Keiretsu Definition

Cite this article as:"Keiretsu Definition," in The Business Professor, updated March 20, 2019, last accessed October 20, 2020,


Keiretsu Definition

Keiretsu is a Japanese word referring to the modern formation of major firms in Japan. These are generally businesses that acquire stock and merge with other firms to conduct the same projects.

Major firms in Japan were managed by families that were very powerful. At a time when the United States of America took over Japan and reviewed its body of laws after the World War II period, the US Government came up with ways through which they keep these families in control. This portrayed the United States as undemocratic and monopolistic. This is what marked the formation of Keiretsus which is composed of a small group of Japanese companies. These companies at some point share similar names.

Keiretsus is still reflected in key aspects of the Japanese economy. For instance, every one of the six-car firms in Japan is a member of at least one of the major six keiretsus. The same is true in the case of electronic firms in Japan.

A Little More on What is Keiretsu

Keirestsus are the major suppliers of products around the globe. One of the famous distributors is Mitsubishi which was at one point responsible for the manufacturing of A6M Zero aircraft that were used to fight during World War II. The current keiretsu has the Bank of Tokyo-Mitsubishi representing it at the top. Mitsubishi Trust and Banking and Mitsubishi Motors are also major parties, followed by Meiji Mutual Life Insurance Company that gives insurance to all the participants of keiretsu. Mitsubishi Shoji is the trading firm representing Mitsubishi keiretsu.

Much as firms belonging to keiretsu work in separate industries, they normally assist each other and perform as business associates in other regions.

For instance, banks at some point take a little percentage ownership in the stock of their members of the keiretsu while on the other hand, these members take some ownership of the bank stock. This creates a connection in the cases where a member firm takes a loan from the bank that is a member of the keiretsus. This established connection permits the bank to keep track of the borrowing, control customers, enhance relationships and assist with challenges encountered in the networks of the supplier.

This method also puts a hindrance to the competition in the keiretsu which discourage outsiders from engaging in company takeovers.

Keiretsus leads to real collaboration, less cost and sharing of data within suppliers, employees, and customers. This in return encourages the faster making of the decisions pertaining to investments.

Nevertheless, critics partially believe that keiretsus cannot regulate the changes in the market fast enough because of their small sizes hence enough profits cannot be realized in these investments.

In addition to this, the lack of competition found in the keiretsu has led to incompetency hence not producing the desired results.

In addition, due to the ready access to capital by directors from banks that are members of the keiretsus, they may borrow excess loans and make use of risky strategies that a firm relying on outside capital would not engage in.

Reference for Keiretsu

Academic Research on Keiretsu

  • Does Governance Matter? Keiretsu Alliances and Asset Specificity as Sources of Japanese Competitive Advantage, Dyer, J. H. (1996). Organization science, 7(6), 649-666. This survey portrays how the competitive advantage of Japan has been partial as a result of the variance in the governance and co-specialization of assets within the firms. The outcomes suggest that the automotive companies in Japan have earned an upper competitive edge compared to their competitors in the United States. This has been attributed by the use of the hybrid governance in Japan which encourages greater co-specialization in the firm and lower cost of doing business compared to the value chains within the United States. These outcomes reinforce transaction cost theories which propose that matching the structures of governance with transaction cost leads to the benefits of efficiencies. In conclusion, hybrid governance is more efficient compared to hierarchical governance and that the cost of transactions does not grow with the expansion in the asset.
  • How Chrysler created an American keiretsu, Dyer, J. H. (1996). Harvard Business Review, 74(4), 42. This article is concerned with highlighting to us the avenues that were used by Chrysler to create a Japanese like keiretsu in America, which was commonly referred to as the American keiretsu
  • The governance structure of the Japanese financial keiretsu, Berglof, E., & Perotti, E. (1994). Journal of financial Economics, 36(2), 259-284. This article investigates how the governance structure in the Japanese keiretsu can be maintained over time. The author suggests how managers can be controlled by use of coalition-enforced threats. However, this threat is not very effective which moves the governance structure to the hierarchical model under the leadership of the bank
  • Understanding the Japanese keiretsu: Overlaps between corporate governance and industrial organization, Gilson, R. J., & Roe, M. J. (1993). Yale Law Journal, 871-906. This paper is concerned with how Japanese keiretsu can be well understood. The author finds out that the system of Japanese does not only enhance relationships amongst its senior managers, its shareholders and the corporation but it also efficient production.
  • Keiretsu networks and corporate performance in Japan, Lincoln, J. R., Gerlach, M. L., & Ahmadjian, C. L. (1996). American sociological review, 67-88. This survey is conducted on 197 big Japanese companies for a period of 24 years with the aim of finding how returns are influenced by the integration of firms in the major six keiretsu networks. The author evaluates how steps of commercial and financial dependence on keiretsu group can by looking into the past studies which argued that independent firms had higher profitability than keiretsu group firms. The article singles out one membership group called Shacko-kai which shapes the process of intervention, Shacho-kai membership seems like an almost sufficient state for the redistribution. According to these shacho-kai companies, the governance ties have no positive influence on the intervention odds. On the other hand; firms without shack-kai ties have a strong impact on such odds of redistribution. In conclusion, the findings argue how the processes of redistribution impacts on both the strong and weak members with zero influence on average performers.
  • Keiretsu networks in the Japanese economy: A dyad analysis of intercorporate ties, Lincoln, J. R., Gerlach, M. L., & Takahashi, P. (1992). American sociological review, 561-585. In this paper, information from the best 50 financial firms and 200 corporations both members of keiretsu are analyzed. The author finds out that companies with commercial and financial links tend to form quasi-administrative links through the transfer of managers and cross-shareholdings. In addition to this, Keiretsu networks have two aspects namely horizontal links of mutual support and vertical aspects of control and asymmetric exchange.
  • The location of Japanese investments in China: Agglomeration effects, keiretsu, and firm heterogeneity, Belderbos, R., & Carree, M. (2002). Journal of the Japanese and international economies, 16(2), 194-211. This article is determined in finding out how the choices of location by Japanese electronics manufacturers in China in the period of 1990-1995 influenced the general industry. The author finds out that small scale businesses are very sensitive to Japanese agglomeration and consider places near Japan, unlike large enterprises. In addition, plants that focus on exports respond more to Japanese keiretsu compared to plants that are focused on the local market.
  • Keiretsu, governance, and learning: Case studies in change from the Japanese automotive industry, Ahmadjian, C. L., & Lincoln, J. R. (2001). Organization Science, 12(6), 683-701. This article investigates some recent emergence of Japanese parts supply keiretsu. It is claimed that keiretsu correlations are changing from hybrid governance to the top-down administration. The changes in supply-purchase relationships can be attributed to the kind of transaction and the change in the governance model of keiretsu. One evidence showing how Japan has moved to the hierarchical style of management is how they manage transactions in the Toyota parts supply. Toyota has remained to control a bigger percentage in its transaction with Daihatsu while its approach towards Denso who was considered a long term partner was completely different.
  • Japan’s corporate groups: Collusive or competitive? An empirical investigation of keiretsu behavior, Weinstein, D. E., & Yafeh, Y. (1995). The Journal of Industrial Economics, 359-376.  The article utilizes information from manufacturing companies quoted on the Tokyo Stock Exchange to establish in case there is a difference in the behavior of keiretsu member companies and the ones that are not members. The finding goes against the hypothesis/believes that firms merge so that they can earn returns. It proceeds to highlight how difficult it is to penetrate the market with strong keiretsu membership.
  • Power dependence, diversification strategy, and performance in keiretsu member firms, Kim, H., Hoskisson, R. E., & Wan, W. P. (2004). Strategic Management Journal, 25(7), 613-636. This paper views keiretsu as a system that relies on power and how the benefits arising from keiretsu membership vary from one firm to another. Less powerful keiretsu companies are usually monitored strongly and focus on profitability. On the other hand, powerful keiretsu mainly focus on growth.
  • Shareholding in the keiretsu, Japan’s financial groups, Flath, D. (1993). The Review of Economics and Statistics, 249-257. Those who largely borrow from firms linked to keiretsu do so if the firms got a high debt to equity ratio, high chances of expanding and weaker collateral security amongst others. In addition, holding more stock encourages high borrowing amongst member firms.
  • Private equity financings in Japan and corporate grouping (Keiretsu), Kato, K., & Schallheim, J. S. (1993). Pacific-Basin Finance Journal, 1(3), 287-307. The article brings out how stock market in Japan responds to the announcement of privacy issues arising from the equity. The results reveal a positive placement of this private equity just like in the United States The paper finally examines two types of firms i.e those that are keiretsu members and the ones that are not members. The results match the perception that keiretsu firms benefit shareholders more.

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