J. Japanese Int. Economies 22 (2008) 143–145

Contents lists available at ScienceDirect

Journal of The Japanese andInternational Economies

www.elsevier.com/locate/jjie

Editor’s Introduction

Organizational innovation and corporate performance

This issue includes seven papers presented at the conference “Organizational Innovation and Cor-porate Performance,” sponsored jointly by the Tokyo Center for Economic Research (TCER), the Na-tional Bureau of Economic Research (NBER), the Centre for Economic Policy Research (CEPR), andHitotsubashi University. The conference was held at the Kunitachi campus of Hitotsubashi Universityon December 15–16, 2006. The papers have gone through a regular refereeing process of the jour-nal and have been revised on the basis of comments and discussion at the conference as well ascomments from anonymous referees.

Organizational economics has rapidly developed to become a major field during the last twodecades. It has highlighted the critical role of transaction costs and asset ownership in defining thenature and boundary of a firm. Studying Japanese corporate practices, such as subcontracting in theautomobile industry, relational bank financing, human resource management with an emphasis onskill formation, and others, have widened scholars’ perspectives on the choice of organizational struc-ture beyond the dichotomy between markets and hierarchies.

The broader understanding of these features of Japanese corporate management has also signifi-cantly influenced management practices around the world. We have observed significant changes incorporate organizations in both the United States and Europe, such as increasing use of outsourcingand emergence of firms specialized in specific parts of vertical production chain. In addition, the waveof corporate reforms in Japan in the midst of stagnation of the Japanese economy for the last decadehas focused international attention on Japanese management practice. The papers in this issue addto the theoretical and empirical literature on organizational economics by paying special attention torecent changes in corporate organizations in Europe, the United States, and Japan.

The organizational economics literature often contrasts rigid controls inside an organization witharms-length contracting outside the organization. In real businesses, however, we observe a vast rangeof strategic alliances of different types, many of which are designed to change organizational practiceand performance without changing the boundaries of corporations. George Baker, Robert Gibbons, andKevin Murphy document the variety of strategic alliances in the US biotech industry and present amodel that can capture the logics behind these different governance structures. Their model focuseson the spillover effects and ex post contracting problems. These two points, emphasized by practition-ers they interviewed, contrast with many theoretical models that stress hold-up problems, specificinvestments, and ex ante incentive problems.

An example of a strategic alliance in production is platform sharing, in which two or more firmsshare common parts or production processes for different goods. Arghya Ghosh and Hodaka Moritaexamine theoretically the welfare implication of platform sharing. They consider two alternative casesfor the competitive environment of the two firms that share the platform. In one case, the firms’products are differentiated horizontally (different varieties), and in the other case, the firms’ prod-ucts are differentiated vertically (different qualities). By using a common platform across differentproducts, firms can save on fixed costs for platform development. At the same time, platform shar-ing imposes restrictions on firms’ ability to differentiate their products, and this may reduce their

0889-1583/$ – see front matter © 2008 Elsevier Inc. All rights reserved.doi:10.1016/j.jjie.2008.03.004

144 Editor’s Introduction / J. Japanese Int. Economies 22 (2008) 143–145

profitability. Ghosh and Morita find that platform sharing benefits consumers because it intensifiescompetition in the horizontal differentiation case and increases the quality of the lower-end productin the vertical differentiation case. They also show new channels through which a corporate mergermakes consumers worse off in the presence of platform sharing.

Production relationships that are neither arms-length nor fully internal are observed very fre-quently in the Japanese auto industry. Indeed, a hallmark of the Japanese automobile industry is theclose relationship between an assembler and its suppliers, the keiretsu. Sadao Nagaoka, Akira Takeishi,and Yoshihisa Noro study the make-or-buy question using data from the Japanese automobile indus-try. In addition to the “make” and “buy” decisions that are standard in the literature, they consider“buy from affiliated (keiretsu) firm” as another possible decision. Their data set covers the procure-ment decisions on 54 auto parts by seven major Japanese assemblers for almost 20 years (1984 to2002).

They find a clear pecking order among vertical integration (“make”), keiretsu outsourcing (“buyfrom keiretsu firm”), and non-keiretsu outsourcing (“buy from non-keiretsu firm”). The automobilecomponents with less specificity and less interdependence (with other components required for pro-duction) are bought from non-keiretsu suppliers. As the specificity and interdependency of the partsincrease, they are more likely to be supplied by keiretsu suppliers. Finally, parts with the highestspecificity and interdependence are produced in-house. The result is quite consistent with a trans-action cost model, which the authors develop to include keiretsu outsourcing. They also find weakevidence suggesting that difficulty in assuring the quality of a component affects the make–buy–keiretsu decision. When it is easy to assure the quality of a component, it is more likely that thiscomponent will be procured from a non-keiretsu supplier than from a keiretsu supplier or from in-house production.

The paper by Hideshi Itoh, Tatsuya Kikutani, and Osamu Hayashida addresses the issues of “au-thority” and “accountability” in corporate groups in Japan, each consisting of a large core firm and itsnetwork of affiliated firms. The core firm of a business group may decide to delegate the authority tomember firms to utilize local information more efficiently. Such delegation of authority, however, mayresult in loss of control. To avoid this, the core firm may make the member firms with delegated au-thority “accountable” for some explicit (profit) targets. The paper studies how delegation of authorityand assignment of accountability interact with each other for Japanese business groups.

They test this theory with a data set derived from an original survey that the authors conducted forJapanese companies in the electronic industry. They find that delegated authority and accountabilityare complementary in the sense that assigning more accountability to a member firm increases themarginal return from delegating more authority to the firm. They also find that a firm performs betterwhen it has high levels of both authority and accountability or low levels of both. In other words,delegation of authority without accountability (or increasing accountability without delegation) hurtscorporate performance. Finally, the performance of firms with high authority and high accountabilityincreases with more intense output monitoring by the core firms, consistent with the theoreticalargument that increasing monitoring intensity raises the marginal return from increasing delegatedauthority and accountability.

Ola Kvaløy and Trond Olsen consider the interactions between ownership rights and incentive con-tracts theoretically. Building a model with multiple agents who engage in joint production, they showthat the principal’s cost of transferring ownership rights to the agents depends on the nature of theincentive contracts. In particular, if peer-dependent incentive contracts, such as relative performanceevaluation or full joint performance evaluation, are optimal, the principal firm is more reluctant togive up the ownership rights and allow its employees to possess considerable hold-up power. Thepaper fills a gap between the literature of multi-agent moral hazard and that of allocation of controlrights, by analyzing the effect of workers’ residual control rights when the firm faces a multi-agentmoral hazard problem.

Hirofumi Uchida, Gregory Udell, and Wako Watanabe examine the implications of the organizationof banks. They pay particular attention to the size of a banking organization and its ability to pro-cess soft information. Recent empirical research in the US has found that smaller firms borrow fromsmaller banks and smaller banks have stronger relationships with their borrowers. This is consistentwith the hypothesis that small banks have comparative advantage in processing soft information and

Editor’s Introduction / J. Japanese Int. Economies 22 (2008) 143–145 145

providing relationship lending. Using a Japanese data set, Uchida, Udell, and Watanabe also find thatsmaller firms tend to borrow from smaller banks and that smaller banks have stronger relationshipswith their borrowers. However, they find that less transparent borrowing firms (those who do not fileaudited financial statements) are no more likely to borrow from small banks than more transparentfirms, suggesting that the comparative advantage in processing soft information is probably not thereason small banks lend to small firms.

The paper by Paul Oyer studies the organization of a market rather than a corporation. The fo-cus here is the market for PhD economists. Compared with other professions, the types of jobs thatPhD economists hold can be easily categorized and they have a clearly observable productivity mea-sure (publications). The paper starts with a two-period model to motivate an empirical analysis ofeconomist job matching upon graduation, matching ten years later, and productivity in the first tenyears. The empirical analysis shows that matching to a higher ranked institution affects productivity.The analysis also reveals that employers improve their estimates of economists’ ability early in theircareer in a way that determines longer-term job placement. Finally, although employers’ predictionsabout new graduates’ abilities are not perfect, they do not seem to make systematic mistakes either.For example, they appear to appropriately value the signal of graduating from the most prestigiousgraduate schools.

We thank Martin Feldstein of NBER, Richard Portes of CEPR, and Sadao Nagaoka of TCER for theirsupport of the conference. We appreciate support from the Hitotsubashi University 21st Century COEprogram Dynamics of Knowledge, Corporate System and Innovation. We appreciate the administrative as-sistance provided by Carl Beck and Brett Maranjian of the NBER and Noriko Morimoto of the Instituteof Innovation Research of Hitotsubashi University. We are most grateful to the authors for their con-tributions, as well as to the discussants, Reiko Aoki, Makoto Hanazono, Daiji Kawaguchi, Hideo Owan,and Ayako Yasuda, all of whom made the conference stimulating and enjoyable. Finally, we thank ouranonymous referees.

George BakerHarvard Business School, USA

NBER, USA

Takeo HoshiUniversity of California, San Diego, USA

NBER, USATCER, Japan

Hideshi ItohHitotsubashi University, Japan

TCER, Japan

Available online 15 April 2008