The Changing Transactional Relations between Japanese Manufacturing Firms and Their Parts Suppliers: A Geographical Perspective

Abstract

The aim of this paper is to consider the change of transactional relations between manufacturer and supplier in Japanese machinery industries, and its spatial implication.A transaction costs perspective defined by Scott (1988) has been much discussed in the literature on industrial geography. This perspective states that vertical disintegration promotes locational agglomeration because external transaction costs increase with geographical distance. But transaction costs do not depend only upon geographical distance. Trust between both parties can also reduce transaction costs. Sako (1992) classified trust into three types: contractual trust, competence trust, and goodwill trust. She defined contractual trust as the adherence to specific written or oral agreements and competence trust as the expectation of a trading partner performing its role completely. Goodwill trust refers to mutual expectations of open commitment, defined as the willingness to do more than is formally expected. She also argued that the manufacturer-supplier relations in typical Japanese machinery industries relied on goodwill trust. Since the proximity of cultural distance (e. g., commonality of social norms, transactional practices, codes of communication) facilitates the creation of goodwill trust, such transactional relations need the proximity of cultural distance.However, external shocks in the 1990's, (e. g., a rapidly changing exchange rate and trade friction) made manufacturers increase international procurement. The increase in international procurement will be accompanied by a change in the nature of transactional relations, as described above.The first question in this paper is whether a hypotheses (Table 1) advocated by Mizuno (1997), which states that a manufacturer tends to procure design-supplied parts on a regional scale, design-approved parts on a national scale and marketed goods globally, is applicable to machinery industries other than the automobile industry.The second question is how important mutual trust is in manufacturer-supplier transactional relations in Japanese machinery industries, and how cultural distance undermines the advantages of international procurement of parts.The third question is how Japanese machinery manufacturers in the 1990's are changing transactional relations with their suppliers with increasing international procurement.In order to examine these questions, the author conducted interviews with purchase managers of four machinery manufacturing firms from October 1996 to April 1997. The firms interviewed were Nisshin Electric, Omron, Daikin Industries and Kubota. The findings are summarized by the following three points.First, these four companies procure subcontracting parts or design-supplied parts mainly on a regional scale. The frequent face-to-face contact between the companies and their suppliers enhances technology transfer in the transaction process of these parts. The physical proximity between both parties reduces leadtimes of distribution. In the meanwhile, the procurement process of design-approved parts and marketed goods requires less frequent contact. Particularly, since marketed goods suppliers do not need the involvement of their customs in the development process, the face-to-face communication between a manufacturer and its supplier does not necessarily matter in this situation. These findings show that the hypotheses can apply to these companies.Second, the interviewed companies have somewhat increased international procurement of marketed goods and design-supplied parts in the 1990's. While these companies purchase marketed goods (e. g., electronic components) from foreign suppliers, design-supplied parts are mostly procured from Japanese affiliated suppliers and Japanese wholesalers. This is because the procurement process of design-supplied parts requires cultural proximity more than that of marketed goods.