Agglomeration
with the Declining Marshallian Agglomeration Economies:
An inquiry into the postwar development of the Nada sakebrewing district in Japan
Yuya Aikawa
Tomoko Hashino
Keijiro Otsuka
April 2023
Discussion Paper No. 2308

GRADUATE SCHOOL OF ECONOMICS
KOBE UNIVERSITYROKKO, KOBE, JAPANAgglomeration with the Declining Marshallian Agglomeration Economies:
An inquiry into the postwar development of the Nada sake brewing district in Japan
Yuya Aikawa(Ph.D student at Graduate School of Economics, Kobe University)
Tomoko Hashino(Professor at Graduate School of Economics, Kobe University)
Keijiro Otsuka(Professor at The Kobe University Center for Social System Innovation and Graduate
School of Economics, Kobe University)
Abstract
This study explores the changing roles of agglomeration economies in cluster
development based on the historical experience of sake brewing districts in postwar
Japan. Nada, the most advanced brewing district, had grown through the horizontal
division of labor and development of skilled labor market when production was labor‐
intensive in the 1950s. The adoption of capital‐intensive mechanized brewing, induced
by wage growth in the 1960s and 1970s, replaced skilled labor. In recent periods, Nada’s
breweries attempted quality improvement and establishing a regional brand bycollectively internalizing the external benefits of information spillovers, which arebeyond the scope of the Marshallian arguments.
Acknowledgement
We are grateful for supports from the Nada‐Gogo Sake Brewers Association, Hyogo
Prefectural Agriculture, Forestry and Fisheries Technology Center, and Brewers in Nada.
We also appreciate for valuable comments from the participants at Rokko Forum in July
2022 and Summer Workshop on Economic Theory in August 2022. This research waspartially supported by the grants from the Next‐Generation Outstanding Doctoral
Human Development Project through Co‐creation in Different Fields and Kobe
University Center for Social Systems Innovation.

1

Introduction

The vital role of the industrial district or cluster in industrial development isincreasingly recognized with the accumulation of empirical studies. Alfred Marshall(1920) is the first economist who identified the three advantages of industrial district
called Marshallian agglomeration economies: These are (1) information spillover or
imitation, (2) vertical division of labor and specialization among enterprises, and (3)the development of skilled labor market. The pioneering studies by Piore and Sabel(1984), Sabel and Zeitlin (1999) and Zeitlin (2007) demonstrated that fine and flexible
division of labor among small enterprises significantly contributed to cluster‐basedindustrial development in European countries. In developing countries, Sonobe andOtsuka (2006b, 2011, 2014) and Hashino and Otsuka (2016) found that many
spontaneously established clusters were formed by the entry of imitators who often
used to work for founding firms and imitated production technology, management
and marketing methods from them in Asia as well as in Africa.
The shortcoming on Marshall’s argument of agglomeration economies is theabsence of the discussion about innovation, without which it is unclear why
information spillovers are important. Sonobe and Otsuka (2006b, 2011, 2014) foundthat the improving product quality by innovation is an engine of growth in many1industrial clusters. Other studies also provide insights into the process leading toinnovation by arguing that local collective action which internalizes the externality
within the industrial district promotes the innovation or the improvement of
production systems (Schmitz 1995; Nadvi 2007; Hashino 2012; Hashino andKurosawa 2013) ．
The history of economic development in Japan is replete with the successful
development of industrial districts. In the case of weaving industries, merchant‐manufacturers, engaged in weaving and marketing, offer subcontracts with small‐scale out‐weavers, called putting‐out system, which was an important institutional
factor in cluster development (Abe and Saito 1988; Hashino and Kurosawa 2013).
With respect to the sake brewing industry, interfirm sake transactions,1 in whichsmall breweries sell sake to large ones, contributed to the development of sakebrewing districts since the prewar period (Yunoki 1941; Yunoki 1965). The pottery
industry, one of the traditional industries in Japan, also developed by horizontal
division of labor within clusters. Large pottery firms or merchants outsource theirproduction and processing to small firms, which is similar to OEM, thereby realizing
the division of labor between production and sales within the district (Miyachi 2008;

1

Note that although inter‐firm transaction in the brewing industry has also been observed in

the whiskey industry (High and Coppin 1988), the discussion of its causes is absent.
2

Yamada and Ito 2008, 2013). These examples indicate that the horizontal division oflabor among enterprises played an important role in the historical development ofindustrial districts in Japan, which is different from the vertical division of laborenvisaged by Marshall (1920).
Another feature of the development of industrial districts in Japan is thatmechanization led to changes in the composition of skilled and unskilled workers(Sakurai 1981; Miyachi 2008), to which Marshall did not pay any attention. While theimpact of mechanization on productivity growth has been well analyzed, thediscussion about how it affected the skilled labor market has been largely absent. In
addition, the discussion of the long‐term development process of industrial clusters
with special attention to the changing role of agglomeration economies is scant.
In this study, we would like to address the following questions: (1) What are
the conditions underlying the horizontal division of labor? (2) How did
mechanization change the importance of the skilled labor market? and (3) Under
what circumstances was local collective action toward the innovation induced? To
answer these questions, we explore the long‐term development process of the sakebrewing districts in Japan, with particular attention to the Nada brewery district.
The rest of this article is organized as follows. The next section provides a3

historical overview of the cluster formation in Nada and the development of the
postwar sake brewing industry by comparing contrasting performance of threemajor brewing districts. Section 3 describes changes in production, number of firms,
firm size, and labor productivity, as well as production of special rice variety forsake brewing, called Yamada‐Nisihiki, to identify the three distinct phases ofdevelopment in Nada from 1953 to 2017. In the following two sections, the driving
forces for the three phases are discussed, i.e., interfirm sake transactions in the early
postwar period, mechanization of the brewing process during high wage growth
periods, and local collective action in the face of increasing demand for high‐quality
sake in recent period. We conclude this study by summarizing the main findings
and their contributions to the literature in Section 6.

2

Historical Development of the Japanese Sake Industry

2.1

The rise of sake production in Nada

The Nada sake brewing district, located 15 kilometers along the coast of the Hyogo
prefecture (Figure 1), has been the largest cluster producing branded sake since theearly nineteenth century.2 According to the Nada Sake Research Association (1960),2

Note that the sake brewing industry was one of the most important traditional industries forhistorical development in Japan. Survey data from the Ministry of Home Affairs (1874) showed4the production share of Nada’s sake in Japan exceeded 10 per cent in 1902, which
was higher than Fushimi in the Kyoto prefecture and Ikeda in the Osaka prefecture,
where major sake clusters were located in this period.
<Figure 1>
Historically, the formation and growth of the Nada district were driven by
its geographical advantages. In addition to the maritime advantages, which reduced
transportation costs, the cold climate and the availability of clean spring water
suitable for brewing sake conferred the advantage of producing high‐quality sake in
Nada (Yunoki 1941; Yunoki 1965). 3 Consistent with the arguments advanced by
Marshall (1920), the development of the labor market with specialized skills wasanother source of cluster development. Since the Hyogo prefecture is covered bysnow in winter, many farmers engaged in sake brewing as a side business during
the slack months in the prewar period.4 Gradually, they became skilled sake brewers

that, in 1874, sake accounted for 16 per cent of total Japanese industrial production, indicating
its importance as a manufactured products in the early stage of modern Japanese economic
development. It was also important for public finances: the liquor tax has been an importantsource of government revenue, and it surpassed the land tax to become Japanʹs largest sourceof tax revenue in 1900 (Ministry of Finance 1969).
3 The importance of geographical advantages in sake industry is similar to the wine industry,
which emphasizes the ideal natural environment for growing wine grape, called terroir (Satoand Kohsaka 2017).
4
As in modern developing countries, such utilization of underemployed rural labor during theslack months was important for economic development in pre‐industrial Japan. Similar cases
are observed in Japanese sericulture and weaving (Nghiep and Hayami 1979; Hashino andOtsuka 2016).
5

called toji, who were seasonal migrants to Nada and technically responsible for sakeproduction there (Sakurai 1981).
In contrast to the vertical division of labor envisaged by Marshall, horizontal
division of labor, that is, a subcontracting relationship between large firms, which
are sake brewers and sellers in nation‐wide markets, and small firms, which sell saketo large local firms, promoted the prewar growth in the Nada district. 5
Subcontracting in the sake brewing industry was buying and selling operation
between firms producing raw sake before bottling, which was called oke‐torihiki ortransaction by the tub. Since separating the fermentation processes in the sakebrewing industry is difficult, the division of labor is limited to transactions after
brewing (Kawaguchi and Fujimoto 2010). Because the sake brewing industry waslabor‐intensive without mechanization in the prewar period, production wascharacterized by scale diseconomies. Thus, large brewers in Nada with establishedbrand names could not expand the volume of their sake sales without
subcontracting with the small brewers (Shinbo 1962; Tanimoto 1996). Such interfirm

5

Marshall (1920) pointed out that the vertical division of labor among different industries

develops when industries that supply intermediate and capital goods are established in thecluster. On the other hand, the inter‐firm transaction envisaged in this paper represents thehorizontal division of labor between large and small sake breweries, which is clearly different
from the Marshallian arguments.
6

transactions were advantageous for large brewers to secure volume and small
brewers to secure customers (Oshima 2009).

2.2

Overview of the sake brewing industry in the postwar period

Figure 2 depicts the number of sake factories in Japan and the total quantity of sakeproduction from 1953 to 2017. Production grew rapidly throughout the 1950s and1960s, whereas the number of factories slightly declined, implying an expansion in
firm size. In the early period after the Second World War (1939–45), sake was Japan’s
most popular alcohol product. The demand for sake increased significantly sinceconsumption expenditures increased along with rapid income growth (Miyamoto
2010). Demand was high for brand‐named sake produced in Nada, Hyogo andFushimi, Kyoto. The increase in firm size in this period was mainly due to the growthof firm size in these two districts.
Figure 2 also shows that sake production entered a stagnant and slightly
decreasing period from the 1970s to the late‐1990s. In this period, reasonable‐quality
sake for the mass market, which was mainly produced in Nada and Fushimi, became
increasingly popular (Hakutsuru Syuzo Co. 1977). Large firms succeeded in mass
production through mechanization; hence, structural transformation in favor of7large firms seemed to have occurred in the brewing industry.
Since the late‐1990s, however, production as well as the number of firms
sharply declined. When the sake industry entered a slump, demand for other alcohol
products such as wine and whiskey imported from Western countries increased.
Therefore, consumption stimulation and marketing campaign became important forsake (Miyamoto 2010). According to Ito (2000), the unique feature of this period isthat while the demand for mass‐market sake mainly produced in Nada and Fushimi
significantly declined, the demand for high‐quality sake produced in small brewing
districts increased.
<Figure 2>
Why did large brewing districts shrink, whereas small districts prospered?
Since the availability of district‐level data is limited, we will examine prefecture‐level data.6 Table 1 exhibits the historical changes in production share, production
per factory (i.e., firm size), and the real price per kiloliter of sake in the top threeprefectures,7 Hyogo, Kyoto, and Niigata, as of 2017. Several important observations

6

In Hyogo prefecture, there are several other sake brewing districts. Throughout the postwar
period, however, sake produced in Nada accounted for approximately 60% to 80% of total sakeproduction in this prefecture (Nada‐shu Kenkyu Kai 1969, 1988). Similarly, Fushimi, the largest
sake brewing district in Kyoto prefecture, accounted for more than 80% of total production inthis prefecture. On the other hand, firms in Niigata Prefecture are dispersed in their location
within the prefecture.
7 The real price per kl is obtained by dividing the real value of shipments by the quantity. The
8can be made. First, Hyogo prefecture, where Nada district accounted for lion’s share,
dramatically increased its production share to more than 30 per cent in the 1980s andmaintained a high share thereafter. We hypothesize that this is due to the pursuit ofscale economies by mechanization of their production facilities by the major firms in
Nada.
Second, it can be pointed out that while the production per factory expanded
in Hyogo and Kyoto prefectures during the 1980s, the Niigata prefecture has
consistently been characterized by small‐scale producers. These differences in
production scale are related to the extent of mechanization. According to Morimoto
and Yagura (1998), the large firms with established brand names in Hyogo andKyoto pursued the mechanization of their production processes. In contrast,
mechanization was not pursued in other districts due to the absence of large firms
with well‐known brand names. Thus, small‐scale brewers in these districts haveproduced sake by traditional, labor‐intensive methods (Hiroi 1990; Ito 2000).
Third, while the real prices per kiloliter in the Hyogo and Kyoto prefectures
were much higher than in the Niigata prefecture in the 1960s, the price difference
decreased in the 1980s. Furthermore, the sake price in Niigata surpassed the othernominal price per kl and the nominal value of shipments are deflated by the consumer priceindex (Statistics Bureau of Japan 2017).
9

prefectures after the 2000s, whereas prices in Hyogo and Kyoto stagnated in thesubsequent period. This emerging difference in price among the three prefecturesindicates a changing difference in the quality of sake. According to Shinoda (1981),
brewing high‐quality sake requires traditional, skill‐intensive brewing method,which can be hardly mechanized. As in many other traditional industries, small‐scale firms using labor‐intensive, traditional technologies have a comparativeadvantage in producing high‐quality sake. It can be assumed that firms in Niigata
succeeded in producing the highest‐quality and expensive sake, whereas firms in
Hyogo chose cost reduction rather than an increase in quality.
<Table 1>
The price differences in Table 1 are also attributed to the differences in the
raw‐material rice. The rice used for high‐quality sake is called sake rice, which isdifferent from ordinary rice for consumption. 8 Among the varieties of sake rice,
Yamada‐Nishiki, 9 developed in the Hyogo prefecture in 1936, is the most popular

8

Sake rice is characterized by its large grain size. In order to brew high‐quality sake, grains of
raw‐material rice must be shaved significantly, and thus ordinary rice is easily cracked due toits smaller grain size compared to sake rice (Hyogo Sakamai Kenkyu Group 2010).
9 Historically, sake brewers in Nada conducted contract farming with Yamada‐Nishiki farmers(Hyogo Sakamai Kenkyu Group 2010), especially classified as marketing contract which
concerned only with the conditions of product delivery (Otsuka et al. 2016). Likewise, in thewine industry, contract farming is practiced to ensure the quality of the wine grapes, and mostcases seem to be limited to marketing contracts in which autonomy of production is largely left
to farmers (Goodhue et al. 2003; Fraser 2005).
10

variety, which was used for the most expensive, high‐quality sake produced in
Hyogo in the early postwar period, when its prices were comparatively high (Table1). In the mid‐1960s, however, demand for mass‐produced sake using cheap rice
began to increase, which decreased the demand for Yamada‐Nishiki (Hyogo Sakamai
Kenkyu Group 2010). The demand for sake rice has once again increased from small‐scale brewing districts, especially from Niigata prefecture, which pursued to
produce expensive, high‐quality sake in the 2000s. In recent period, brewers in
Hyogo resumed to use Yamada‐Nishiki to improve the quality of sake (Hyogo
Sakamai Shinkokai 2020). 10 This historical experience suggests that the use of
Yamada‐Nishiki has been animportant factor affecting the rise and fall of sake brewing
in the Nada district.

3

Three Phases of Growth Process in Nada

To identify the major factors affecting the change in the growth processes in Nada,
we divided the postwar growth of Nada into three phases based on the changing
trends in sake production, the number of brewery firms and rice production. Figure
3 examines the long‐term sake production in Nada and other areas in the Hyogo

10

Recently, Yamada‐Nishiki has been increasingly produced in other prefectures, but 60 per centof this rice variety in Japan is still produced in Hyogo (Hyogo Sakamai Kenkyu Group 2010).
11

prefecture (excluding Nada), the number of brewery firms in Nada, and the
production of Yamada‐Nishiki in Hyogo prefecture. From Figure 3, several distinct
trends can be identified. First, the production of sake continued to grow from 1953
to around 1970. It stagnated from around 1970 to the mid‐1980s and sharply declined
after the late‐1980s. Second, the number of firms grew slightly until around 1970, but
it started to decline after the early‐1970s. Third, production of Yamada‐Nishiki
increased until the mid‐1960s, when the demand for mass‐produced sake using
cheap sake rice began increasing. Hence, its production declined until the mid‐1980s.
Yet it has been growing since then, except for a temporary decline in the early‐2000s.
Finally, the sake production trends for Nada and the rest of Hyogo are similar
throughout all periods.
<Figure 3>
Based on these observations, the development path of this industrial district
can be divided into three periods. From 1953 to around 1970, the increase in thenumber of firms and Yamada‐Nishiki was responsible for production growth. We callthis phase I. PhaseⅡ started in 1970 with a sudden stagnation in the number of firms
and production until the mid‐1980s. Since the production of Yamada‐Nishiki
remained low, it can be assumed that the production system has shifted to a capital‐

12

intensive mass‐production of sake using cheap sake rice. After the mid‐1980s (phase
III), sake production and the number of firms declined, but Yamada‐Nishiki
production gradually increased, particularly from around 2010. It can be assumed
that Nada was forced to reduce its production due to declining demand for mass‐
market sake, but they partially restored its competitiveness by shifting to high‐quality sake using Yamada‐Nishiki after 2010.
To identify the major components of production growth in Hyogo, we
decompose the real value of production (Q) 11 into the number of firms (N), firm sizein terms of the number of workers per firm (L/N), and labor productivity (Q/L) using
the following formula:
𝑄

𝑁

𝐿 ⁄𝑁

𝑄 ⁄𝐿

1

Taking the logarithm of (1), we can transform it into the following equation:
𝐿𝑛 𝑄

𝐿𝑛 𝑁

𝐿𝑛 𝐿⁄𝑁

𝐿𝑛 𝑄⁄𝐿

2

Using this relationship, changes in the indices of Q, N, L/N, and Q/L for
the production of sake after 1971, for which the data are available, are shown in
Figure 4. These indices were set to be 100 in 1971. Observed trends reveal several
characteristics that support our hypothesis. First, labor productivity in terms of the11

Since the data for value of production is limited, value of shipment is used as a proxyvariable.
13

real value of production per worker grew rapidly until the middle of phaseⅡ, andthen it began declining and stagnating in phaseⅢ. This suggests that although Nada
gradually lost its comparative advantages after increasing labor productivity due tothe capital‐labor substitution in phaseⅡ, such production system was maintainedeven in phaseⅢ, judgeing from largely unchanged labor productivity. Second, thedecline in real value of production in phaseⅢ was stopped around 2010, suggestingthat innovative changes might have occurred in the district.
<Figure 4>

4

Dynamic Growth of Nada Sake Brewing District

4.1

Phase I : Demand expansion and interfirm sake transaction

PhaseⅠ is characterized by the high growth of sake production and the number offirms (Figure 3). The question is what kind of firms and production methods
contributed to such production growth.
Table 2 shows the average characteristics of sake brewing firms in Hyogo
prefecture in selected years from 1959 to 1995. We define large firms as those that
had produced more than 10,000 kiloliters per year by the 1990s and small and14

medium‐sized firms as others.12 All large firms are located in the Nada district. Table
2 indicates that the all firms entered into sake brewing business in Hyogo prefectureby the 1970s were small and medium‐sized, and their average production was muchsmaller than that of large firms. In terms of the production method, the adoption ofcapital‐intensive technology known as four‐seasons brewing, which helped realize
scale economies and perform strict quality control throughout the year, wasparticularly important in the sake brewing industry (Segashira 1964; Kondo 1967).
Table 2 exhibits the adoption rate of this technology by the large firms for which data
are available. The adoption rate was low in the early‐1960s, suggesting that theirproduction was still labor‐intensive and subject to scale diseconomies in phaseⅠ.
<Table 2>
It is important to note that the expansion of the interfirm sake transactions
through subcontracting relationships promoted the development of Nada in phase
Ⅰ. Figure 5 illustrates the difference between the shares of shipments andproduction in each prefecture, which indicates the net amount of sake transaction
across prefectures through subcontracting. From the late‐1960s to the early‐1970s,

12

According to National Tax Agency (2018), despite only 0.8% of firms annually produced
more than 10,000 kl of sake in 2017, their production accounted for 48.7% of total production in
Japan. This suggests that the existence of huge production gaps between large and small firms
in the sake brewing industry.
15

the market share of shipments in Hyogo exceeded that of production. In contrast,
the opposite trend was observed in other prefectures except for Kyoto and Niigata,suggesting that large firms in Hyogo offered subcontracts to small‐scale brewers inother prefectures.
Unfortunately, we cannot observe the subcontracted amount of sake within
Nada, but it is highly likely that similar transactions were made between large andsmall firms within this district. In fact, demands were highly concentrated on sakeproduced by a small number of large firms with well‐recognized brands in Nada,
although they cannot expand their own production due to scale diseconomies
caused by the lack of mechanization of production facilities.13 Under this condition,
large firms in Nada expanded their subcontracts to small firms in other prefectures,
since the amount of subcontracted sake from small firms within the district wasinsufficient (Kato and Ishikawa 2006; Ozeki Corporation 2014). 14 As a result,subcontracted small firms were not engaged in sales and marketing activities todevelop their sales channels, while large firms strengthened their corporate brands

13This was partly because rice trade was strictly controlled by the government under the FoodControl Law until 1968, so that large firms could not get enough rice for brewing.
14 Similarly, Ito (2000) pointed out that large firms with established brand names increased
subcontracting amount from their districts and neighboring prefectures when demands wererising, while they decreased subcontracts and increased their own production when demands
were declining.
16

by investing a substantial portion of their profits to advertising (Tomita 1974;
Ninomiya 2016), which leads to the division of labor between production and sales
within the district.15 It seems clear that under the situation in which production waslabor‐intensive and demands for brand‐named sake were high, the horizontal
division of labor between sales by large firms and production by small firms
developed.16<Figure 5>

4.2

PhaseⅡ: Rapid growth of labor productivity

Figure 4 shows that the value of production per worker in Hyogo prefecture rapidly
increased in phaseⅡ. It is clear that mechanization in sake brewing played an
important role in boosting production as well as labor productivity. As is shown in
Table 2, the adoption rate of four‐season brewing technology by large firms locatedin Nada dramatically increased to 100 per cent in phaseⅡ. The average size of thelarge firms measured by production also doubled, while the average number of15

In other words, large firms have a comparative advantage in sales and marketing, whereas
small firms have a comparative advantage in production.
16 Note that information spillover and imitation, one of the Marshallian agglomeration
economies, were active in Nada in phaseⅠ. Workers in small firms absorbed brewing
knowledge and technology from skilled labor in large firms through regular meetings in Nada
Sake Research Association, organized by brewers in Nada in 1917 (Nada‐shu Kenkyu Kai
1968).
17

workers in large firms has declined (Table 2). This suggests that the brewing
industry in Nada has changed from being labor intensive to capital intensive inphaseⅡ.
Such process innovation was associated with the increase in wage ratecaused by miraculous economic growth in Japan.17 Table 3 exhibits the changes in
the number of skilled workers called toji and their real wage rate. From 1950 to 1965,
not only did the number of skilled workers increase —from 249 to 302— but also
their daily wage rate rapidly increased from 4,704 to 8,176. 18 In contrast, their
number rapidly declined, and the growth of wage rate had slowed after the 1970s.
These observations indicate that firms in Nada had enjoyed the Marshallian
agglomeration economies arising from the developed skilled labor market when
production method was skilled labor‐intensive in phaseⅠ. In contrast, theimportance of skilled workers diminished as they were replaced by machines after
phaseⅡ, which Marshall (1920) did not envisage. In fact, as skills and experience ofthe skilled workers were embodied in machines, they were replaced with unskilledworkers who can handle machines (Sakurai 1981; Morimoto and Yagura 1998; Ozeki

17

According to Sakurai (1980), the development and diffusion of labor‐saving technologies isstrongly expected due to the significant increase in wage rates after the 1960s.
18 According to the data from Ministry of Labor (1961), their wage rates were about twice theaverage wage rates of Japanese manufacturing workers in 1960.
18

Corporation 2014).
<Table 3>
It must be emphasized that increase in labor productivity and diminishingimportance of skilled labor by mechanization were achieved at the sacrifice of thequality of sake. Figure 6 shows the changes in real price per kiloliter of sake in the
top three prefectures (Hyogo, Kyoto, and Niigata). Although the average price inHyogo prefecture was highest in the 1960s, the gap between average price in Hyogo
and other prefectures had decreased throughout the phaseⅡ, and Hyogo’s price was
finally surpassed by Niigata in the middle of the 1980s. 19 This indicates that themechanization reduced the quality of sake. Indeed, many large firms in Nada which
realized the mechanization of the brewing process began to use the cheap sake rice
as a raw‐material for brewing instead of Yamada‐Nisihiki after the 1970s (Ozeki
Corporation 2014). Figure 6 also shows that the gap between average price in Hyogo
and other prefectures has increased until around 2010. In all likelihood, Nada
maintained the large‐scale mechanized production system for mass‐market sake19

The number of firms that introduced four‐seasons brewing increased from 6 to 10 in Hyogo
prefecture in the period of 1983–1990, while it increased only from 1 to 2 in Niigata prefecture(Ito 2000). This trend supports the conjecture that Nada pursued cheap, mass‐produced sakeby capital‐intensive production method, whereas Niigata specialized in expensive, high‐quality sake by labor‐intensive production method.
19

established in the phaseⅡ until the middle of the phaseⅢ.20<Figure 6>
In addition, a large number of small firms bankrupted in phase II. As isshown in Table 2, the number of small firms has decreased and average productionof small and medium‐sized firms has increased since the 1970s, suggesting that theexit and absorption were accelerated.21 Such shakeouts took place presumably due
to the inefficient scale of production of small firms. Capital intensive technologies,
such as four‐seasons brewing, were rarely adopted by small firms because it requires
large investment (Onishi 1968), which suggests that the technological spillover
within the district was limited. 22 In addition, since subcontracts offered by large
firms have declined after the 1970s (Figure 5), when capital‐labor substitution

20

Similar to Hyogo prefecture, Kyoto prefecture also tended to produce low‐priced sake. For
instance, Gekkeikan Co., a large company located in Fushimi in Kyoto, introduced four‐season
brewing in 1961, earlier than any other company in Nada, and realized capital‐labor
substitution (Gekkeikan Kabushiki Gaisha Shashi Hensan Iinkai 1999). Furthermore, Takara
Shuzo Co., the largest company in Fushimi, built a new large factory capable of four‐season
brewing in the late‐1980s and has continued to produce mass‐market sake (Kawaguchi andFujimoto 2010). It seems that Fushimi district followed the similar growth path to Nada.
21 In the case of beer‐brewing industry in New South Wales described by Stubbs (1996, 1999),
improvements in technologies such as power machinery and better refrigeration enabled larger
breweries to achieve greater scale economies. Since these were too expensive for small
breweries to install in their plants, most small brewery exited. Stubbs also pointed out that thisis because of the increase in the minimum optimal scale, based on the discussion by Scherer(1974). In addition, a similar case is also observed in the brewing industry in New Zealand(Jones and Paul 1991).
22 Note that the role of information spillover and imitation within Nada also diminished inphase Ⅱ. According to the Nada‐shu Kenkyu Kai (1968), large firms in Nada refrained fromjoint research and technological exchanges as competition among the firms intensified.
20

rapidly advanced in Nada, small firms attempted to survive within the district by
expanding their firm size through merger of firms (Editorial Department of Journalof the Brewing Society of Japan 1972).23 These findings are consistent with the theoryof efficient scale of firms formulated by Romer (1990a, 1990b), who argues that
results of R&D, such as large mechanization of production processes, will increase
the minimum efficient size of the plant, which forces inefficient‐scale firms to exitfrom the market.

5

Expansion of High‐quality Sake and Catching up of Nada in PhaseⅢ

5.1

Rapid decline of Nada and growth of small brewing districts

Figure 3 shows a sharp decline in sake production in Nada, whereas Yamada‐Nishiki
production was gradually increasing in phaseⅢ. This means that mass‐market sakeproduced in Nada in phaseⅢ was unsuitable for the boom of the high‐quality sakeusing Yamada‐Nishiki. While total production of sake in Japan declined significantly
after the 1990s, consumer preferences for high‐quality sake mainly produced in

23

For example, Kiku Shuzo Co., a subsidiary of a large firm in Table 2, was established throughthe merger of four companies in Hyogo and Kyoto prefecture in 1971. Another firm,
Hyakumangoku Shuzo Co., established in Nada in 1973 through the merger of two firms in
Hyogo, is also absorbed as a subsidiary by one of the large firms in Table 2 (Journal of the
Brewing Society of Japan Editorial Department 1972). Such merged firms mainly specialized inselling subcontracted sake, since their own‐brand sales declined significantly after the 1970s.
21

small firms increased, and they occupied major market share (Niigataken Shuzo
Kumiai 2003; Noma 2006). 24 At the same time, the demand for Yamada‐Nishiki
produced in Hyogo prefecture from small brewing districts in other prefectures,25
which concentrated in producing high‐quality sake, has increased (Hyogoken
Sakamai Shinkokai 2020).26
Large brewers in Nada district, however, continued to pursue a strategy of
producing mass‐market sake by capital‐intensive brewing methods, which resulted
in the crisis of this district. If we turn to the data on large firms in Table 2, it is clearthat they still expanded their production in the 1990s, but the sales per worker have
sharply declined —from 103.3 in 1977 to 67.1 in 1995— suggesting rapid decline in
the demand for their mass‐produced sake. In fact, since large firms wished to securelarge volume to sustain their business under the decreasing demand for their sake,they increasingly attempted to reduce costs by adopting cheap paper bottles (Nada‐

24

According to the data from National Tax Agency (1961‐2018), the market share of high‐quality sake rapidly increased from 10 to over 30 per cent from the 1990s to the 2010s.
25 Note that the quality of Yamada‐Nishiki produced in Hyogo prefecture is the highest in Japan.
According to the data from Ministry of Agriculture, Forestry and Fisheries (2017), the average
production share of Yamada‐Nishiki graded over “high” by government was only 7 per cent inother prefectures, while that of Hyogo was 71 per cent in 2017.
26 The shift of raw‐material rice from Yamada‐Nishiki to cheap rice by large brewers in Nada wasalso a cause of crisis for farmers producing Yamada‐Nishiki. Therefore, Japan Agricultural Co‐
operatives organized by farmers in Hyogo prefecture organized sales promotion activities tosmall brewers in other prefectures, resulting in the rapid expansion of sales channels of
Yamada‐Nishiki after the 1990s (Hyogoken Sakamai Shinkokai 2020).
22syu Kenkyu Kai 1987)27. As a result, Nada lagged behind in the development of high‐quality sake. According to the results of the annual nation‐wide sake quality
competition from the 1950s to the 2010s, whereas firms in Niigata and other small
brewing districts had been awarded gold medals, firms in Nada only began to win
a few awards in the 1980s. Thus, there were concerns that its brand image may havebeen tarnished by the sale of such cheap paper‐bottled sake (Mitsui and Mizutani
2000). In other words, Nada was recognized as a district for cheap sake.
In response to such distress, however, some small firms in Nada achieved
high growth by changing their strategies for producing superior sake. For example,
Kobe Shu‐shin‐kan Co., located in the Nada district, successfully exported its products
and established brand as a high‐quality sake internationally (Yasufuku 2020). In theearly phase Ⅲ, there was a division between small firms following the strategy of
producing high‐quality products and large firms following the unchanged strategy
in Nada.

27

Such pursuit of producing mass‐market sake also attributed to the changes in sales channel.
After the 1980s, the main sellers of sake were shifted from commercial liquor retailers toconvenience stores and supermarkets, where cheap paper‐bottled sake for mass consumption
was sold (Morimoto and Yagura 1998).
23

5.2

Quality upgrading through local collective action

Contrary to Hyogo and Kyoto, Niigata became one of the growing prefectures, thatsuccessfully adapted to the high‐quality sake boom and increased its market sharein phaseⅢ.28 Traditionally, brewing in Niigata was characterized by labor‐intensive
production methods by small‐scale breweries. Interfirm sake transaction was
uncommon due to the absence of large breweries with famous corporate brands inthe district. In response to the growing demand for high‐quality sake, theyattempted to produce high‐quality sake for which small brewers have comparativeadvantages.
As Sonobe and Otsuka (2014) pointed out, the private benefit of theentrepreneur who succeeds in innovation (in terms of quality improvement) is lower
than social benefit because of the imitation in the industrial district. Therefore, theprivate incentives for innovation may be depressed. In other words, market failure
occurs since the market for innovative knowledge does not function. To overcome
market failures, Niigata Sake Brewers’ Association (NSBA) organized the local
collective action, which attempted to internalize external benefits of information

28

Other small‐brewing districts, such as Shiga, Kochi, and Yamagata prefectures, have also
succeed in shifting their production to high‐quality sake since the 1980s (Seki 2013, 2015; Ono
2018)
24

spillovers within the district. For example, NSBA held regular meetings for technicalexchanges among the brewers as well as training of managers and employees.29 In
addition, they engaged in the diffusion of new sake rice varieties used for high‐quality sake, and jointly owned rice milling machines which is useful for the
production of high‐quality sake (Niigataken Shuzo Kumiai 2003). Niigata Sake
School (Niigata Seishu Gakko), which was also founded by NSBA in 1984, have played
the central role in training skilled workers to produce high‐quality sake (Shima 1991).
As a result, several firms in Niigata succeeded in producing high‐quality corporate
brands such as Koshino‐Kanbai and Kubota, whose prices were far higher than the
average sake price in Japan (Asahi Shuzo Corporation 2003; Shima 2007).30
Nada began catching up with other districts to produce high‐quality sakearound 2010. In order to improve the quality of sake, brewers in Nada first returned
to using their original sake rice, Yamada‐Nishiki. Production of Yamada‐Nishiki in

29 The training included marketing, market research, and customer management (Niigataken

Shuzo Kumiai 2003). In developing economies, the growth of the garment industry in
Bangladesh and Tanzania has also been facilitated by training programs (Mottaleb and Sonobe
2011; Sonobe and Otsuka 2014)．
30

Historically, collective action through local associations has also been undertaken in theFushimi district, Kyoto. In the pre‐war period, sake brewed by Fushimi brewers was called
out‐of‐place because of its low quality. Fushimi Sake Brewers’ Association organized bybrewers in Fushimi, however, succeeded in developing the regional brand and expanding its
market share by monitoring the brewers to ensure that they never produce inferior products(Fushimi Shuzo Kumiai 2001). In addition, this association has held the meeting for technology
exchanges in recent years (Tasaki 2009; Kawaguchi and Fujimoto 2010).
25

Hyogo prefecture has increased significantly since 2010 (Figure 3). It accounted forapproximately 50 per cent of all sake rice used for brewing in Hyogo prefecture in
the 1990s, but it has risen to around 70 per cent in the 2010s (Hyogoken Sakamai
Shinkokai 2020). The brewers clearly recognized Yamada‐Nishiki as an indispensable
material for the production of high‐quality sake.
In addition, similar to Niigata prefecture, the large brewers in Nada also took
local collective action. 31 In contrast to Niigata, which attempted to develop eachcorporate brand, large brewers in Nada attempted to construct the regional brandthrough collective quality control.32 The research group, which was newly organizedby six large firms in Nada, was responsible for promoting this brand. Theycollectively attempted to recover the regional reputation through quality
improvement by strictly monitoring the quality and eliminating poor‐quality

31

According to Mitsui and Mizutani (2000), there had been a strong competitive relationshipbetween large firms in Nada since they have achieved mechanization in the 1970s. Therefore,
unlike in Niigata prefecture, where the market share of each firm was small and thecompetitive relationship between firms was weak, the incentive for collective action wasprobably low in Nada.
32 The distinctive feature of this project is that it achieved cooperation by emphasizing theestablishment of a unified regional brand, while maintaining difference in the products of eachfirm. According to interviews with executives of large firms in Nada and Nada brewers’
association, ʺBrewers in Nada are large and it is difficult to brew completely unified products.
Therefore, cooperation is possible only by selling each firm’s sake under a unified regional
brand. Even within the Nada district, we wish that consumers enjoy the unique taste of sake ofeach brewery” (Interview conducted on October 21, 2021).
26

products (Akashi 2017).33 This research group also collectively monitored the raw‐material rice because the desired high‐quality sake with regional brand requires
using rice produced only in Hyogo prefecture (Nada‐shu Kenkyu Kai 2011).34 On
the other hand, small and medium‐sized firms did not participate in this brandformation and attempted to enhance their own corporate brands without muchsuccess. Thus, firms in Nada were divided into two groups: large firms withcollective regional brand and small firms with their own corporate brands. Throughthese efforts, Nada seems to be partly successful in quality upgrading. The declining
trend in the real value of sake production halted (Figure 4), and its real price inHyogo prefecture began to increase again in the 2010s (Figure 6).
The collective efforts to improve quality and construct regional brand in phase
Ⅲ are also confirmed by the introduction of Geographical Indication (GI) system in
Nada in 2018.35 In order to claim Nada‐brewed sake, GI system legally requires thecertification by the Nada‐gogo Brewers’ Association (NBA) organized by sake33

All but one of these firms are large firms in Table 2 (Nada‐Shu Kenkyu Kai 2011).

34 The average price per kiloliter of this branded sake, calculated from each brewer’s retailprice, was 1.5 yen in 2011 (Nada Sake Research Association Sake Quality Review Committee2011). This price is much higher than the national average price in 2011 (that is, 0.7 yen), whichsuggests that Nada partly succeeded in quality improvement in phase Ⅲ.
35

The introduction of the GI in sake was modeled after the wine industry, which succeeded ineliminating imitated poor‐quality products in Europe and Latin America (Crozet et al. 2012;
Defrancesco et al. 2012; Agostino and Trivieri 2014).
27

brewers (National Tax Agency 2018). NBA developed strict rules for production ofquality of certified sake, such as the use of clean spring water in Nada and high‐quality sake rice, which successfully prevents the distribution of imitated sake.
Quality improvement through establishing regional brand by the local collective
action was clearly beyond the scope of Marshallian agglomeration economies. The
fact that such innovation halted the declining production of the district is consistent
with the argument of Sonobe, Otsuka and Hashino (2016), who suggest theimportance of local collective action for innovations by internalizing the externality
within the cluster.

6

Conclusions

This study explored the changing roles of agglomeration economies in the industrial
cluster by addressing three questions underlying the long‐term development of the
Nada sake brewing district. These are (1) economic forces underlying the horizontal
division of labor, (2) the impact of mechanization on the importance of skilled labormarket, and (3) conditions triggering local collective action toward the innovationinduced. In the postwar period, Nada experienced three distinct changes in its
development process, which provide unique evidence to answer our questions. In

28the first phase (from the 1950s to the 1960s), under the condition in which production
was labor‐intensive with scale diseconomies, and demands were highly
concentrated on branded, reasonable‐quality sake, the horizontal division of labor
between sales by large firms and production by small firms accelerated the growthof this district. In the second phase (from the 1970s to the mid‐1980s), while large
firms achieved the increase in labor productivity through the mechanization of thebrewing process, skilled laborers were replaced by machines, suggesting thedeclining importance of the skilled labor market. In addition, technologicalspillovers from large to small firms within the district were limited, which
accelerated shakeouts of small firms with inefficient production scale. In the lastphase (from the late‐1980s to the 2010s), Nada faced a rapid decline in demand fortheir reasonable‐quality sake, due to the increasing demand for higher‐quality sakemainly produced in small brewing districts. This crisis, however, induced the quality
improvement in Nada through the establishment of regional brand by collectively
internalizing the external benefits of information spillovers, which is beyond thescope of the Marshallian arguments.
One of the most important contributions of this study is that the increase inwage rate and demand for high‐quality products associated with economic

29

development can have decisive impacts on the development and stagnation of sakebrewing districts. This study, however, indicates the possibility that stagnatedtraditional clusters can recover growth by collectively internalizing the externalbenefits of information spillovers. The relationship between the impacts of suchexogenous changes and the development of industrial districts has not been
considered in previous studies on cluster development (e.g., Sonobe and Otsuka
2006a). In this sense, the results of this study, obtained through historicalobservations using long‐term data, add a new perspective to the literature on thedevelopment of industrial clusters.

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Table 1. Comparison of sake brewing firm characteristics of top three prefectures inselected years from 1961 to 2017
Production share (%)
1961
Hyogo
Kyoto
Niigata
Average in other prefectures
1981
Hyogo
Kyoto
Niigata
Average in other prefectures
2001
Hyogo
Kyoto
Niigata
Average in other prefectures
2017
Hyogo
Kyoto
Niigata
Average in other prefectures

Average productionaReal price per kl (yen)per factory (kl)

16.3
7.3
3.3

501.6
483.3
211.0
201.3

1.60
1.44
1.05
1.05

33.1
10.9
2.8

3,667.7
2,390.2
509.9
455.9

0.69
0.67
0.65
0.58

32.8
13.8
5.9

2,880.1
2,290.7
647.2
298.8

0.57
0.63
0.91
0.70

32.7
15.1
7.9

2,353.9
1,792.1
512.0
182.4

0.56
0.63
0.97
0.86

‐

‐

‐

‐

Notes: a Real prices were calculated by deflating from the Consumer Price Index(Statistics Bureau of Japan 2017).
Sources: Kogyo Tokei Chosa‐kekka Hokoku (1961‐2017).

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Table 2. Number of large and small/medium sake brewing firms in Hyogo and theiraverage characteristics in selected years from 1959 to 1995
1959
Large firmsaAverage No. of firmsbAverage year of establishmentcdAverage production (kl)Four‐seasons brewing ratio (%)
Average No. of workers
Average sales revenue (million yen)
Average sales revenue per worker (million yen)
Small and medium firms
Average No. of firms

Average production (kl)

d

7

7

7

1984
1

7

1995
1
8

1
8

1920

1920

1920

1927

1927

8,362

11,804

18,271

21,96922,668100
499
51,612
103.3

100
458
39,82687

100
445
29,849
67.1

0
‐
‐
‐

c

1977
1

1920

a

1967
1

‐

e

Average year of establishment

1963
1

14
‐
‐
‐

71
‐
‐
‐

2

2

2

110

125

146

1921

1924

1925

1925

1926

1929

578

719

1,041

1,150

1,046

‐

2
121

2
90

0
83

Notes : a Firms that experienced production of 10,000 kiloliters or more were definedas large firms, and those that did not were defined as small and medium‐sized firms.
The data includes firms which factories are located in Hyogo but headquarters arelocated outside of the prefecture.
b All large firms are located in Nada district.
c Since most of the traditional firms are old and it is difficult to define the exact yearof establishment, it is taken as the year of foundation.
d Production refers only to sake produced by themselves, which does not include
the subcontracted amount. Therefore, it can be underestimated for large firms, while
it is overestimated for small and medium‐sized firms.
e Exclude those small and medium‐sized firms whose year of establishment or
production is unknown.
Sources: Zenkoku Jyozoka Meikan (1959‐1995), Hyogoken Kojyo Meikan (1961‐1995) and
Zenkoku Syokuhin‐gaisha Meikan (1981‐1999).

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Table 3. Changes in the number of skilled workers and their real wage rate
1955
1960
1965
1970
1975
1980
1985
1990

a

Number of skilled workers
249
287
302
265
218
164
125
117

Real wage rate per day (yen)
4,704
5,951
8,176
13,453
17,56417,086
18,33320,087

Notes: a The real wage rate of skilled workers called toji is not fixed, but it should be
set to 1.5 times that of their assistants according to the contract (Nada‐gogo Syuzo
Kumiai Chingin Kyoteisho 1970). Hence, we estimated wage rate of the toji based onthat of their assistants. Real wage rate is calculated by deflating from the Consumer
Price Index (Statistics Bureau of Japan 2017).
Sources: Nada‐gogo Syuzo Kumiai Chingin Kyoteisho (1955‐1990) and Tanba Toji Meibo(1955‐1990).

42

Figure 1. Map of Hyogo prefecture and Nada sake brewing districts
Notes and sources: This map is drawn based on the data from National Land
Numerical Data, Ministry of Land, Infrastructure, Transport and Tourism.
(https://nlftp.mlit.go.jp/index.html)

43

4500

1800

4000

1600

3500

1400

3000

1200

2500

1000
2000

800

1500

600
400

1000

200

500

0

0

Sake production

Number of Factories

Production (thousand kl)

2000

Factories

Figure 2. The number of sake factories and the quantity of sake production in Japan,
1953–2017
Notes: Production is measured by the shipment which refers to the quantity of sakethat is finally bottled and shipped, including purchased sake.
Sources: Kokuzeicho Tokeinenpo (1953‐2017).

44

Figure 3. Indices of number of firms, production, and Yamada‐Nishiki in Nada sakebrewing district, 1953–2017 (1953 = 100)
Notes: All indices were set to 100 in 1953.
Sources: Nada‐shu (1969), Zoku Nada‐shu (1988), Kogyo Tokei Chosa‐kekka Hokoku (1953‐2017) and data provided by Nada‐gogo Sake Brewers’ Association (1953‐2017).

45

Figure 4. Indices of number of firms, production, firm size, and labor productivity
in Hyogo, 1971–2017 (1971 = 100)
Notes: All indices were set to 100 in 1971.
Sources: Hyogo no Kogyo – Kogyo Tokei Chosa‐kekka Hokoku (1953‐2017).

46

15.0%
10.0%
5.0%
0.0%
‐5.0%
‐10.0%‐15.0%‐20.0%
Hyogo

Kyoto

Niigata

Other prefectures

Figure 5. Changes in the ratio of subcontracting transactions in top three prefectures
Notes: (1) The ratio of subcontracting transactions is calculated by taking thedifference between the market share of shipments and that of production, based on
Ito (2000). (2) Shipments refer to the quantity of sake that is finally bottled andshipped, including purchased sake. In contrast, production refers to the quantity ofsake, excluding purchased sake. Thus, the difference between the market share of
shipments and that of production refers to the ratio of subcontracting transactions.
Sources: Kokuzeicho Tokeinenpo (1969‐2017).

47

1.8
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0

Hyogo

Kyoto

Niigata

Other prefectures

Figure 6. Changes in the real price of sake per kl in top three prefectures
Notes: (1) Prices are calculated by dividing the value of shipments by the quantity ofshipments. (2) Shipments refer to the quantity of sake that is finally bottled andshipped, including purchased sake. (3) Real prices were calculated by deflating fromthe Consumer Price Index (Statistics Bureau of Japan 2017).
Sources: Kogyo Tokei Chosa‐kekka Hokoku (1953‐2017).

48