DBJ Research Center on Global Warming
Discussion Paper Series No. 42 (7/2011)

The Agglomeration of Learned Skillls and the Roleof Regional Community

Hisashi Yaginuma

This paper is a preliminary material in the draft form to stimulate discussion
and comments from academics and policy makers. Views expressed in thispaper are those of the author(s) and do not necessarily reflect the official
views of the Development Bank of Japan.

1

The Agglomeration of Learned Skills andthe Role of Regional Community
Hisashi Yaginuma

1. Introduction
It is an already established view since the end of 1970's that the agglomeration of very small
factories in Ohta-ward, located in the south of Tokyo, can be seen as a highly flexible
production network system. In this paper, keeping this recognition in mind, I will try toreassess the role of this regional community by stressing the diversity of learned skills, theimportance of the tacit knowledge, and also the reliable relationship and trust nurtured orembedded in this regional community which reduces the transaction cost and induce theinnovation in general. By doing so, we can make it clear how the small factories in
Ohta-ward have produced workers with accumulated skills and unique characters arisingfrom the interdependent relationship among them in the community.
The argument in this paper proceeds as in the follows. At first, the agglomerationof small factories in Ohta-ward and its structural characteristics are briefly explained.
How this phenomenon is explained by the logic of economics follows next. We
can interpret the meaning of obtaining skills as the process of learning tacit knowledge.
It is suggested that the diffusion and transfer of this learned skills are closely
related with the innovations in the regional community.
The pride and artisan spirit of the highly skilled craftsmen working in these small
factories are fed through the interactive relation among them in this community. It suggests
the importance of the social network in this area.
The 'Ohta-ward Model' based on factors existing in this area gives us a good
explanation of this unique and diversified city region. However, the change in thesurrounding environment of this region may destroy the network based upon the trust.

2. The Agglomeration of Small Factories in Ohta-ward
2.1 The Brief History of the Factory Agglomeration

2
In the beginning of Meiji-Era in Japan, Ohta is an area whose main industries are
agriculture and fishery such as seaweeds extraction. Only some canning plants and straw
working factories are located here. The straw hats are the main export products at that time
(S. Okabe and H. Yaginuma, 1978). Lately, several plants and factories located here. But
the atmosphere remained quite rural as a whole.
However, the great Kanto earthquake in 1923 brought about the relocation ofmany factories from the central Tokyo. And the outbreak of Manchurian War in 1931 andits accompanying military demand contributed to the expansion of factories and its
subcontractors in this district, leading her as the core of the Keihin Industrial Belt.
The number of factories in Ohta showed a dramatic increase from 1,112 in 1932
to 5,148 in 1941(S. Okabe and H. Yaginuma, 1978).
The defeat of the 2nd World War gave a great damage to Ohta-ward and thenumber of factories remained about half of 1941 even in 1948 (D. H. Whittaker, 1997, S.
Okabe and H. Yaginuma, 1978). As the Japanese economy entered into the high growth
period, the industry in Ohta-ward became active once again and the number of factories
exceeded the 1941 peak in 1961. The peak of the agglomeration of factories in Ohta-ward
comes in 1983. 1 It is the year when Japanese economy appeared as the giant with great
trade surplus after she managed to overcome the 1st (1973) and 2nd (1978) oil crisis.
The drastic appreciation of Yen and the resulting low interest rate brought about
the 'Bubble.' Japanese economy could not come out the long recession after the collapse ofthis bubble during the last 15 years.
The most remarkable characteristics of the industrial agglomeration in Ohta-ward
are the specialization to metal and machinery industry and the concentration of very small
businesses (Table 1) (S. Okabe and H. Yaginuma, 1978, D. H. Whittaker, 1997, M. Seki and
H. Kato, 1990).
<Table 1 is around here.>
Today, because of the demand shift occurring from the overseas investment ofmajor manufacturing companies, the massive inflow of competitive foreign products from1

The number of factories at the peak of each business cycle is as follows.
Year
1963 1966 1970 1973 1978 1983
Number 7,556 7,031 7,257 8,893 8,380 9,190
Data are from S. Okabe and H. Yaginuma (1978), Institute of Development and Planning (1994), Research Institute of
Small and Medium Businesses (1996).
Accidentally, the number of small factories of Higashi-Osaka, which is also famous for its agglomeration of small
factories, showed the peak at the same year (T. Nakazawa, 1998).

3
China or South Korea, the basic transformation of industrial structure, and theurbanization and the rapid technological change, the number of factories in this region has
drastically declined to 6,038 in 1998, the latest available statistics, less than the one in 1963.

2.2 The Diversity of the Agglomeration
The diversity of the factory agglomeration can cope with various kinds of metal-working
processes. The diversified chain of processes of each factory in this region is as follows(Table 2).
Almost all the metal/machinery related businesses and factories in this region are
specializing into only one of these processes. The most concentrated process is cutting(about 30% of all businesses in this region) followed by sheet-metal processing (8%),
stamping (7%), mold-building (7%), and plastic molding (4%). Today, there exist
businesses and factories which specialize product-design and R&D, prototype
manufacturing, and order-matching (Japan Small Business Research Institute, 1996). In
addition, there is diversity of materials such as ferrous and nonferrous metals, ceramics,
carbon, glass fiber etc. For each material, different types, shapes, and sizes are processed.
The diversity processes in Ohta-ward is quite enormous.
<Table 2 is around here.>
Each material and component gets many different types of processing through the
network of factories before returning to the original ordering company. This chain ordivision of process is not constantly fixed. This is possible because of the potential
capability of each factory so that we can extract a necessary parts of the whole theirprocesses and change flexibly the combination of processes accordingly.
This can be named after M. Piore and C. Sabel (1984) as 'flexible specialization.'
To utilize fully the network of factories with diversified capabilities, some third
party players are required to match the demand and supply taking into account therequirements and separating the processes into small units and allocating each process toeach factory. Factories or craftsmen share their jobs or orders with others, which is called'Nakama Torihiki (transactions among colleagues or job and order sharing)' (S. Okabe andH. Yaginuma, 1978, D. H. Wittaker, 1997). Also, many intermediaries are specializing inconnecting outsiders with insiders or small factories (called 'linking agent' (M. Takaoka,
1998). It is indispensable for them to grasp fully the potential of each factory. The

4diversified agglomeration of small factories in Ohta-ward functions as the unique systempromoting the friendly competition (called 'Sessa Takuma') and the complimentarity orcollaboration among them (called 'Nakama Torihiki').
In the city region there exists lots of diversified needs for intermediate goods withdifferent qualities. By connecting or integrating diversified demand with flexible
agglomeration of supply capabilities, the network of factories in Ohta-ward can produce
lots of diversified intermediate goods.
S. Okabe and H. Yaginuma (1978) points out that small factories are trying toprocess prototype products and or small-lot products and diversify to new areas different
from their traditional businesses (M. Seki and H. Kato, 1990). 2

2.3 The Agglomeration of Learned Skills
In this region, most small factories have only standard and general-purpose machineries(Institute of Development and Planning, 1994). The key to understand the contradictory
phenomenon of the diversity of the goods produced and the uniformity or general-purpose
machineries used is the skills of the craftsmen in these small factories. They are
accumulated and embodied within workers or craftsmen through long years of working
experience. We call them as learned skills.
T. Ozeki (2000), as a lathe man, tells us about many insightful aspects of thenature of learned skills. Craftsman with learned skills can imagine in advance the final stateof the works or materials brought in. He can understand the whole processes ofmetal-working and check the point of attention by himself. Furthermore, he makes clear
about the types of blades and tools to be used or made, and the speed of cutting. 3 T.
Ozeki (2000) expresses this capability as 'the eye to look into the depth of jobs.' It is adifferent capability from the dexterity or cleverness in handling lots of works.
Various materials give sounds when they are cut. The sounds differ depending on
the types of materials, the shapes of blades, rotational speed of machines, movement ofholders, and condition of machines etc. Skilled lathe man must understand the situation bylistening the sounds it produces. In addition, even from the color and shape of chippings
In S. Okabe and H. Yaginuma (1978), that the per-capita value-added, wages and the percentage of factories withoriginal products and patents are higher in Ohta-ward than the national average for small factories. Research Instituteof Small and Medium Businesses (1996) points out even in 1994 the per capita value of shipment in Ohta-ward ishigher than the other region with large agglomeration of metal/machinery industries.
3 When the works are brought in, hand-written rough drawings called 'Manga,' are handed in. Skilled lathe man should
imagine the whole steps of metal-working processes based on Manga. The example of 'Manga' can be seen in H.
Nukada (1998), and T. Ozeki (2001).
2

5
the must infer the appropriateness of the state of work and the ways of cutting. 4
In some cases he scrapes the part not directed in the figures or drawings, called'Sute-biki (scraping to be discarded)' and in the case of mold-building he draws theirrelevant space of the die, which is called 'Sute-shibori (drawing to be discarded).'
These are highly creative activities, without which the final products cannot beproperly completed (T. Ozeki, 1998). The diverse capability of craftsman has displayed
originality in the fields of industrially advanced products. Many examples are shown in
Table 3 which became possible only through the effort and creativity of the small factory in
Ohta-ward (T. Ozeki, 1998).
<Table 3 is around here.>
Many big firms and various business people visited those factories in Ohta-ward
through this 'hidden road of jobs' (T. Ozeki, 2000) since 1950's (D. H. Whittaker, 1997).

3. The Economies of Connectedness and the Externalities
3.1 Division of Labor and Adjustment Cost
The small factory network in this region as a whole does not engage in the production ofstandardized and homogeneous goods in large scale. 'Economies of scope' (W. J. Baumol
et al., 1988) refers the cost advantage of producing several goods in one organization rather
than in different multiple organizations. This fits well to the diversification of big
corporations but not to the network of small factories.
A. Smith's 'division of labor' is concerned about the allocation of labor in one
factory. It can explain the existence of the network of small factories each specializing into
one of the metal-working processes and connected with each other through the chain ofprocesses.
Theses discussions refer to the existence of the 'economies of specialization'
resulting from the differing economies of scale for each process related. Information
technology reduced the connecting cost of business activity and it enables the connectedbundle of the capabilities of small businesses more efficient than the activity of single
4

He has lots of words to express the delicate differences in the process of metal-working. He uses words like 'cut,' 'drill,''crumple,' 'saw,' ' lick,' 'dredge,' 'dig,' 'bite,' 'scrape,' 'scoop' (T. Ozeki, 2000).

6integrated business firm. K. Miyazawa (1998) calls it 'economies of connectedness.' 5 This
argument is most suitable in explaining the division of labor process existing in Ohta-ward.
It is natural to include the accompanying adjustment activity connecting many
resources and businesses as an independent factor of production. The benefits to utilize theagglomeration of small factories for outside clients and for inner factories to exist, theadjustment cost to link and match the orders between client and factories or among
factories and also the adjustment cost to transfer and exchange information and know-how
among them is required to be quite low.
The important point in discussing adjustment cost is the loyalty or trust
mentioned by K. J. Arrow (1974). He describes loyalty or trust as 'the goods which cannot
be purchased in the market but it makes economic activity efficient once we get it.' He does
not refer how this loyalty or trust goods are constructed. However, trust goods have asimilar characteristic as of capital. Through the improper maintenance or excess utilization
and also by the sudden crisis or destruction of human relationship, the stock level of loyalty
or trust will be decreased. On the other hand, as far as the proper relationship among theparticipants is kept continuously, the level of loyalty or trust are maintained and utilized in
the future for the benefit of the parties concerned.
In the first place, loyalty or trust is defined as 'the behavior to expose oneself torisk of deceit by others with the expectation of no-to-be-deceit by others' (T. Yamagishi,
1998, B. Nooteboom, 2002). To obtain the loyalty or trust one needs to establish his or her
reputation through assimilation to regional communities and cultures, conformation to thequalifications and rules in many professional areas, maintaining loyalty or commitment topartners, and training by way of learning etc. The loyalty or trust thus established lowers'the relational risk' such as the hold-up problems accompanying the relation-specificinvestment and spillover or diffusion of information and finally reduce the transactions
cost or the adjustment cost (B. Nooteboom, 2002). 6
According to H. Nukada (1998), there are two types of 'port of Entry' (C. Kerr,
1954) in Ohta-ward. In the first step newly employed worker engages in only low-gradeand peripheral jobs and only in the second step he is allowed to join the core shop floor by
his established trust.

H. Yginuma (1995) argues the necessary condition for the economies of connectedness. It requires the cost function tosatisfy 'super-additivity.' This is just the opposite condition of 'sub-additivity' necessary to hold for the economies ofscope discussed in W. J. Baumol et al. (1988).
6 The review of the positive analysis of the effect of trust on the business transactions are shown in B. Nooteboom(2002). He confirms that the existence of trust strengthens the business transactions through several channels in thecase of EU and Japan.
57

3.2 Geographical Agglomeration and it's Externalities
The discussions above do not necessarily explain enough about the agglomeration ofdiversified small businesses in some particular regions like Ohta-ward or Higashi-Osaka.
We require other conditions such as the transportation cost in moving the resources forbusiness activity and the benefit of face-to-face activity for information exchange andadjustment in addition to the economies of specialization and the economies ofconnectedness. This consideration takes us closer to the external economies ofgeographical agglomeration.
A. Marshall pointed out the existence of this external economies of the 'Industrial
Community' or 'Industrial District' (Table 4).
<Table 4 is around here.>
The Marchallian geographical externalities are supported by several positive
studies. 7
V. Henderson et al. (1995) classify different type of externalities in urbanizedregion as in Table 5.
<Table 5 is around here.>
The recognition of the role of spillover and diffusion of technology or knowledge
as the source of innovation is found in the extended version of geographical externalities.
This recognition is persuasive to understand the situation of Ohta-ward where small
factories exchange various information and ideas on market and technology and making
effort to be friendly rival and competitor with each other. The concept of the dynamic
externalities is to look the origin of information accumulation formed historically from thepast and it affects the development of the city afterwards. We can find some similarities
with the path-dependence by P. A. David (1985) and the positive feedback by B. Arthur(1994), both of them stressing the role of historical path affecting the future course of theindustry and society. There are many studies on the two types of geographical externalities
most popularly in the U.S. 8
G. Dumais et al. (1997) analyzed the location decisions of new factories in the U.S. and found the proximity to clientsor suppliers is not important. But the spillover effect of knowledge and the thick layers of skilled labors are very
important.
8 G. Dumais et al. (1997) analyzed the industrial agglomeration in U.S. city regions and confirmed the existence of7

8
The diversity of intermediate products and skilled labors has been formed
historically and many factories are connected with each other based on the trust formed
through the long years of transactions. In this sense it has the same aspect of the dynamic
externalities just discussed.

4. The Diffusion and Transfer of the Learned Skills and Tacit
Knowledge
4.1 Learned Skills Based on Experience
H. Nukada (1998) considers learned skill separately from craftsman's technical skill. A
worker who can work in many different ways utilizing his rich knowledge about theproperty of machines and materials is only a capable skillful technician. Learned skill
requires the flexible capability to cope with irregular, non-standard, and unexpected
problems in the working processes. As is stressed by T. Ozeki (2000), the difference
between workers with learned skills and workers with multi-job skills lies whether hi iscapable to take a holistic and broad approach to decide the se-up for the whole
metal-working processes.
K. Odaka (2000) made a distinction between craftsmen in the traditional sensefrom workers in small factories. The traditional craftsmen are those who fit into theconditions in Table 6 according to him.
However, T. Ozeki (1997) recognizes that the workers with learned skills are thecraftsmen. Many workers with learned skills remaining in Ohta-ward have been thinking
themselves as craftsmen full of pride and artisan spirits in the traditional sense even after
the high growth period (see T. Ozeki, 2001). In many cases they wish to become
independent and have actually obtained a high level of discretion when they engage in the
production of prototypes and small lot components. They are just the craftsmen defined by
K. Okada. The world of traditional craftsmen continued to exist as the world of workers
with learned skills in this region.
urbanization economies and Jacobs urbanization economies. V. Henderson et al. (1995) found that new industries growin the central city area where there exist Jacobs urbanization economies. On the other hand, matured industries come tothe scattered small cities where they can enjoy MAR localization economies. De Lucio et al. (2002) studied the case for
Spain. In their analysis MAR localization economies is confirmed. The findings by G. Duranton and D. Puga (2000) on
the relation between cities and industrial diversity based on U.S. data are that large cities tend to be highly diversified
and tend to show high degree of urbanization economies and Jacobs urbanization economies. On the other hand, insmall and medium cities localization economies and MAR localization economies are popular.

9<Table 6 is around here.>
A worker with learned skills has to acquire the capability to cope with irregularprocesses and find new ideas for the working processes, to advise and change the materials
or designs and/or figures, to identify and coordinate the collaborations with and theinter-factory division of labor among the colleagues. After reviewing the factors ofsuccesses or failures, he tries to reset his own rules and norms to avoid failures and tocontinue to learn in such a way as learning by doing, by using, by interacting, by learning,by asking etc. Learned skills cover not only technological learning, but also cover
far-reaching experiences in human relationships and business management. Thus thelearned skills are embodied in the body of workers.
Almost all of the orders brought to factories state only about the final image of
the works. Workers with learned skills can imagine the total arrangements and processes,
required tools and subsidiary steps for the best and suitable disposition based on theirknow-how without any use of manuals and outside instructions.
The most suitable steps and works to be done in each phase are drawn form theimplicit and embodied memories of the workers fed through the experiences. The works
are executed through the joint and close cooperation between their hands and machinesconnected. Feelings of integrated movement of hands and machines are transmitted
through his arms and fingers. It this way works are processed by referring to the memories
in his body at the same time.
When he cannot complete his works by himself because of the lot size or delivery
time, he must ask his colleagues to join or cooperate. To decide whom and which part ofthe processes to ask hi should take into account both the level of his colleague's skills
required for the jobs and his trustworthiness. This decision is done by the Judgment
accumulated through business relationship and exchange of skills and ideas in the past.
Those judgments are knowledge embodied and memorized internally within the body ofeach worker with learned skills. It can be codified only to a limited degree.
In the first stage toward learned skills, workers have to learn the basic
metal-working processes under the apprenticeship or supervision of their masters just as in
the world of traditional craftsmen. The learning through instructions or manuals is no
sufficient. They have to internalize learning by way of imitating the works and operating
the machines by hands within their body. This is the learning process through experienceand embodiment acquired by attending at each special occasion with the accompaniment

10of someone.

4.2 The Transfer and Spillover of the Tacit Knowledge
The totality of diverse experiences implied in learned skills is deeply connected with theprocedural memory regarding how to combine the various uncodifiable knowledge
succeeded and accumulated continuously within the body acquired at each actual situation.
Such knowledge is embedded in the special memories and tends to become 'tacitknowledge' (B. Nooteboom, 2002). M. Polanyi (1996) says that a man can know more thanhe can tell. The totality of experiences and memories of workers with learned skills within
their body as the 'procedural knowledge' (M. Itoh, 1997) mastered through the long yearsof working experience bears fruits as 'the tacit knowledge' or wisdom knowing more thanthey can tell.
According to M. Polanyi (1996), there is not anything but our human body which
experiences incessantly the world outside of us. We sense the world directly through our'adjacent terms' or contacting organs like sense of sight, hearing, touch, smell, and taste etc.
and integrate and restructure our experiences actively toward the whole understanding or'far-reaching terms' to utilize our skills or imagine the total processes lying ahead. The
capability of this active integration composes the indispensable part for our recognition of
the world as the implicit force. This implicit force which integrate our experiences in theform of tacit knowledge or wisdom can be understood and transferred as knowledge only
when we as an observer dwell-in the motion of those with implicit forces.
Knowledge can be divided into codifiable or describable knowledge and tacitknowledge. However, tacit knowledge is an indispensable factor to understand andinterpret codifiable or describable knowledge and to re-integrate it toward the new
far-reaching terms. This complementarity between two types of knowledge, suggested by B.
Nooteboom (2002), is the key to the understanding of the word as we recognize it. The
complementarity between describable knowledge and tacit knowledge in each layer ofknowledge assures the raison-d'etre of tacit knowledge and continues to exist during theprocess to ascend the ladder of the layered knowledge.
The learning process necessary to the formation of learned skill has acharacteristic of sunk cost. It is difficult to recover the cost even if his skills are applied andtransformed to different jobs. Therefore, those with learned skills have the relativeadvantages in staying in their own established jobs because of this difficulty to recover the11cost. This shows naturally the path-dependence effect defined by B. Arthur (1994). 9
The learned skills produced by sunk cost decrease the adjustment cost of
coordination. They also contribute to absorb, diffuse new innovations and ideas and to
improve them with some destruction of the established jobs and technologies. It is wellknown theoretically and positively that the spillover effect of information and knowledge isvital to the innovations occurring within urban area. 10 The possibility of new innovations
will be increased with the existence of learned skills and its accumulation as is alreadymentioned.
According to J. R. L. Howells (2002), Knowledge is diffused and transferredthrough several channels shown in Table 7.
<Table 7 is around here.>
The uncodified format of spillover, which we cannot find in Table 7, is theprocess of learning itself toward the completion of learned skills and utmost important
form of the transfer or spillover of tacit knowledge or wisdom. Tacit knowledge is
indispensable in interpreting and understanding describable knowledge usually in codified
form. Especially in the case of innovation where uncertainty is high and knowledge orinterpretation cannot be shared among the related participants, to promote sharing,harmonizing and integrating tacit knowledge or wisdom among them becomes the key forsuccess (B. Nooteboom, 2002).

5. Work Incentives and Social Network
5.1 Work Incentives and Regional Community
The long period necessary for the completion of learned skills requires so much cost.
Applying the human capital theory of G. S. Becker (1993), the reason of long years
learning through education and training with high cost is the monetary return such as the
future increase in productivity or wages. A worker with learned skills can earn higher
income compared with a worker of lower skills. However, the workers with learned skills
910

M. Ohtaki (1994) proves strictly that the sunk cost is the cause of the path-dependence or hysteresis.
See note 7. J. Simmie (2002) argues that the concentration of innovations in South-east urban region of England canbe attributed to the spillover of localized knowledge and the international transfer of knowledge. C. J. Simon et al.
(2002) reports the importance of the effect of the spillover or diffusion of knowledge produced in urban regions.

12
in Ohta-ward have quite different ways of thinking.
The examples from T. Ozeki (1997, 2001) give us some suggestions about this.


When I polished the lens with the accuracy of micron level and found the
expected result by measuring with the standard, it is a great excitement to me.

I am always ashamed of carelessness or abandonment of the jobs asked by others
more than failures in business management.



A craftsman must complete the product without any personality. But we call him
as a worker with learned skills because he demonstrates his own creative
characters until the final moment of accomplishment.

When he faces a seemingly difficult or burdensome task, he hesitates at first. But
his face brightens with his eyes full of expectation of joy as if a hawk looking into
his catch.



I feel that I got some progress only when I invented necessary tools for work andutilized them. The important sense of metal-working or creativity can only beobtained from this experience.



The implicit desire to do good jobs or make better products is quite different
from the business oriented economic activity in its nature.
From these examples appears the belief of the workers with learned skills, finding

the genuine delight in his job as his lifework, thinking his job as intellectual and creativeand full of pride, and paying continuous effort as the good to be pursued. Theirself-discipline or lifestyle may be the result of this satisfaction of accomplishment not
attributable to monetary calculations as in the human capital theory. To a craftsman or aworker with learned skills, high-quality learned skills, broad human network supported by
the mutual trust, intellectual creativity, enthusiastic desire for his job, respect for the
personality, and independence from each other are utmost important. These characteristics
can be summarized in a word as the artisan spirits or craftsmanship.
This sense of craftsmanship is fostered and nurtured within the 'industrial district'according to A. Marshall. The characteristics of a worker with learned skills have beensucceeded, widened and deepened in a place or regional community consisted of his
seniors or colleagues with common work-ethics. On the other hand, each worker interacts
with each other to master the craftsmanship and affect fostering the workers with common
characteristics further. We can find the interactive situation originating from individual
workers and the situation originating from region or community. The latter channel can be13interpreted as the effect coming from regional culture. New participants to this community
can easily acquire these characteristics and enjoy a great benefit in his jobs and businesses.
It is a phenomenon described as the 'increasing returns' or 'self-reinforcement' effect of asocial phenomenon referred to by B. Arthur (1994). As the result of this interaction, acommunity with unique characteristics is constructed cumulatively and path-dependently.
Along such path the workers with learned skills are reproduced continuously. The
atmosphere filled with craftsmanship unique to a region can be said as a regional public
goods and plays an important role in the forming and maintaining the characteristics or
culture.

5.2 Social Network as a From of Institutional Capital
R. Putnam (1997) stresses the role of social network with others, norms and trust arisingfrom the social life in the regional community as the social capital producing mutual
cooperation among the people (J. Sobel, 2002). As economists, K. J. Arrow (2000) and R.
Solow (2000) are rather critical in defining the social capital as capital. H. Uzawa (1994,
2005) also stands afar from this concept. His original concept of Social Common Capital isclassified into three categories; natural capital, social infrastructure, and institutional capital.
According to H. Uzawa (1995), T. Veblen understands the institution including theorganization, customs and psychological conditions. Intangible assets such as language,
traditions are classified into the cultural capital, which constitutes a part of his institutional
capital. D. Throsby (2001) defines cultural capital as another form of capital. In the analysis
of innovative community such as Silicon Valley, the regional social networks play animportant role (A. Saxenian, 2000, E. J. Castilla et al., 2000, D. Fornahl, 2005).
Putting aside the theoretical argument about the definition of social capital, weunderstand social capital as social network or informal place where people contact andinterchange with others to master norms or ways to behave required to each person there,
and rules or institutions for that purpose. Trust or reputation is the service provided by it.
Ohta-ward is characterized as a system helping each worker with learned skills
acquire tacit knowledge through the contact, learning, and transactions with his colleagues.
It is also a system or a place reproducing them 11 the wholeness of their experiences can bemastered from the social network in the regional community and the bundles of manners

11

R. Florida (2005) stresses the importance of the characteristics of a place as the innovative engine of that region. A
place with high degree of tolerance or diversity induces talented people who are the sources of regional innovation.
Such a place can have a regionally specific institutional or cultural capital in the sense of H. Uzawa.

14
and rules there. This regional social network enables for each worker to accumulate easily
his skills and to obtain the convenience of transactions with others. By applying theconcept of social network or capital, we can identify clearly the implications of the
reproduction of the learned skills and the transaction based on trust or reputation. Now we
can say that Ohta-ward with its high concentration of workers with learned skills and its
regional social network accumulated and developed its worker's unique learned skills andaccompanying trust through the interactive learning process between each worker andregional community. The artisan spirit of the workers with learned skills and their tacitknowledge deepen the mutual relationship among them, 'bonding' in the word of R.
Putnam, and widen the opportunities of contact with outside world through lots ofpersonal channels, 'bridging' in the word of R. Putnam.
They contributed to raising their specialization level to much higher dimension
and maintaining its unique and disciplined regional community.

6. The Development of Diversified City and the Change in its
Environment
6.1 Ohta-ward: As a Diversified City
G. Duranton and F. Puga (2001) analyses a model where two types of cities exist. The
diversified cities are cities with incubation functions where lots of prototype producers areoperating and related new business firms are constantly emerging. The specialized cities are
consisting with mass production firms transferred from the diversified cities because of
their success there.
Based upon the findings of the unique characteristics of the agglomeration ofsmall factories and workers with learned skills in Ohta-ward, the following four points canbe added into their model.
1) Accumulated tacit knowledge by individual workers with learned skills withindiversified cities.
2) Satisfaction from and strong artisan spirit of the workers in acquiring new idea
and adding them to their stock of tacit knowledge.
3) Strong complementarity among factories with their differing economies of scale
and proximity.

154) Trust or loyalty arising from the regional social network.
The revised model of G. Duranton and D. Puga (2001) let us male possible tocompare our conclusions with theirs.
1) The decline in the production cost and increase in demand in the diversified city
will provide the increased number of complementary factories and employees.
2) Higher level of loyalty or trust will promote the diffusion, transfer and exchange
of information and ideas. The resulting advancement of technologies andinnovation will be more promoted.
3) Congestion will arise. But its restraining effects may not be strong enough to limit
the size of diversified city.
4) The social network or institutional capital embedded in the region will form
higher trust or loyalty. It will contribute more in forming and maintaining thelearned skills or tacit knowledge.
5) More successful firms will appear in the diversified city and its incubation function
will be strengthened.
The Ohta model will give a clearer explanation about the phenomenon of themassive agglomeration of innovative firms with high degree of specialization reflecting thebonding among factories. Workers have strong incentives to invent new ideas and thelearned skills will be reproduced through the learning processes embedded in this region.

6.2 The Effect of the Change in the Environment
As is already referred to, the number of small factories in Ohta-ward has dramaticallydecreased in recent years to the level of almost 40 years ago. Many factors have beenworking behind this long-term trend. The following four factors should be noticed.
1) Shift of the industrial structure from secondary to tertiary sectors.
2) Globalization of the manufacturing industry.
3) Urbanization in the regional community.
4) Technological progress in the field of IT.
These factors will add another revision of the above conclusions as in the follows.

161) The demand for the prototype will decline because of the shift in the industrial
structure and overseas investment.
2) Increased competition will decrease the advantages of prototype production in thediversified city.
3) Succeeded firms will relocate their production bases more easily to the
mass-production city in the outside world.
4) The urbanization will work as a negative factor to the network operation andinnovative activities in this region.
5) The development of IT will strengthen the economies of connectedness. It will
promote the prototype production. On the other hand, it may reduce theopportunity of local contact among the factories and clients and have a negative
impact on the network in the region.
These revisions can explain the declining trend of the number of small factories in
Ohta-ward. However, more fundamental process 1 is under this phenomenon. That is thedecline in the stock of the accumulated learned skills and the stock of social network or
institutional capital in this region. This process will cause long-term decline of the strong
complementary relations among small factories network and its innovate on activating
function.
The development of information technology may curb this trend. However, it
may become a rod connecting a region with more remote and different regions for anotherdevelopment. According to T. Yamagishi (1998), there is possibility that the trust to others
will be united with information technology to the release of trust to establish a new social
network.

7. Epilogue
We tried to capture the unique aspect of the agglomeration of small factories in Ohta-ward
focusing on the accumulation of learned skills and tacit knowledge, flexible specialization
system based upon mutual trust, and the regional social network fostering mutual trust andnorms or characteristics of the working people there.
It was shown that small factories in Ohta-ward specializing into some unit ofworking process have been producing highly advanced products through their networks. It

17is also confirmed that the highly diversified and advanced agglomeration of learned skills
supported this phenomenon.
The agglomeration of small factories in this region can be explained by the
economies of connectedness and the dynamic externalities arising from informationexchange and socialization. The loyalty or trust as a factor to reduce the adjustment cost
and the tacit knowledge arising from the accumulation of learned skills and its diffusion are
the important factors lying behind.
The incentive of the factory workers in this region lies strongly in the process torealize their own ideas and obtain their satisfaction by it. This character has been
reproduced from the interactive relationship between individuals and regional community.
Ohta-ward can be explained as the diversified city with incubation functions.
However, the long-term change in environment of this community is shown to have anegative impact. Information technology can have both positive and negative effect. By
looking into the agglomeration of small factories in Ohta-ward, we can recognize theimportance of the accumulation of tacit knowledge and its diffusion and the role of thesocial network nurturing the community specific characters or norms. The construction ofregional community based on the bonding and collaboration with new industries andresidents will be in the future problems to be solved in this community of Ohta.

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20
Table 1: The Share of Metal and Machinery Factories and Small Businesses in Ohta-ward
1960

1980

1990

1998

Metal and Machinery

77%

79%

84%

78%

Very small Businesses

42%

79%

80%

82%

Total Sum of Businesses

4,987

8,307

7,860

6,038

(Note) 1. Data are from D. H. Whittaker (1997), Institute of Development and Planning (1994), M.
Seki and H. Kato (1990), and the report 'Industry of Ohta-ward'.
2. Metal and machinery includes Iron and Steel, Non-ferrous Metal, Metal Products,
Industrial Machinery, Electric Machinery, Transportation Machinery, and Precision
Machinery.
3. Very Small Businesses means the number of employees under 10.

Table 2: The Classification of the Processes of the Factories in Ohta-Ward(Arranged from the Figure by M. Seki and H. Kato, 1990)
Process or function
Materials

Examplesiron & steel producer, nonferrous metal producer,
trading company, recycling company

Molding

sheet-metal processing, welding, stamping, minting, drawing,
powder metallurgy, die-casting, mold-building

Clearing

metal-working (cutting, grinding, shaving), stamping, heat-treating

Finishingsurface-processing (plating)

Assemblingplastic molding, circuit board, sub-assembling (parts, painting)21
Table 3: The Examples of Advanced Products and Components Produced in the Small
Factories in Ohta-ward
Ex.1

Scraping the rotor for automobile engine
Solution is to scrape rotor embedded in low-melting alloys and melt away
alloys later.

Ex.2

Processing the stainless mesh case to store electric parts and systems under thedeck of the bullet train
Idea is to solidify the case with Japanese traditional paper and process withmelting later.

Ex.3

Drawing the head cover or fairing of the H2 rocket
Traditional spatula drawing skills are used to the accuracy of 30 micron by
finger touch.

Ex.4

Grinding non-spherical lens made of glass with high accuracy
Idea is to invent a special tool to grind non-spherical lens with high accuracyof 10 micron level.

Ex.5

Developing a mold for the cover of a can which does not hurt the fingertip
New idea to introduce S-structure to the cross-section of the cover is the
key for success

Table 4: Characteristics of the Geographical Externalities Pointed out by A. Marshall (by P.
Krugman, 1991)
1)

Large market for labor with highly specialized and diversified skills.

2)

Provision of cheap and diversified non-traded inputs by the supportive industries.

3)

Facilitation of innovation through regional diffusion of technology and new
management style.

22
Table 5: Static Externalities and Dynamic Externalities
Static Externalities"Localization Economies"
Benefits to firms from the local agglomeration of the same industry.
Cities tend to specialize into its own industry and form small or medium-size
cities.
"Urbanization Economies"
Benefits to firms from overall local urbanscaleand diversity.
More diversified and larger cities are formed.
Dynamic Externalities"Marshall=Arrow=Romer (MAR) Localization Economies"
Benefits to firms from accumulated knowledge associated with ongoing
communications among local firms in the same industry.
Small and medium-sized cities with the persistent agglomeration of same
industry tend to be formed.
"Jacobs Urbanization Economies"
Benefits to firms from accumulated knowledge or ideas associated withhistorical diversity.
Larger cities with the accumulation of diversified skills and technologies andalso with the development of new industries tend to be formed.

Table 6: The Characteristic Conditions of the Traditional Craftsmen
1)

He is the owner of tools or machines and quite independent of his
client.

2)

He has the socially established reputation of his own skills.

3)

His skills are accumulated and embodied in his body.

4)

He has a high level of discretion about his job.

23
Table 7: The channels of Knowledge diffusion 12
1)

Intended and codified forms of spillover
Ex. patents, patent citation, manual

2)

Intended but largely informal knowledge spillover
Ex. membership of learned societies or industry associations or
regional agencies

3)

Unintended and informal knowledge spillover
Ex. departure of key scientists and engineers, informal know-how
sharing

12

The classification is too simple. Strictly, the combination of intended and unintended transfer, codified andnon-codified format, formal and informal channel, for two types of knowledge will give us 16 cases.