The Division of Labor is Limited by the Extent of the Market? The Counter-case of the Okayama Farm-engine Industrial District in Japan

Abstract

The purpose of this paper is to understand how industry organization evolves under conditions of a growing market. Since Adam Smith the traditional argument has claimed that as a market grows, a vertically disintegrated industry organization evolves, and that this enhances productivity. However, the question remains whether the market alone can select an efficient industry organization. This paper analyzes a case from the Japanese farm-engine industry of the 1950s, namely the industrial district of Okayama, where the breakthrough into disintegrated production was never achieved, despite rapid growth in the domestic market for agricultural engines. This led to the collapse of the district. The analysis shows that, if vertical disintegration requires radical changes in the technological competence of each firm, the market does not necessarily offer sufficient incentives for vertical disintegration, even under conditions of a growing market.