diversified.

The CPC development of the Japanese automobile industry deserves a brief explanation. Although it is seen in Fig. 5 that the industry entered the export phase in around 1960, the figure was distorted under heavy protection. In 1953 both import and domestic consumption of passenger cars were around 12-13 thousand. Strict import quota restriction continued until 1965 and import of passenger cars was kept as few as 5 thousand, while its consumption increased up to 700 thousand during the same period and was secured for domestically produced cars. About 10 thousand cars were exported in 1965, but they were mostly shipped to Southeast Asia. Export to the United States started to increase only in the 1970s. The period 1953-1970 may well be identified as the import substitution phase of the Japanese passenger car industry, but the import was suppressed under restrictive policy. During this period European technology was introduced actively and the well-known subcontracting system for parts-supply was firmly established, both of which led to export expansion in the 1970s and 1980s. Thus the same catching-up mechanism worked in spite of its truncated CPC form. In 1988, the production/consumption ratio amounted to 2.5. (f.n.4)

On the other hand, the steady export of industrial machinery started in the late 1970s and its production/consumption ratio amounted to 1.30 in 1988. During the 1970s, many Japanese industries reached the export and mature phases while only a few proceeded to the reverse import phase, which resulted in the accumulation of trade-surplus and led to trade conflicts with major trade partners in the 1980s (Yamazawa 1984, ch.9).

What enables the CPC development of one industry to spread to other industries in the same country? Four forces are counted on as affecting the diversification of industrial structure. First is the increased availability of capital. The factor proportion theory (Hecksher-Ohlin Theory) of international economics is applied to the mechanism of structural changes in production and trade in the process of industrialization. Industrial production is footloose and can be located in any country by importing material inputs unavailable domestically. Final output is produced by combining labor and capital with materials. Individual industries differ in their capital intensity, and in a country with abundant labor, capital accumulation enables the start of new, more capital intensive industries.

Thus a two-factor two-commodity model explains how the capital-intensive production expands, i.e. industrial structure is diversified, so that increased capital is fully employed. But if we disaggregate industries and try to explain the actual process of industrial diversification, we have to distinguish different forms of capital and technology specific to individual industries. (Johnson 1968, Caves and Jones 1973, ch.7 and 8). That is, changes in production and trade structure cannot be determined by the full employment condition alone. Authors introduced additional conditions as in three sector models of Kojima (1983, ch.7) and Inada-Sekiguchi-Shouda (1971) and N-sector model of Bensusan-Butt (1954). To conclude, the accumulation of capital provides a primary explanation for broad diversification of industrial structure but it must be supplemented by additional factors affecting actual diversification at more disaggregated level. The CPC model can meet this need.

Second, entrepreneurship is counted as the force actually deciding the start of a new industry. The basic type of CPC has provided a newly introduced industry; growth of domestic demand, decreasing cost realized as production expands, and protection provided by