Coordination of plant investment in the petrochemical industry

Abstract

The purpose of this paper is to describe how coordination of plant investment in the petrochemical industry by the Ministry of International Trade and Industry (MITI) did not achieve its originally intended function.In 1967, MITI established a 300,000 ton standard for annual production of ethylene in order achieve economies of scale and strengthen international competitiveness. This standard sets the minimum size for new ethylene manufacturing facilities at annual production of 300,000 tons. In this way, MITI aimed to avoid overcapacity and consolidate investment. Part of the background behind establishing this standard was the ulterior motive of leading firms, who wished to block the entry of relatively weak latecomer firms.The intentions of MITI and the leading firms were realized comparatively well, based on the 300,000 ton standard, in initial coordination of plant investment. Facility construction was only approved for 5 companies, primarily leading firms. Furthermore, the scale of investment in the overall industry was restrained at a smaller scale than would have been the case had each firm invested freely.However, demand for petrochemical products subsequently increased more than expected, resulting in a situation different from that which was originally intended. In later coordination of plant investment, MITI concluded that it was necessary to construct more facilities to satisfy future demand, in response to the growth in demand at that time. Accordingly, new facility construction by 4 companies was gradually recognized. Due to growth in demand, MITI's policy of blocking the entry of latecomer firms lost its legitimacy. In the final phase, MITI recognized active construction of new facilities to match the increase in demand.