The role of keiretsu in the global production sharing: The case of Toyota Motors

Abstract

Over the past two decades, Japanese automobile industry has experienced the growing global production sharing - a disintegration of production process in which a final product is assembled at home with intermediate goods imported from other countries. The established understanding is that foreign parts suppliers have difficulty penetrating into Japanese market due to the existence of keiretsu, a long-term and continuous business relationship between an assembly maker and its domestic parts suppliers. Given the growing globalization of the Japanese auto industry, this study aims to reexamine a role of keiretsu for auto parts imports in Japan, using the case of Toyota Motors. This study estimates a gravity model with Poisson pseudo-maximum likelihood estimator and finds that the domestic keiretsu network does not reduce imports but the global keiretsu network increases it. The additional examination supports that the global keiretsu network increases exports as well. These findings suggest that keiretsu membership reduces the cost of market entry not only in Japan but also host countries by lower transaction costs.