The kigyo keiretsu and the supplier-switching-costs in the Japanese automobile industry

Abstract

There are several views to explain why the kigyo keiretsu is organized. However, limited econometric research has been conducted on the hierarchical groupings of manufacturers, in particular the Japanese automobile industry. This paper re-examines and empirically tests a well-known hypothesis in industrial organization literature; namely, the supplier-switching-costs hypothesis. The model used here is a dichotomous probit model, similar to that used by Monteverde and Teece (1982). The evidence supports the hypothesis: the auto-maker organizes the parts-supplier into its keiretsu group if the parts-suppliers produce specific parts with high-switching-supplier's costs. Thus, the keiretsu organization mitigates existence of high switching-supplier-costs and supplier's opportunism. In this respect, the kigyo keiretsu system achieves the same end as does vertical integration.