Lecture note for Yale School of Management

1. Supply Chains in Japan:
How do they affect resilience and
innovation of the economy?
Yasuyuki Todo
Faculty of Political Science and Economics
Waseda University
yastodo@waseda.jp
Yale SOM Japan 2016
March 16, 2016

2. About Me
Research Fields
• Development economics, international economics,
Japanese economy
• Applied econometric analysis
Research Topics
• Effects of firm internationalization
– Firm-level data for Japan, Chain, and Indonesia
• Effects of networks on economic growth
– Firm-level data for Japan, Indonesia, Vietnam,
and the whole world
• Quantitative evaluation of Japanese aid in
Indonesia, Ethiopia, and Burkina Faso
2

3. 3
http://www.voxeu.org/person/yasuyuki-todo
http://www.weforum.org/agenda/2016/01/how-will-the-tpp-affect-japans-economy

4. Today’s Talk
Supply Chains in Japan
• What is keiretsu? How does it work?
• Resilience of Japanese supply chains
• Role of diversity of supply chains
in innovation
• Current changes and prospects
• Internationalization of supply chains
4

5. Keiretsu
5
Final-good
producers
1st tier
suppliers
Share of Toyota in
Aisin’s sales: 60%
50%
2nd tier
3rd tier
Togo
Seisakusho
Toyota
Aisin
Denso
Toyo
Honda
MusashiKeihin

6. Characteristics of Keiretsu
Close ties between firms through supply chains
• A large share (e.g., 60% for Aisin)
of a particular keiretsu partner in total sales
• Long-term relation
• Technical assistance from buyers to suppliers
– E.g., Toyota teaches
“kaizen” to suppliers.
• Joint R&D for new parts
• Sometimes associated with capital ownership
6
Kyohokai’s web site
http://www.kyohokai.gr.jp/

7. 7
Mutual Benefits through Keiretsu
Buyer Supplier
Technical assistance
(production & development),
higher prices than in the market
High-quality parts of a wide variety,
“just in time” delivery
Aoki, M. (1988), Information, Incentives, and Bargaining in the Japanese Economy,
Cambridge University Press.

8. 8
Keiretsu
long-term relations b/w
suppliers & assemblers
Long-term
employment
Seniority
wage
Employment
Team production
Firm-specific tacit knowledge
matters
Complementarity
• Share tacit knowledge b/w
suppliers and assemblers
• Long-term relation provides
incentives to invest in
relation-specific assets
Inter-firm relations
Necessary for
long-term
employment
Provides
incentive to
invest in
firm-specific
knowledge
Complementarity between Keiretsu
and the Employment System in Japan
Aoki (1988), ibid

9. 9
Supply Chains in Japan
Based on 100,000 ties
randomly selected from 4 million in firm-level data
collected by Tokyo Shoko Research in 2010
Recent challenges:
Are keiretsu-type
supply chains in Japan
resilient to disasters?

10. Effects of Supply Chain Disruptions
10
Disruption
of supplies
due to
disasters
Flow of
material
and
parts
Propagation of
neg. effects
through supply
chains

11. 11
Tohoku: Areas Affected by the Great East
Japan Earthquake in March 11, 2011
●：Plants in the auto industry
Epicenter
Cluster
of the auto industry

12. Disruption of Supply Chains
by GEJ Earthquake
12METI (2011), http://www.meti.go.jp/press/2011/04/20110426005/20110426005.html
0
10
20
30
40
50
調達済み 5月～7月 8月～10月
％
assemblers
April 2011 May-July August-
suppliers
Survey in April, 2011 to firms (not directly affected):
Expectation about when they can procure sufficient
amounts of material, parts, and components

13. Were impacts of the earthquake
propagated through supply chains?
Observations
 Many plants not directly hit by the earthquake
(including GM in US) were temporarily shut
down b/c of lack of parts and materials.
Simulation using an IO-based model
(Tokui J., et al., 2012, RIETI Policy Discussion Paper, No. 12-P-004.)
Loss of 1.35% of GDP by the earthquake
90% of the loss  disruption of supply chains
But, supply chains are not always harmful
to recovery from disasters.
13

14. Supply chains’ positive effects on
recovery from disasters
Support from suppliers and clients
• Renesas Electronics
– Microprocessors for automobiles
– One of the largest bottleneck for recovery
of the auto industry
– 80,000 man-days of labor from clients
14http://japan.renesas.com/media/ir/library/pdf/csr/2011_csr_03.pdf

15. Supply chains’ positive effects
Support from firms in impacted areas
Ogatsu Musen (3rd tier w/ 14 workers)
Horio Seisakusho (2nd tier of auto makers)
15
Nikkei Newspaper, Sep. 8, 2011,
http://www.nikkei.com/article/DGXZZO42592900U2A610C1000000/
Ogatsu, whose plant was washed away by
the tsunami, rented a space from Horio to
continue production (left), until it built a
new office in 2012 (below).
Nikkei BP, Mar. 10, 2015,
http://techon.nikkeibp.co.jp/article/MAG/20150225/405903/?rt=nocnt

16. Supply chains’ positive effects
Support from firms in impacted areas
Toyo Seikan (can maker)
Kirin (beer brewery)
16
http://www.jsda.or.jp/katsudou/kaigi/chousa/haxtusin_kon/no05/files/vol5-2.pdf
Sendai
PortKirin
Toyo Seikan
Google Map

17. 0 10 20 30 40 50
Others
Financial institutions
Public institutions
Volunteers
Relatives/friends
Competing firms
Suppliers/clients
17
Share in all firms
Share in firms
damaged
completely/half
Todo, Y. et al., 2015, How Do Supply Chain Networks Affect the Resilience of Firms to Natural
Disasters? Evidence from the Great East Japan Earthquake, Journal of Regional Science.
% of firms that received support from:

18. Positive Effects of Supply Chains
18
Disruption
of suppliesFlow of
material
and
parts
+ effect
through
support from
partners

19. Another Positive Effect
Substitute new partners for damaged
partners using supply chains
Iwaki Die-cast, which had to stop production
for a while, provided dies to competing firms.
• Felt responsible for
continuing to supply
parts to buyers
• Gained more trust
and thus more
purchase from buyers
after the earthquake
19http://www.rieti.go.jp/jp/events/13032201/pdf/09_yokoyama.pdf

20. 20
Searching for New Suppliers (April, 2011)
METI (2011)
0
20
40
60
80
代 代
％
material
producers
assembler
s
Have found new
partners for most
disrupted supplies
No yet

21. Positive Effects of Supply Chains
21
Disruption
of supplies
Flow of
material
and
parts
+ effect
through
substitution of
damaged
partners

22. Effects of Supply Chains on Recovery
22
+
Support from
partners
+
Substitution of
damaged
partners
‒
Propagation of
negative effects
through supply chains
What is the actual net effect?

23. Recovery from the GEJ Earthquake
Projection by METI in April, 2011:
Full recovery of supply chains: Fall in 2011
Actual full recovery: July in 2011
• Renesas Electronics:
Re-started production on June 1
23http://japan.renesas.com/media/ir/library/pdf/csr/2011_csr_03.pdf

24. Recovery from the GEJ Earthquake
24
Wakasugi R., Tanaka, A., 2013, Recovery from the Mega-quake in Japan: Evidence from
Manufacturing Firms, KIER Discussion Paper, No. 867, Kyoto University.
Tohoku
Japan
Index of industrial production
in the transportation equipment
industry (2005=100)
Earthquake

25. Recovery from the GEJ Earthquake
25Cabinet Office of Japan, http://www.esri.cao.go.jp/jp/sna/menu.html
Earthquake
Real GDP of Japan
Billion yen

26. Todo, Y. et al., 2015a, How Do Supply Chain Networks
Affect the Resilience of Firms to Natural Disasters?
Evidence from the Great East Japan Earthquake, Journal
of Regional Science.
• 2 firm-level datasets
–Data collected in the impacted areas
after the earthquake (2000 firms)
–Data for supply chains before the earthquake
collected by Tokyo Shoko Research
(800,000 firms & 4 million ties)
26
Evidence of positive effect of supply
chains on recovery from GEJ Earthquake

27. 0102030
Percent
0 20 40 60 80 100
Recovery time
27
No disruption of operation: 30%
No operation for 1-5 days: 23%
Median: 5 days
Effect on the recovery time
 short-term effect
(# of days before resuming operation)

28. 0100200300400
Recoverytime
0 5 10 15 20 25
# of suppliers outside impacted areas
28
Many suppliers outside impacted areas
 quicker recovery
Graphical Evidence

29. 29
Dep. var.
Time for
resuming
operation
Sales
growth
in ½ yrs
Suppliers in
impacted areas
0.108 3.62*
Suppliers outside
impacted areas
-0.351*** 2.61
Suppliers of
direct suppliers
0.081** -1.04
N 902 883
Pseudo R2 0.149 0.129
Regression Results
* p<0.1; ** p<0.05; *** p< 0.01
support,
substitution
> propagation
support,
substitution
< propagation
Agglomeration
effect

30. Summary of Todo et al. (2015a)
30
Supply chains are helpful to recovery from
disasters.
Disruption of supply chains negatively affects
production of firms not directly affected by
the earthquake.
But, the effect does not last long.
Geographically diversified supply chains
promote resilience through substitution and
inter-firm support.
Clustering within regions promote medium
term recovery. Todo, Y. et al., 2015, Journal of Regional Science.

31. Knowledge Diffusion
through Supply Chains
Diffusion from buyers
Explicit technical assistance to suppliers
(See slide 6)
 Disembodied knowledge diffusing
through face-to-face communication
Diffusion from suppliers
High-quality intermediates
for high-quality final goods
 Diffusion of embodied knowledge
31
Dyer, J., and Nobeoka, K., 2002, Creating and managing a high performance knowledge-
sharing network: the Toyota case. Strategic Management Journal 21.

32. Knowledge diffusion
through buyer-supplier relations
Learning by exporting/importing
(Kimura et al. 2006, Blalock et al. 2004, Amiti et al. 2007)
Vertical spillovers from downstream FDI
(Javorcik 2004)
 Implying larger diffusion from overseas
partners than from domestic ones
Importance of geographically diversified
networks
32

33. Results from Social Network Studies
Importance of diversity
Structural hole (ties between different groups)
(Burt 1992)
Strength of weak ties
(Granovetter 1973)
Density of ego network
redundant knowledge
(Burt 2004)
33Figure from Burt (2004)

34. 34
Measure of diversity
of an employee’s ties
less diversemore diverse
MeasuresofPerformance
Burt (2004)

35. Estimating Effects of Supply Chains
on Productivity and Innovative
Capacity through Knowledge Diffusion
35
Todo, Y., et al., 2015b, “The Strength of Long Ties
and the Weakness of Strong Ties: Knowledge
Diffusion through Supply Chain Networks,” RIETI
Discussion Paper, No. 15-E-034.
• TSR data for the manufacturing sector in Japan

36. Effects of Supply Chains
on Sales/Worker and # of Patents
36
ln(# of suppliers/clients in same pref. )
ln(# of suppliers/clients out of pref. )
Network density
ln(sales per worker)
ln(sales)
controls including industry
it it it it
it
it
−=+ + +
+ 
 + 
 =
 
 
 
 
=
Y α βY δX ε
Y
X
1
1
1
and pref. dummies
Estimate the system of dynamic equations
by Seemingly Unrelated Regressions

37. Key Network Variable:
Density of each firm’s ego network
• # of actual ties among each firm’s supply chain
partners /# of all possible ties among them
• Mean: 0.26
• Considerations
– Redundant knowledge
in dense networks
– Dense networks  trust  knowledge
diffusion
• Hypothesis:
Density may or may not promote diffusion.
37
Me
My ego-
network
density = 1/3

38. -4-2024
1 2 3 4 5
5-year Period
-4-2024
1 2 3 4 5
5-year Period
-4-2024
1 2 3 4 5
5-year Period
％
Sales
Sales per
worker
(1) When the
number of
neighboring
suppliers
increases by 1
(3) When transactions
between partners
(density) increase
Todo, Y., et al., 2015, “The Strength of Long Ties and the Weakness of Strong Ties:
Knowledge Diffusion through Supply Chain Networks,” RIETI Discussion Paper, No. 15-E-034.38
(2) When the
number of
distant suppliers
increases by 1

39. Effects on # of Patents (IV Tobit of Newey, 1987)
Independent var.
(logged)
Dependent var. (logged): # of registered patents
# of neighboring suppliers 0.00286 0.0413
# of distant suppliers 0.133+ -0.0474
# of neighboring clients -0.0786 -0.0638
# of distant clients 0.240** 0.117
Density -0.283 -1.154* -0.294 -0.987*
# of distant suppliers * density 0.887*
# of distant clients * density 0.583
N 36,839 36,839 36,839 36,839
+: p < 0.1, *: p < 0.05, **: p < 0.01 39

40. Technological advantages vary
across prefectures.
40
Todo et al. (2015)
Technology class
Dark color
indicates
technological
advantage.
Prefectures

41. 41
Knowledge Similarity between Supply Chain Partners
CDF of a measure of
knowledge similarity
(constructed from patent data)
for firm pairs with supply chain ties
without supply chain ties
Similar knowledge in dense networks

42. Summary of Todo et al. (2015b)
Effect on
productivity
Effect on
innovative
capability
# of neighboring
suppliers
No No
# of distant
suppliers
+ +
# of neighboring
clients
+ No
# of distant
clients
No +
Density − − (weak)
42
F2F tech.
assistance
needed
Disembodied
knowledge
diffusion

43. 43
Diversified networks contribute to
innovation.
Clustered networks
within the community
 Knowledge diffusion
from multiple sources
(Centola, 2010)
Ties with outsiders
(bridging ties, structural holes)
 Diffusion of new knowledge
(Watts & Strogatz, 1998; Burt 1992;
Granovetter 1973
[strength of weak ties])

44. Recent Changes in Supply Chains
in Japan
Dissolution of keiretsu
Toward more resilient supply chains
• No reliance on particular suppliers
Modularization of parts
• Promoted by US and
European auto makers,
stimulated by the
electronic machinery
industry
44Nikkei Newspaper, Feb. 4, 2013.

45. 45
Average Characteristics of Top 5
Japanese Automobile Manufacturers
Data source: Tokyo Shoko Research

46. 46
Illustration of Changes in Supply Chains
2nd tier
A
Final assembler
1st tier
suppliers
B C D
E
Before
After
When C is hit, it
may be replaced
with D.
When A is hit,
C can still survive
because of
demand from E.
Supply chains have
become more resilient.

47. Inevitable Weakness
Tradeoff b/w efficiency
and resilience
• To achieve a high
quality, special parts
available only from
a particular supplier
should remain.
Toyota seems to be
ready for this problem
this time.
47
Nikkei Asian Review, Feb. 15, 2016
http://asia.nikkei.com/Business/Companies/
Toyota-resumes-production-at-assembly-
plants-after-weeklong-stoppage

48. Internationalization of Supply Chains
48
Characteristics of Suppliers of
Top 3 Auto Makers in Each Region
In Japan, final producers are internationalized,
but suppliers are not.
FactSet Revere

49. 49
Production networks in East Asia has been developed.
Fujita and Hamaguchi (2014), Supply Chain Internationalization in East Asia:
Inclusiveness and risks, RIETI Discussion Paper No. 14-E-066.
Trade in
intermediates
in 2000

50. 50
Trade in
intermediates
in 2012
Fujita and Hamaguchi (2014), ibid.

51. Regional Share
in Trade in Parts and Components
51
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
Intra
Regional
to the ROW
Intra
Regional
to the ROW
Intra
Regional
to the ROW
NAFTA
EU
East
Asia
Fujita and Hamaguchi (2014), ibid. ROW: Rest of the World

52. Internationalization of Japanese Firms
Japanese final assemblers: Yes
Their suppliers (mostly SMEs): Not much
52
Lack of internationalization of SMEs
is one of the biggest problem
of the Japanese economy.

53. 53
0500100015002000
企業数
0 1 2 3
全要素生産性（平均=1）
国内向け企業
0500100015002000
企業数
0 1 2 3
全要素生産性（平均=1）
国際化企業
“Lying dragon” firms
Internationalized firms
Numberoffirms
TFP (average = 1) Wakasugi et al. (2008)
TFP distribution for non-internationalized firms in Japan
Many productive firms are not
internationalized.

54. 54
Why?
Protection
of SMEs
Economic
stagnation
E.g., a law required banks
to give forbearance to
distressed SMEs.
Zombie
firms
Political pressures
SMEs do not need to be internationalized to survive.

55. 55
Japan could be more internationalized.
Average of 2010-13: World Bank, World Development Indicators

56. 56
But, Japanese firms may not survive
any more without going out.
Share in World GDP (%)
G7
Middle incomes
countries
Japan
World Bank, World Development Indicators

57. Summary
Supply Chains in Japan
• Resilient to some extent
even when hit by the GEJ earthquake
• More resilient after the earthquake
through diversification of partners
• Diversification, in turn, leads to productivity
improvement and innovation.
• Lack of internationalization of SME suppliers
may be a big problem.
57