequired condition from the purchaser side: Abusiness practice of dealing directly only withkouza-holding firm must be present within the

kouza-holding firms. 6 At the same time, while theindustrial district.

ability to restructure transactions flexibly is afluctuate

Furthermore, the following mutually reinforcing

quantitatively and qualitatively, doing so is difficult

relationships exist between these requirements on theunder this business practice. On this point, if a

supplier and purchaser sides:

requirementofplacingordersthat

kouza-holding firm is located within an industrial(a) Since the presence of local markets for

district it is possible to place orders for suchspecial skills makes it possible to accept orders fromfluctuating jobs by designating the kouza-holding

purchasers and maintain kouza even for jobs that arefirm as a chouai-saki and dealing through it. In short:relatively large in comparison with their own
capabilities, kouza-holding firms will locate in areas

6

It is highly likely that this business practice will continue
to persist in the future as well. This is because ISO
certification is now taken into consideration by large
enterprises in choosing direct trading partners. In fact,according to the survey covered in this paper, since it isunlikely even in areas such as Ota Ward that small firms
would have the specialized environmental managers
required under ISO 14000, large enterprises haveadopted the makeshift approach of dealing directly with
suppliers that have attained ISO certification. Further,
they require that firms serving as liaisons employ
administrative efforts such as document control, as partof their strengthening of governance activities.

with such local markets for special skills.
(b)

Since

subcontractors

locatednear

kouza-holding firms can secure stable work, even if insmall quantities, local markets for special skills will
form in such areas.
Put another way, the presence of local markets
for special skills encourages kouza-holding firms to
14

A new model of Japanese industrial districts

locate in an area, and the location of kouza-holding

individual purchasers are unstable and not infirms in an area encourages the formation of local

sufficient quantity, transaction relations between

markets for special skills (see Figure 3). Based on thiskouza-holding firms will switch with each order,

mutually reinforcing mechanism, economies ofsince work accommodations will be made for each

agglomeration appear, maintaining and promoting theorder. For this reason, confrere trading (Watanabe,industrial district. By looking at the purchaser side1997), in which orders are placed in both directions

instead of just the supplier side alone, as has been

between small firms in the same industry, takes place

done in traditional Japanese industrial district theory,(see Figure 4). This phenomenon has been pointed

we have been able for the first time to complete theoutmechanism of economies of agglomeration intheory. For example, in Ota Ward, against theindustrial districts.

background of the existence of other firms within thefrequently

inJapaneseindustrial

districtsame area, kouza-holding firms can accept orders for5.2. Toward future research

work they could not handle alone (Yoshida, 2002). In

Since the subject of the survey described in this paper

the case of tool-and-die manufacturers, whenis limited, research with a broader subject matterindustry-wide production capacity cannot increase

should be conducted in the future. We would like toquickly enough in times of rapid demand growth or inconclude this paper by proposing three issues thatorder to avoid the risks involved in facilities

should be verified by such research.

expansion, manufacturers mutually accommodate

The model proposed above has the following

excess orders received by outsourcing some work to

two characteristics: (i) purchasers and kouza-holdingothertool-and-die

manufacturers

firms are individual actors, and (ii) kouza-holding

processing only (Saito, 1994).

forspecific

firms are determined individually for (i.e., vary by)

Structure of social division of labor akineach purchaser. In fact, this also could explain theto a mountain chain: When one or moreprimary characteristics and phenomena of industrial

purchasers placing relatively stable orders in

districts as pointed out in Japanese industrial district

sufficient quantity is present, a structure similar totheory: confrere trading, the structure of the social

the structure of social division of labor like adivision of labor akin to a mountain chain, andmountainlocationofpurchasers

outsideindustrial

7

districts. This model should be used to further clarify
the conditions for formation of these characteristics
and of the phenomena noted.
Confrere trading: If orders received from
15

chain

(Watanabe,1997) 7willbe

The structure of social division of labor like a mountainchain is a concept proposed by Watanabe (1985, 1997)
to describe the structure of division of labor in theJapanese machine industry. Watanabe (1985, 1997)
depicts the concept of the structure of social division oflabor as a mountain chain on a graph, with company
size on the vertical axis and market capacity in themachine industry on the horizontal axis. Althoughlikening the structure of the social division of labor to aInamizu and Wakabashi

Figure 4. Confrere-trading structure

α

β

α

β
a

a
b

b
e

c

e

c
d

d

Note: When the purchaser changes, the directions of transactions between firms in the industrial district change as
well. (Firms shown in the same positions in the diagrams at left and right represent identical firms.)

visible. However, since in general firms can choose

district. To summarize, even if the location for thelocations irrespective of existing industrial districts

operations of the large manufacturer serving as thewhen there is stable business in large quantities

purchaser is the initial impetus for formation of the(Watanabe, 1997), this structure is not unique toindustrial district (Itami, 1998; Seki & Kato, 1990), it

industrial districts.

is not a requirement for the functioning and continued

Location of purchasers outside industrial

existence of the industrial district. Although, at a

districts: From the perspective of industrial district

minimum, the location of kouza-holding firms andmechanisms, purchasers need to be confined to

subcontractors within the industrial district is alocationswhenrequirement, large enterprises such as manufacturers,

information stickiness as proposed by von Hippel

retailers, and trading companies serving as purchasers(1994) is strong. When a kouza-holding firm fulfills

can be located either inside or outside the industrial

distribution, production control, and production

district.

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20

ABAS: Annals of Business Administrative ScienceVol. 8 December 2009

CHIEF EDITOR

Junjiro Shintaku, the University of TokyoEDITORIAL BOARD

Makoto Abe, the University of Tokyo
Takahiro Fujimoto, the University of Tokyo
Makoto Kasuya, the University of Tokyo
Nobuo Takahashi, the University of Tokyo
Technical Editor: Maki Nishida, Global Business Research Center

ABAS: Annals of Business Administrative Science is published annually by Global
Business Research Center, Marunouchi, Chiyoda-ku, Tokyo, JAPAN. http://www.gbrc.jp