THE EMERGENCE of the PROTOTYPE of ENTERPRISE GROUP CAPITALISM - the CASE of Mitsul

Hitotsubashi Journal of Commerce and Management 20 (1985) pp. 63-104. C The Hitotsubashi Academy

THE EMERGENCE OF THE PROTOTYPE OF ENTERPRISE GROUP CAPITALISM - THE CASE OF MITSUl -

SEIICHIRO YONEKURA*

Introduction

The strategy and structure of the Japanese enterprise groups have been a topic of in- telest in many fields because of the rapid development and the strong performance of the Japanese economy. In a recent global comparison of business development, Japanese enterprise group capitalisml has been analyzed.2 However, the historical development of enterprise capitalism and especially the differences and similarities between the pre-war zaibatsu and the postwar enterprise group (kigy6-shadan and keiretsu) have not yet been clearly examined. Generally speaking, the similarities and differences between zaibatsu and kigy6-shadan are listed as follows:3

Similarities : a) Both of them have integrated a financial institution, such as a bank, a general trading company (so~g5-sh5sha), and a manufacturing company into a group. b) The large firm consists of many firms under an umbrelia (keiretsu). c) Both of them have dominated and led the Japanese economy since the Meiji Restoration (1 868).

Differences : a) The capital control structures are different from each other. In zaibatsu, the capital control structure was vertical (pyramid structure) and centralized by the holding company. But in kigyd-shtidan, the interlocking directorate and shareholding has been developed into a horizontal and decentralized control system of management and capital. The control pattern over the subsidiaries and

* The author would like to thank professors A. D. Chandler, Jr., A. M. Craig, S. Ericson and B. Waka- bayashi for useful and constructive comments. Also special thanks to Rachel King for her great and patient help. * The international comparison of business development in the United States, Britain, Germany and Japan had been developed by Professor Alfred D. Chandler, Jr, and his colleagues at Harvard Business School, and the Business History Seminar which focused on the international comparison during September 1981~85 has been held by them. The author studied many useful conceptual frameworks from Prof. Chandler and the seminar The concept of enterprise group capitalism is one of these things. ' The discussion paper, "Industrial Group Capitalism and the Japanese Enterprise System," was presented by W. M. Fruin at the Business History Seminar at Harvard Business Schoo] in December 1984. ' H. Okumura, Nihon no Roku-Dai Kigyo-shudan (Six major Business Groups in Japan), Daiyamondo- sha, 1976, pp. 48-50. 64' HITOTSUBASHI JOURNAL OF COMMERCE AND MANAGEMENT [December

Zaibatsu Kigy6-sh~dan

Family

Holding Group Company Member

Direct Subsidiaries Af f iliates (Keiretsu) Af f iliates

afiiiiates has been changed into a mutual control relationship. b) The family monopoly domination over the capital in the prewar zaibatsu was thoroughly abolished by the Supreme Commander of the Allied Powers, and in the postwar kigy5-shtidan the interlocking directorate, interlocking shareholding and the group presidents meetings control and coordinate the business activities as a whole. c) The financial power of a bank within a kigy6-shtidan is much stronger than in a zaibatsu, because the bank has taken the place of the power of the zaibatsu family or that of the holding company.

As we see from this list, the zaibatsu group and kigy5-shtidan have great similarities in their business behavioral patterns. The most distinguishing difference between them is that in zaibatsu the family domination depends upon the holding company system while in kigyd- shtidan (enterprise group) the corporate mutual domination depends upon the interlocking directorate and shareholding. That is the difference between the pyramidal structure and the circular structure of the managelial and capital control as we see in the chart. This difference is also very significant to understand the long term orientation of Japanese firms, because the mutual interlocking shareholding system makes them to pursue long term strategy without concerning short term interest of independent shareholders.4 In this paper, in order to understand when, how and why these similarities and differences emerged in the Japanese economy, the historical development of the managerial and capital structure of the Mitsui zaibatsu (the largest and most dominant business group in pre-war Japan) will be examined. In the first chapter, the development of managerial structure will be examined. From .this examination, we will understand that the interlocking directorate was developed to complement the incompleted managerial structure for the expanding business group in the Mitsui zaibatsu. Chapter 11 will discuss the establishment of Mitsui Gomei as the holding company in 1909. This chapter will show that the centralized structure and family dominance of capital control in the Mitsui zaibatsu were established by 1910. Chapter lll will discuss the so~gd-sh5sha, one of the most important devices in business group formation. Specifically, the development of Mitsui Bussan as so~gd-shosha, and the

' Ibid., p. 21. 1985] THJ3 EMERGENCE OF THE PROTOTYPE OF ENTERPRISE GROUP CAPITALISM. THE CASE OF MITSUI 65 way how it organized industries and integrated the affiliated firms into business group will be analyzed. Chapter IV will present the case of so~g6-sho~sha and Onoda Cement as example of the relationship between so~g5-shdsha and its affiliated firms. In these chapters, we will see the emergence of prototype of keiretsu (affliated) and understand the important role of so~g5-sh5sha for keiretsu formation. Finally, the relationship between the collapse of Mitsui Gomei as the holding company system and the emergence of the interlocking shareholding system in the Mitsui zaibatsu will be explained.

I. The Historical Development of the Managerial Structure in the Mitsui Zaibatsu (1868-1909)

In contrast to American business, Japanese big business invested its resources in diversification from the early stages of industrialization. This is because Japan had to concentrate its scarce capital and resources on several big businesses, in order to compete with Western World. Zaibatsus were the typical result of such concentration and diversification.5 The Mitsui zaibatsu diversified at the beginning of the Meiji era (1868-1912) and strug- gled to establish an adequate managerial structure for its diversified business. In order to understand the development of this managerial structure and its uniqueness (interlocking directorate), it is necessary to look briefly at the business history of Mitsui and the evolution of its management structure.

(1) The Pre-modern Era (1671~1868) The business history of the Mitsui family began in 1672 when the founder Takatoshi Mitsui started a traditional clothing wholesale and retail store (gofuku-ya). In 1683, using the wealth accumulated through the business he started a money-exchange business (ryo~gae- ya). He expanded these two businesses with an innovative retailing system6 and with the financing of the Tokugawa government and local lords (daimy6). In 1691 he was designated as authorized financier by the government. The Mitsui family grew to be one of the wealth- iest merchant families in Japan before the Meiji Restoration (1868). It should be noted that during the Tokugawa period the family developed a complicated managerial structure for its expanded business. This was the dmotokata system-a kind of centralized managing system.7 They also separated ownership from management by using banto (non-family and salaried manager) system and precise book-keeping meth-

5 H. Morikawa, "Management Structure and Control Devices for Diversified Zaibatsu Business," in K Nakagawa, ed., Strategy and Structure ofBig Business, University of Tokyo, 1978, p. 45. 6 S. Yasuoka, Zaibatsu Keiseishi no Kenkyu (The Study of Zaibatsu Formation), Mineruba Shobo, Kyoto, 1970, pp. 193-196. The founder Takatoshi Mitsui innovated the large scale wholesaling for the nation- wide retailers and the over-the-counter dealings with tag-price which had not yet been done on a large scale in the seventeenth century Japan. He also introduced a visual advertizement by using nishikie (a kind of ukiyoe). 7 Ibid., pp. 197-214. 66 HITOTSUBASHI JOURNAL OF COMMERCE AND MANAGEMENT [December ods.8

(2) The Great Reform of Minomura (1868-1880)

After the end of the Tokugawa period, Mitsui strove to renovate its family and business structure in order to survive and adapt itself to the newly modernized society. First of all, in order to overcome the financial crisis caused by the collapse of the Tokugawa economy, the Mitsui family hired a highly talented manager, Rizaemon Minomura, as the bant6 from outside of the Mitsui family and business. Anticipating the conditions of the time, he gradually led Mitsui away from the Tokugawa government towards the new Meiji government. After the Meiji Restoration, he cooperated with the new government and its politicians (especially Kaoru Inoue, one of the dominant figures in Meiji politics and business) by pro- viding them with financial services. Minomura modernized Mitsui's managerial structure. He tried to separate the Mitsui house (the family) from the Mitsui-Gumi (the business) and to re-establish the dmotokata as a kind of central corporate office. He did reorganize the money-changing business (Mitsui-Gumi) in 1876 into Mitsui Bank (the first private bank in Japan with ~~~2 million in capital) under the guidance of Inoue. He was appointed vice-president of the bank (the top manager in the real sense, because the president was nominally chaired by the family head). In establishing Mitsui Bank, he separated the traditional clothing retail store from Mitsui's main business as an independent partnership (Mitsukoshi) according to Inoue's advice, because at that time this retailing business had many unhealthy transactions with old customers and the government officials. Immediately following Mitsui Bank's open- ing, Minomura and Inoue combined Mitsui's domestic trading establishment (kokusan-kata) with the Senshu Company into Mitsui Bussan. The Senshu Company had been established by Inoue with Takashi Masuda as the forerunner of the general trading company in 1874. Although this company had earned large profits in the rice trade, it was dissolved when Inoue returned to his cabinet post. When Mitsui Bussan was established, Minomura asked Takashi Masuda, the former vice-president of the Senshu Company, to take over its management. Beginning this new business, however, the Mitsui family did not risk establishing Mitsui Bussan as the main family business, instead, started it as a separate partnership of two young members of the family who had no right lo inherit the family fortune so that the family could avoid taking any responsibility in case it went bankrupt. They did not invest any money in this company either; they simply allowed Mitsui Bank to lend it up to ~50,000.9 At that time, nobody anticipated that this trading company would become the largest general trading company and would later lead to the prosperity of the Mitsui zaibatsu. In 1876, Minomura fell sick and died in the next year, Ieaving behind a modernized banking house and unfinished reforms of the Mitsui family and business structure. After

' N. Nishikawa, "Edojidai ni okeru Mitsui Omotokata no Kaikei," S. Yonekawa and M. Hirata, ed., Kl~yo Katsudo ,10 Riron to Rekishi, Chikura-shobo. Tokyo, 1982, pp. 213-236. As A. D. Chandler, Jr. says, the advanced bookkeeping had contributed not only to the accounting in firms, but also to the control and coordination of firms (A. D. Chandler, Jr., Tlle Visible Ha,Id. Belknap Press, Cambridge, MA, 1977, pp. 109- 120). ' Nihon Keieishi Kenkyujo ed., Kohon Mitsui Bussan Kabushikigais/1a Hyakunen Shi (A hundred year history of Mitsui Bussan), vo]. l, Nihon Keieishi Kenkyujo, Tokyo, 1978, pp. 55-56. 1985] THE EMERGENCE OF THE PROTOTYPE OF ENTERPRISE GROUP cAPrrAus,¥f, THE CASE OF MITSUI 67 his death his plan for the strict separation of the ownership and management was emas- culated by the family members who were frustrated by his plans. Mitsui Bank, having lost Minomura's strong leadership, increased its bad debts to politicians and the family's connections,ro After the death of Minomura, Takashi Masuda became one of the men who led the Mitsui family and business. He managed Mitsui Bussan and expanded its international trade, particularly its coal exports. After 1879 Mitsui Bussan made an exclusive sales contract (itte 1lanbai-ken) with the government-owned Miike coal. Bussan's coal exports rapidly grew from 2,700 tons in 1877 to 183,700 tons in 1886. In 1888 when the Meiji government announced its intention to sell the Miike mines to private enterprise, Masuda, who realized their potential, persuaded the Mitsui family and bankers to enter the fierce competitive bidding for the mines with Mitsubishi. It is a famous story that Mitsui bought the mines for about ~4.5 million, after outbidding Mitsubishi by only ~i~2,300. At that time, the industry participants said Masuda was crazy to pay ~~4,5 million for such a mine. When Mitsui purchased the Miike mines, Masuda insisted on hiring the chief government engineer for the Miike mines, Takuma Dan. Masuda was sure that Dan, who had graduated from the Mineralogy Department at the Massachusetts Institute of Technology, was the best engineer in Japan in those days. Masuda said that Dan was included in the ~~~4.5 million.n In fact, Iater Dan also played a part in leading the Mitsui zaibatsu as chairman of the central office. The Miike mines were jointly controlled by Bussan and the Bank. While Masuda expanded Mitsui Bussan as a large general trading company, he hired many talented college students from Sh5h5-Ko~shujo (later Tokyo Commerce College and Hitotsubashi University),12 These accumulated human resources would later develop and modernize the diversified Bussan's business.

(3) The Modernization and Industrialization of Nakamigawa By 1890, increasing bad debts worsened Mitsui bank's financial state. Kaoru Inoue forced the bank to hire Hikojiro Nakamigawa as vice-president to reform the barik's management and the Mitsui business combined in 1891. Nakamigawa (1857-1901), who was a nephew of Yukichi Fukuzawa, the famous leader of the bunmeikaika (the enlightenment movement) in Meiji Japan, had managed the Sanyo Railway since 1888.13 In order to reform Mitsui's business, he began to establish a temporary headquarters which would develop the basic reform policy and coordinate Mitsui business activities. In December 1891, he organized a kari-hyo~gikai (temporary council), which consisted of eight family members, the seven chief executive officers of each business (including Masuda and Naka- migawa), and Eiichi Shibusawa who was one of the most important business leaders in Meiji Japan as well as a business advisor to Mitsui. Nakamigawa integrated the two separate partnerships, Mitsui Bussan and Mitsukoshi gofuku-ten, into the principal business of Mitsui. While he was reforming Mitsui's management, he also employed many college students from Keio College, the school his uncle Fukuzawa had founded. Due to such human resources

*" Yasuoka, op. cit., pp. 326-328. ** Nihon Keieishi Kenkyujo, op, cit., p. 128. *' Ibid., p. 60. *3 T. Yui, "The personality and Career of Hikojiro Nakamigawa, 1887-1901," Busmess Hlstory Revrew Spring 1970. Harvard Business School, Boston. MA, pp. 39-61. 68 HrroTSUBASHI JOURNAL OF COMMERCE AND MANAGEMENT [December

TABLE I . THE DISTRIBUTION OF THE PARTNERSHIP IN 1 893 Bank Bussan Min ings Gof ukuten Head House Hachirouemon x Main House Motonosuke x Main House Genuemon x Main House Takayasu X Main House Hachirojiro x Main House Saburosuke X Branch House Fukutaro X Branch House Morinosuke x Branch House Takenosuke X Branch House Younosuke x Branch House Tokuemon x

Spouce: Shigeaki Yasuoka, Zaibatsu Keiseishi no Kenkyu, p. 403 .

TABLE 2. THE INTERLOCKING DIRECTORATE IN MITSUl IN 1894 Mitsui Motokata Mitsui Bank Chairman Mitsui, Hachiroemon Pres i dent Mitsui, Takayasu Managing-Conunitteeman Nakai, Sanpei Managing-Director Nakamigawa, Hikojir0$ Committeeman Nishimura, Torashiro* Director Nishimura, Torashiro* Masuda, Takashi* Masuda, Takashi* Nakamigawa, Hikojiro* Minomura, Risnke Mitsui Bussan Mitsui Mining President Mitsui, Motonosuke President Mitsui, Saburosuke Managing-Director Masuda, Takashi* Managing-Director Dan, Takuma Director Mitsui, Yonosuke Director Asada, Sauemon Magoshi, Kyohei Mitsui, Hachirojiro Ueda, Yasujiro Masuda, Takashi* Nakamigawa, Hikojiro* Nakamigawa, Hikojiro* Source : Shigeaki Yasuoka, op, cit. , pp. 406~09. * means "interlocking." accumulated by Masuda and Nakamigawa, people called Mitsui "strong in human resources," while calling Mitsubishi, "strong in organization." After the promulgation of the Meiji Constitution in 1890, the government announced that the Civil Law and the Corporation Law would be promulgated by 1893. Responding to this announcement, Nakamigawa reorganized Mitsui Bank, Mitsui Bussan, Mitsui Mines and Mitsui Gofuku-ten into G6mei-Gaisha (a legal unlimited partnership) in 1893 according to the law,14 Therefore the partnership was carefully distributed among the eleven houses of the family to prevent the whole family from going bankrupt (as Table I indicates). At the same time the managing director system, with the nominal family president, was introduce to Mitsui. The officers of motokata (administration offlce of the family) and directors of the three big business (the Bank, Bussan and Mining) were interlocked, Naka- migawa was Managing Director of the Bank as well as a Director at Bussall_a..nd_Mining, Masuda was Managing Director of Bussan as well as a Director of the Bank and Mining

*' Yasuoka, op. cit., pp. 399~04. According to the Law, a limited corporation could not register its corporate name as a proper name, such as Mitsui. 1985] THE EMERGENCE OF THE PROTOTYPE OF ENTERPRISE GROUP CAPITALISM, THE CASE OF MITSUI 69 as Table 2 shows. In this reorganization, however, an explicit central organization which could control and coordinate the whole business combine was not established. Instead, in order to control and coordinate each business which developed independently, Mitsui interlocked the directors, especially Masuda and Nakamigawa. Instead of a central control organization, Nakamigawa reorganized the Temporary Council into the do~zoku-kai (the Mitsui Family Council) consisting of the family members and directors of each business. The do~zoku-kai became the highest decision-making or*'an, concerned with finance, investment management and personnel matters. After settling the bad debts of the bank, Nakamigawa actively invested in various modern industries, such as silk and cotton-spinning mills, electric manufacturing and mining (the so-called Nakamigawa's industrialization policy at Mitsui). In 1894 he established the Industrial and Real Estate divisions. The industrial division managed all the factories which were merged or foreclosed by the Bank. The Real Estate Division controlled the non-commercial estates ~ossessed by the Mitsui family. To manage these expanding and complex businesses, Nakamigawa established Mitsui sh6ten njikai (the Board of Directors of the Mitsui companies) in 1896. Behind the creation of this Board in addition to do~zoku- kai, there was a strong desire on the part of Nakamigawa to separate the Mitsui Family from the business.15 (The organizational chart at Mitsui at that time is described in Figure

1 .) Shdten Rljikai not only coordinated the overall business policy of the four companies and two departments but also inspected and approved their individual policies. It can hardly be called the central corporate office, however, because the members of the board were representatives of each company and there were too many conflicts among the oper-

FIGURE 1. THE ORGANIZATIONAL CHART OF THE MITSUI ZAIBATSU IN 1893

莇■o庖伽（Family Comcll） Famlly M‘耐bor昌目nd Direoto周

∫伽刎肋伽三〃o他加他工Board of Dlr㏄to祀〕｛The Admini5㍑窩ti、・e Office of the Family〕

Gofuku B目nk 1ヨ㎜n Mml㎎ lndu…tria1庇P

Oji P目p酊Co．Ltd．

Kanebo Co甘on M1lls

L 〉 Shibau胞Mmufacturmg L N昭o｝a T㎞ead MH1冨今 Mie Thread Mll1昌

Tomioka Thr閉d MIms

0昔aki Co甘on SPinm㎎Ml11昌

M舵b目shi Co肚on SPimi㎎Mnls

shinmachiO』；｝…，一｝q；1L貝ni［n一刊｝M111o Snk Spi~nmg hl,us Source: Kazuo Shibagaki, Nihon Kinyu Shihon Bunseki, p. 210 and Shigeaki Yasuoka, op. cit., p. 465.

15 Ibid., p. 419. 70 HrroTSUBASHI JOURNAL OF COMMERCE AND MANAGEMENT [December ating companies to make a policy for the Mitsui business combine as a whole. Nakami- gawa's industrialization policy, for example, confiicted with Bussan's commission business policy because cotton-spinning mills, which were important customers for Bussan's international trade, became serious competitors of the Industrial Department's mills, Iike Kanegafuchi Cotton Spinning Co. Ltd. (Kanebo). Nakamigawa's radical industrialization policy conflicted especially with Masuda's commercial policy. Masuda was rather conservative and preferred commission business to industrialization. In 1898, the distributed partnership of the four businesses was changed. This change reflected the enactment of a new Civil Law.16 The eleven family houses participated equally in each partnership in the following investment ratios: Sdry5ke (the family head house) : 23.0~ x 1=23.0~ Five Honke (the main houses) : l 1.5~~ x 5=57.5~ Five Renke (the related houses) : 3.9~ x 5= 19.5~

In 1900, the new Mitsui Family Charter (Mitsui-ke Kaken) was established. This Charter was not only the private family charter but also the articles of association of the Mitsui business combine. Until the end of World War II, this charter played an important role as the constitution of Mitsui.17 According to the Charter, the name of shoten njikai (the Board of Directors) was technically changed to el~y5ten ju~yakukai (the Board of Directors of the Mitsui frms). In November 1899 Nakamigawa suffered an attack of kidney disease and died in Oc- tober 1901, still struggling to industrialize the Mitsui business combine. In his last years his radical industrialization and plans for the further separation of ownership and management had conflicted even with the views of his mentor, Kaoru Inoue.18 In addition, because of the unprofitability of the Industrial Division, his industrialization was criticized by Mitsui business directors. The year following Nakamigawa's death, the kanribu (Supervisory Department) was established within the do~zokukai (Mitsui Family Council). The kanribu was established to supervise the el~ydten ju~yakukai (the Board of Directors of the Mitsui firms), because, as mentioned above, the directors of each operating firm who were interested in the day-to-day business of their own ~rms could not function for the sake of the Mitsui business combine as a whole.19 Another reason was the reaction of the family against Nakamigawa's policy to separate ownership and management.ao The kanribu consisted of family members, some of whom were also presidents, and the managing directors of the four firms-the Bank, Bussan, Mining, and Gofukuten. Then the Family could have a say at the meeting again. In addition, the silk and cotton mills, which Nakamigawa had invested in, were sold very cheaply in 1901. Shibaura Manufacturing (it produced electric machinery, generators and appliances) and Mitsui Gofukuten were also separated from the main business in 1904. The same year, in order to avoid a dual structure of kanribu and eigydten ju~yakukai, the latter was abolished. Thus after the death of Nakamigawa, the Mitsui family, Masuda and Inoue slowed the industrialization and became much more

16 Ibid., p. 430. IT H. Matsumoto, Mitsui Zaibatsu no Kenkyu, Yoshikawa Kobunkan, Tokyo, 1979, p. 17. 13 Yui, op. cit., pp. 53-54. l9 Morikawa, op. cit., pp. 53-55. 20 Yasuoka, op, cit., p. 508. 1985] THE EMERGENCE OF THE PROTOTYPE OF ENTERPRISE GROUP CAPITALISM THE CASE OF MITSUI 71 conservative. Partly because of this change and slowness, Mitsubishi, which had aggressively launched a heavy industrialization program, caught up with the Mitsui zaibatsu.21 So far, we examined the historical development of managerial structure in the Mitsui zaibatsu. By turn of the century, the Mitsui zaibatsu was unable to establish the appro- priate central corporate ofnce for its business combine. In order to complement this weak- ness, it interlocked the directors, especially two key persons, Masuda and Nakamigawa. This system is quite contrasting to the American large corporations' experience. In the United States, Iarge corporations established the centralized managerial structure, in order to control and coordinate a large volume of transaction, as well as cope with the anti-trust movement. Thus a separate corporate office decided on a corporate strategy as a whole, instead of day-to-day business operations.22

II. The Establishment Of Mitsui Gomei

(1) Mitsui Gomei as the Holding Company Throughout the Sino-Japanese War (1894-1895) and after the Russo-Japanese War (190l~l905) the Japanese economy, as well as the Mitsui business combine, developed rapidly. Table 3 shows how Mitsui's three big businesses expanded during this period. This rapid growth made renovating the Mitsui's management structure inevitable, since these three firms had become too large and too risky to manage under an unlimited partnership. In addition, the income tax on private partnership companies would be increased by the government. In 1907, Saburosuke Mitsui, who was the department head of the kanribu and Takashi Masuda, the managing director of the kanribu went to Europe and the United States to investigate the managerial structure of wealthy western families. They visited and received much advice from the Rothchilds, Gibbs, Krupps, Vanderbilts and Morgans.23 After this investigation, the Mitsui family decided to incorporate their business and to adopt the holding company system to control their incorporated firms,

TABLE 3. THE DEVELOP*MENT OF BIG THREE SUBSIDIARlrs (1897-1913) Mitsui Bank Mitsui Bussan Mitsui Mjning Total Total Year DepositTotal Index Total Loans Index Sales Index Output Index (fl ,OOO) (Yl ,OOO) (f I ,OOO) (1 ,OOO tons) 1897 25,064 100 20,405 100 53,729 100 633 100 1901 29,048 1 1 6 18,469 91 74,298 1 3 8 l ,224 1 93 1905 49,388 197 35,232 173 1 80,894 3 3 7 1,859 294 1909 86,162 344 72,827 357 223,742 416 2,657 420 1913 92,233 368 85,618 420 402,041 748 4,056 641 Source : Hiroshi Matsumoto. Mitsui Zaibatsu no Kenkyu, p. 20.

21 Ibid., p. 509. 22 A. D. Chandler, Jr., The Visible Hand, Belknap Press, Cambridge. MA, 1977, contrastingly describes the historical development of the American management. 23 Mitsui Bunko, ed., Mitsui JI~yoshi Shiryohen, vol. 3, Mitsui Bunko, Tokyo, 1974, pp. 487-581 and Ma- tsumoto, op, cit., pp. 29-34. 72 HITOTSUBASHI JOURNAL OF COMMERCE AND MANAGEMENT [December because the holding company would not only save taxation on subsidiaries, but could also maintain family domination over the ownership. By adopting the holding company system, however, Masuda also put greater emphasis on the managerial advantage of this system. He said that the Mitsui family, by recognizing its business into limited corporations, could not only avoid unlimited risk and heavy income tax, but could also entrust professional managing directors with the complicated management of each firm.24 In 1909 the Mitsui Gomei was established as a holding company with ~~500 million capital. It was an unlimited partnership of eleven families wherein family domination over capital was main- tained. The proportions of this partnership for the eleven families was the same as before (Head House 23.0~~, Five Main Houses 1 1.5~~ x 5, Five Branch Houses 3.9~~ x 5). The proportions of the right to vote and profit distribution were determined according to these proportions of the partnership. They then reorganized Mitsui Bank and Mitsui Bussan into limited corporations, each one with ~20 million paid-in capital respectively. At the same time, the Warehousing Department of the Bank was separated and incorporated Toshin Storing Company Ltd. Two years later, Mitsui Mining was also incorporated with 20 million yen nominal capital (paid-up was ~~5 million at that time). Mitsui Gomei owned and controlled 100~ of each firms' stocks and the presidents of each firm were dominated by the family members. But the management of each firm was administered by a professional manager with the managing director system. Moreover, the directors of the firms were interlocked, as Table 4 shows. In particular, Takuma Dan participated in the management of every firm. Again the president of Mitsui Gomei (the holding company), Hachiroemon Mitsui

FIGURE 2. THE ORGANIZATION OF THE MITSUl GOMEI IN 1914

M1TSUI GOMEl PARTNERSHIP ｛Holdl㎎Comp日町｝

THE DlRECTORATE Ch肥f D1爬〔tor：Takuma D帥

KANSABu ｛Department of Con肚ollers〕

DEpt．Mヨnager：Gen－u巴mon MItsuiエControlkr of Gomei〕

Tak旧nosuke Mi笛ui‘Controller of the Bank〕 Youno言u止e Mlt昌ul｛ControHer of the Toshin〕 Tokuemon M1帖u割｛Controller ofGomEI｝ Shogoro Hat目noエDIr㏄tor of Tos11■n〕 Nag劃fumi ArIga（Coun昌elor of Gom凹〕 Ken H町a昌hl（Controller of Bu監咀n〕 Yujiro Ono｛Co耐ro1ler of the B田nk and To；hin〕 K皿mi｝osh1M固冨hlm訓Sec日on Chief of Bu鶉邊n）

SHIBAURA MFG． 0Jl PAPER MILL ヨ B M T SAKAI CELLuLOID A、 U 1 0 0NODA CEMENT N｛K S N S HOKKA工DO COAL MlNlNG （ S 1 H A N I 田nd SmPPlNG ■ N G N DENKl KAG＾KU ~' KANEGAFucHIV ＾、1口〔＾ロー1〔u－ r（TT（、一＾’1－ 1 1 COTTON MILLE and etc.

24 Matsumoto, op, cit., pp. 62~3. 1985] THE EMERGENCE OF THE PROTOTYPE OF ENTERPRISE GROUP CAPITALISM, THE CASE OF Mrrsul 73

and Takuma Dan (the managing director of Mitsui Mining) went to Europe and the United States from April to November 1910, to study the administrative methods of holding companies. In 1912, the kansabu (the department of controllers) was established within the holding company to control and coordinate these incorporated companies. The kansabu consisted mainly of the controllers of each incorporated company. The kansabu not only inspected the accounts of subsidiaries, but also had the final say in appointments and dismissals, performance evaluations of employees and the morals of the business.25 From January to July of 1914 a large bribery case was revealed involving the Navy and some of Mitsui Bussan's officers who had allegedly bribed Navy officials to purchase a warship from the British company. Consequently three executives from Bussan had to take responsibility and resign their posts. This so-called "Siemens Scandal"26 made it necessary to clear the authority and responsibility of the holding company as the central zaibatsu office. At the end of July, the njich6-sei (the Directorate) was established in the Holding Company to clear the responsibility. This directorate system was established to

TABLE 4. INTERLOCKED EXEcurIVES IN THE MITSUI ZAIBATSU IN 1914 Mitsui Gomei Mitsui Bank President Mitsui, Hachiroemon President Mitsui, Takayasu* Execut i ve Mitsui, Hachirojiro* Managing Director Flayakawa, Senkichiro* Mitsui, Saburosuke* lkeda, Shigeaki Mitsui, Takayasu* Yoneyarna, Umekichi Counselor Masuda, Takashi Director Mitsui, Morinosuke Controller Mitsui, Gen Dan, Takuma* Mitsui, Tokuemon* lida, Yoshikazu* Councillor Dan, Takuma* Hayashi, Ken Asabuki, Eiji* Controller Mitsui Takenosuke Ariga, Nagafumi Asabuki, Eiji* Ono, Yujiro Mitsui Bussan Mitsui Mining President Mitsui, Hachirojiro* President Mitsui, Saburosuke* Managing Director lida Yoshikazu* Managing Director Yamada, Naoya Watanabe, Senjiro Okamoto, Kan-ichi lwahara, Kenzo Mitsui, Motonosuke Yamamoto, Jotaro Dan, Takuma* Fukui, Kikujiro lida, Yoshikazu* Director Mitsui, Younosuke Controller Mitsui, Gen-emon* Komuro, Sankichi Hatano, Shougoro ffayakawa, Senkichiro* Asabuki, Eiji Controller Mitsui, Tokuemon* Dan, Takuna* Source : Hiroshi Matsumoto, op. cit. , pp. 4(~48 & pp. 58-59. * means "interlocking."

:5 Ibid., p. 104. 26 The reason why this bribery case was called the "Siemenns Bribery" was that it happened to be revealed as a result of a bribery investigation of the Siemenns Company in Germany (Matsumoto, Ibid. , p. 67). 74 HITOTSUBASHI JOURNAL OF COMMERCE AND MANAGEMENT [December prevent family members from being involved in such incidents.27 Takuma Dan rather than Masuda was designated chairman. By 1914, then, the holding company system of the Mitsui business combine was completed. We can say that at the time when Mitsui Gomei was established, the vertical and centralized control of the capital and the horizontal interlocking directorate were fully integrated in the Mitsui zaibatsu. Although the basic separation of ownership from management and the managerial hierarchies of each subsidiary were completed by this time, the presidents of the three big firms were dominated by family members and the family had a strong say about the pro- motion of the very top managers and the large investments until the end of World War II. In the Mitsui zaibatsu it is difficult to say that such a complete separation was achieved when Gomei was established. The management structure of the Mitsui business combine, therefore, was a mixed type between "owner-management" such as Mitsubishi and the "reign but not rule" type such as Sumitom0.28 We can say, then, that there was a coex- istence of family management and salaried managers in the Mitsui zaibatsu. The organizational chart of the Mitsui zaibatsu at this time is shown in Figure 2 and the interlocking directors are listed in Table 4.

(2) The Financial Structure of Mitsui Gomei

In the previous section, we analyzed the transition of the managing structure of the TABLE 5. THE TOTAL ASSETS OF MITSUI GOMEI IN 1911 Items Amount (1) Securities 51,182,390 (72.65~~) Mitsui Bank Co. Ltd. 20,OC0,000 (28.4~O Mitsui Bussan Co. Ltd. 20,000,000 (28.4~~) Mitsui Mining Co. Ltd. 5,000,000 (7. I ~) Toshin Storing Company Co. Ltd. 7CO,OOO (1 .O~) Shibaura Electronic Mfg. Co. Ltd. l,171,000 (1 .7~) Oji Paper Mill Co, Ltd. 2,079,140 (2.9~~ Onoda Cement Co. Ltd. 1 68,750 (0.2~~) Sakai Celluloid Co. Ltd. l,307,950 (1.9~~) The Bank of Japan 652,950 (0.9 ~;) Others 102,500 (O.1~) (2) Real Estate 2,310,849 (3.3~~) (3) Buildings l,437,879 (2.0~) (4) Others 15,562,742 (22.1~) loan for the Mitsui Mining 9,569, I lO (13.6~) loan for the Oji Paper Mills 3,000,000 (4*3~~) deposit in the Mitsui Bank 2,318,371 (3･3~~) others 675,261 (1.0~;) Total 70,493,850 (100.0~~) Source: Hiroshi Matsumoto Mitsui Zaibatsu no Kenkyu, pp. 59-60.

27 Because there was no inevitable necessity to establish the njicho-sei in addition to the Mitsui Family Council which had represented the Mitsui zaibatsu. In other words, by this time the Mitsui zaibatsu needed the system which would represent the Mitsui zaibatsu as a whole instead of the family members. as H. Morikawa, Nihon Keieishi, Nihon Keizai Shimbunsha, Tokyo, 1981, pp, 137-38. 1985 TH］…EMl…RGENCE OF THE PROTOTY朋0正ENτ1…RPR1SE GROUP CAP1TALlSM．THE C＾SE OP MlTSUI 75

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Mitsui zaibatsu up to the establishment of Mitsui Gomei (the Holding Company) in 1909. Now in order to understand the relationship between ownership and control of the Mitsui business combine, we will look at the capital structure of Mitsui Gomei. (a) T/1e Capital Structure of Mitsui Gomei29: Table 5 shows the total assets of Mitsui Gomei in 1911. As this table indicates, the proportion of shares held in the big three businesses (the Bank, Bussan and the Mining) represented 64,0~ of the total assets and if we include the loan of Gomei for the mining and the deposit in the bank, 80,1~~ of the total assets were related to the big three businesses. Accompanying the rapid growth in the Japanese economy during World War I (1914L1918), the Mitsui zaibatsu also expanded its businesses. By 1920 the assets of Mitsui Gomei grew four times as shown in Table 6. From Table 6, we see that between 1910 and 1916 the total capital increased from about ~~~:68 million to ~~:88.7 million. By the end of 1916, the paid-in capital of Gomei increased from ~~~50 to ~~60 million. And during the economic boom caused by World War I, the total capital increased at an amazing rate. By 1919, it surpassed ~~200 million and Mitsui Gomei increased its paid-in capital to to ~200 million in February 1920. It must be noted that these paid-in capital increases were mainly covered by internal reserves. Since the debt of ~~20 million in 1920 was borrowed from the Mitsui Bank to cover the large capital increase, it can hardly be said that it was an external debt. This point will be closely analyzed later. This amazing expansion was made possible by several factors. Table 7 shows the asset structure of Mitsui Gomei. The main increase in assets was in securities. Especially after the economic boom of World War I, 90~ of the assets came to account for securities. As Table 8 shows, more than 80~ of these securities were those of chokkei (the direct subsidiaries-the Bank, Bussan, the Mining, and Toshin Storehouse); the rest were those of bdkei (affiliates-Kanebo cotton mill, Shibaura Manufacturlng, Sakai Celluloid, Oji Paper, Onoda Cement and so on-see Table 5). It would be useful, therefore, to analyze the expansion of the four direct subsidiaries (chokkei) to understand the main capital structure of Mitsui Gomei. During the economic boom of World War I the four direct subsidiaries expanded business rapidly. In February 1918, Bussan decided to increase its' paid-in capital from ~~20 million to ~~IOO million. The additional ~~~80 million was paid in two installments by Mitsui Gomei; ~~~50 million in 1918 and ~30 million in 1920. Toshin Storehouse also increased its paid-in capital from ~~'_ to ~~5 million in 1918. This was paid in by Gomei at once. Mitsui Mining also increased its capital from ~~20 to ~~50 million. This additional ~~30 million also was paid in by Gomei separately; ~~l0.5 million in 1918 and ~~19.5 million in 1920. Again in 1920, Mining decided to increase its capital to ~~IOO million. Gomei paid in ~~12.5 million (25~ of the increased capital) at that time, but the rest was not paid in until 1934. In July 1919, Mitsui Bank also decided to increase its paid-up capital from ~~20 to ~IOO million. At that time ~~40 million (50~~ of the increase) was paid in, but ~i~5 million of this ~~40 million was opened to public subscription. __ Ihis point is discussed further below. To cover the capital increases of its direct subsidiaries, Gornei needed about ~~l50 million. In~order to respond to these increases, Gomei had to increase its capital to ~~200

'" The description and data of this section owe to Matsumoto, op, cit., pp. 162-66. 78 HITOTSUEASH1』OURNAL OF COMMERCl…AND MANAGEMENT ［D㏄ember

TABLE8． TH正PR0p0RTl0N0F M1TsUl G0ME1’s SEcURmEs HELD BY1Ts SUBsIDIARlEs（Cんo肋3’）AND AFHLIATEs（月o加f） Teml Ye皿（a）Chokkei （a）／（c）（b）Bokei （b）ノ（c）（c）Tota1 Subsidia工ies AKliates ％％ 1 1910．1 40，700，㎜ 86，9 6，161．230 13，1 46，861．230 2 ．7 柵，700，㎜ 86，0 6，626．830 14，0 47，326．830 3 1911．1 40，700，㎜ 86，2 6，519．080 13，8 47，219．080 4 ．7 40，700．000 85，6 6，841．930 14，4 47，541．930 5 1912．1 45，700，OO0 86，9 6，898．180 13．1 52，598．180 6 ．7 45，700，㎜ 85，6 7，715．350 14，4 53，415．350 7 1913．1 45，700．000 85，5 7，756．600 14，5 53，456．600 8 ．7 45，700，OO0 84，7 8，244．700 15，3 53，944．700 9 1914．1 45，700，OO0 82，4 9，768．850 17，6 55，468．850 10 ．7 55，700，㎜ 84，7 10，093．637 15，3 65，793．637 11 1915．1 55，700，OO0 83，0 11，412．937 17．O 67，112．937 12 ．7 55，700，OO0 81，7 12，498．112 18，3 68，198．112 13 1916．1 55，700，O00 80，8 13，220．725 19，2 68，920．725 14 ．7 55，700，㎝ 78，3 15，452．035 21，7 71，152．035 15 1917．1 55，700，OO0 79，4 14，419．395 20，7 70，119．385 16 ．7 60，700，OOO 79，7 15，425．890 20，3 76，125．890 17 1918．1 11O，700，O00 87，0 16，495．145 13，0 127，195，145 18 ．7 124，200，O00 85，5 20，996．352 14，5 工45，196．352 19 1919，1 124，200，OO0 85，2 21，641．552 14，8 145，841．552 20 ．7 125，200，㎝ 82，5 26，548．057 17，5 151，748．057 21 1920．1 210，778，OO0 87，5 30，085．195 12，5 240，863．195 22 ．7 210，781．250 85，5 35，867．180 14，5 246，648．430 23 1921．1 210，936．250 84，7 38，2工1，一45 15，3 249，147．395 24 ．7 210，937，OO0 84，5 38，547．995 15，5 249，484．995 25 1922．1 210，977．000 84，5 38，654．995 15，5 249，631．995 26 ．8 210，982．250 84，6 38，495．995 15，4 249，478．245 27 1923，2 213，332，250 84，4 39，395，682 15．6 252，727，932

80〃Cεj Hiroshi Matsumoto，op．c〃．，p■38．

TABLE9． CApITAL INcR旧AsEs AND THB ExTRA DIvIDENDs （￥＝million yen） Datc Subsidiary Amount of Date Subsidia1＝y Amou皿t of Capital 1三xtra Dividcnd Increases Paid by to Gomei Mitsui Gomei Oct．1917 BuSSan ￥50 Feb．1918 Bussan 〒50 F6b．1918 Toshin 予3 May1918 Mini口g 〒1O．5 Ju1．1918 Mining ￥10．5 Jun， 1919 Bank 〒11 Jul，1919 Bank Y23．578 0ct，1919 Bussan 予30 Jan1920 Bussan 予30 Nov．1919 Mining 予12 Jan1920 Mining 予19．5 Jan1920 Mi皿ing 予12，5

Total 〒149，078 Tota1 ￥113．5 （a）（b） b／a％三76．1％

80〃Cε’ Hi正oshi Matsumoto，oρ．‘〃、，p． 132． 1985] THE EMERGENCE OF THE PROTOTYPE OF ENTERPRJSE GRour CAPITALISM. THE CASE OF MITSUI 79 million in 1920, as stated above. Table 9 shows the way Gomei increased its capital as well as that of its subsidiaries. As the right side of Table 9 indicates, before the capital increase of each subsidiaries, Gomei received extra dividends from each subsidiary and then paid the increased capital. By the end of 1919, the extra dividends from the three big subsidiaries amounted to ~~113.5 million; this figure amounted to 76.1~ of what Gomei paid in to the subsidiaries. In this way, Gomei concentrated the profits of the subsidiaries and then reinvested in each. Thus Gomei tried to control the capital increases of both itself and its subsidiaries. Gomei, however, had to change the basic principle of its capital procurement; that was the exclusivity of ownership. In 1919, when Mitsui Bank decided to increase its capital from ~~20 to ~i~IOO million, it offered ~~15 million for public subscription. As Table 9 shows, the capital increases of the subsidiaries were much more than the extra dividends that Gomei had received. In 1918, for example, Mitsui Mining increased its capital from ~20 million to ~E50 million, and in 1920 it was increased to ~~~lOO million. In January 1920 Gomei had to pay ~i~19.5 for the second payment of the first increase and ~l2.5 million for the first payment of the second increase at the same time. These payments amounted to f32 million and were ~~20 million more than the ~!~l2 million in extra dividends from Mining. That is why Gomei borrowed the necessary ~:~20 million from Mitsui Bank, as mentioned above. Furthermore, at that time the capital demand of these subsidiaries was more than the Mitsui Gomei could afford. In order to keep the family domination over the ownership of Gomei and its other subsidiaries, Gomei decided to offer only 15~~ of the Bank's stocks to the public, then it borrowed the money from the Bank. But ~20 million of the increased capital of the Mining was to be deposited in Mitsui Bank. So that, this increase was just a paperwork. It must be remembered, however, that the rapid expansion of the subsidiaries during the economic boom had begun to make it necessary to introduce external capital even they were very small portions to the Mitsui zaibatsu. (b) The Revenue Structure of Mitsui Gomei.' As we see in Table 7, over 90~~ of Mitsui Gomei's total assets were in secunities. Therefore the main revenues of Gomei were dividends from those securities. In the first half of fiscal year 1922; 86.8~~ (about ~~~I0.9 million) of total revenues were from dividends, 5.8~ from interest on bonds, 3.6~~ from

TABLE lO. THE CAPITAL PARTICIPATION RATIOS OF MITSUl GOMEI IN THE Bdkei FIRMS (February 1923) ~~

Shibaura Mfg. Co. Ltd. 57.24~~ 5,008,675 Sakai Celluloid Co. Ltd. 27.70~~ 2,770,000 Oji Paper Co. Ltd. 31.59~~ 9,872,500 Onoda Cement Co. Ltd. 12.20~~ 637,500 Hokkaido Coal Mining and Shipping 22.83~ 8,619,937 Co. Ltd. Denki Kakaku Co. Ltd. 8.75~~ 675,000 (Electronics & Chemical) Kanegafuchi Boseki (Kane-Bo) 7.50~~ 1,183,950 Co. Ltd. Source: Hiroshi Matsumoto, op, cit., pp. 142-153. note : * in June 1919. 80 HrroTSUBASHI JOURNAL OF COMMERCE AND MANAGEMENT [December real estate, and 1.9~ from miscellaneous interests.30 73.9~ (about ~~8 million) of Gomei's total dividend revenue was from the four chokkei businesses: ~3 million from Bussan, ~2.2 million from Mining, ~~2.6 million from the Bank and ~~~2 million from the Toshin Store- house. The remaining 26.1~~ of total dividend revenues was from the hokei (affiliates).31 In Table 10 the capital participation ratios of Mitsui Gomei in these bokei firms are listed. Of these affiliate firms, Shibaura Manufacturing, Sakai Celluloid (established in 1908 by Mitsui), and Oji Paper (established in 1873) had developed using Mitsui's capital and managerial resources. Sakai Celluloid, Onoda Cement, Oji Paper, Kanebo Cotton mills and Hokkaido Coal Mining and Shipping had close relations with Bussan in procurement of raw materials and marketing of their products. Producing generators, motors and pumps for Mitsui Mining, Shibaura Manufacturing also manufactured special machines for Oji Paper, Onoda Cement, Denki Kagaku (Electronics and Chemical) Company and Kanebo Cotton Mills. Furthermore, Mitsui Bank provided both long and short term financing to these affiliate firms. With Mitsui Gomei as the holding company, the four direct subsidiaries (chokkei) and affiliate subsidiaries (bdkei) were closely and organically interrelated by capital, financing, managerial resources, procurement of raw materials and machinery, as well as the distribution of products. In next chapter, we will see the concrete example of these organic integrations between the Mitsui zaibatsu and affiliates through Mitsui Bussan.

III. Mitsui Bussan as S6g6-sh6sha

Mitsui Bussan was the pioneer and forerunner of so~g5-shosha. The meaning of so~g6- sh5slla is much more than what the English translation "general trading company" reveals.32 Particularly, for the enterprise group formation, Mitsui Bussan as so~g6-shdsha played an important role not only as a profitable trading company, but also as the integrator of the whole Mitsui business combine. In this chapter, we will analyze how and why Mitsui Bussan

se lbid., pp. 161~165. 81 Ibid., p. 167. *' According to Y. Togai's, Mitsui Bussan Gaisha no Keieishi-teki Kenkyu, Tokyo Keizai Shimposha, Tokyo, 1974, pp. 1 1-13, the general characterics of so~g(~-sho~sha are as follows : 1) it handles various and large scale transactions domestically, internationally, and triangu]arly through its many branches all over the world; 2) it plays the role of the total organizer for industries as it supplies machinery, techlonogy, raw materials and markets for the products of the industries ; 3) in order to get an exclusive sales contract with producers, it finances and capital-participates with producers. In addition, the more recent national and international functions of so~g5-shosha are defined as follows : 1) transacting function - it takes risks to execute and complement transactions for producers; 2) financial function - it oomplements the financial management of the industries ; 3) information gathering and research function - it gathers and researches information about the political, economic, trade and market conditions of countries where it has will transactions ; 4) risk-hedge function - if it is necessary, it functions as a time and space buffer for transactions; 5) transporting and storing function; 6) converter function - it participates in both production and distribution ; 7) organizing and promoting function - it organizes or supports industries for the development of natural resources and energy; 8) developing function - it organizes or supports industries for the development of natural resources and energy; 9) it integrates the above eight functions and promotes large national or international projects. THE EMERGENCE OF THE PROTOTYPE OF ENTERPRISE GROUP CAPITALISM, THE CASE OF MITSUI emerged as so~g6-sh5sha by examining relationships between Mitsui Gomei (the holding company), its direct subsidiaries, affiliates, and Mitsui Bussan itself.

(1) Historical Development

As stated in Chapter I, Mitsui Bussan was established in 1876 as the merger of Senshu- sha and Mitsui Kokusan-kala (domestic trading establishment). Senshu-sha, which was established by Kaoru Inoue in 1874, traded such items as rice, coal, raw silk and tea, both domestically and internationally, as well as woolen cloth and blankets for the newly formed army. The rice trade for Choshu prefecture where Inoue was born and raised up and the woolen cloth and blankets for the army which required strong political connections were very profitable. Snshu-sha earned ~l49,132 in net profits over two years.33 Bussan which took over Senshu-sha continued the rice trade as well as the import contract with the army. Table I I is a list of commodities Bussan traded in 1876. As this table indicates, Mitsui Bussan traded various commodities domestically (43.8~~) and internationally (56.2~~) from the beginning, though exports were only a small portion (l0.5~~). Table 12 is also a list of the kinds and sales of commodities which Bussan transacted in 1890. In this list, rice, coal, and cotton were particularly important, because these trades

TABLE 1 1 . TRANSACTIONS OF MITSUl BUSSAN (July-December in 1 876)

Commodities Quantity Sales Customer or Destination (f) Coa I 776 tons 3,837 Shang-hai (China) Ex port Raw silk 25,398 papers 49,100 for Tokusumi Tea N.A. 4,358 U.S.A. 57,295 (10.5~) Woolen N.A. l 1 4,525 the army Glass bottles 3 02 the army Steam engine 5,163 the army Import Flannel 31 the army (Konoe-kyoku) Gold 101,420 consignment Go]d l0,142 Bussan Hemp bags 5,399 Mitsui Gumi Petro]eum 1,839 consignment 238,841 (43.8~) Rice 52,665 koku 227,699 to Ministry of Finance Copper coins 1 5,000 yen 14,526 consignment Domestic Leathers 266 for Kyoto Prefecture Coal 622 Army socks 187 the army (Konoe-kyoku) Misceffaneous 5,364 for lzu islands 248,864 (45.7~) Total 545,000 (lOO.O~) Net profit 7,922 (1.45~~) Source: Kohon Mitsui Bussan Hyaku Nen Shi, p. 79.

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－εo↑ 1985] THE EMERGENCE OF THE PROTOTYPE OF ENTERPRISE GROUP CAPITALISM, THE CASE OF MrrsUl 83 contributed not only to Bussan's profitability, but also to the establishment of Bussan's trading pattern as a so~g6-shdsha. In order to understand the way how Bussan emerged as a so~gd-shosha, it is necessary to look at these trades carefully.

(a) The Rice Trade34: In Meiji Japan, the rice trade was an important commodity for traders, because about 80~ of the government tax revenue was from the agricultural sector and the main product was rice. Mitsui Bussan earned high profits from the rice trade with taxpayers. In Mitsui Bussan's rice trade, consignment sales and exports were especially important. Mitsui Bussan started the rice documentary draft for taxpayers (farmers) with the cooperation of Mitsui Bank and got a commission of 2.5~~ on these transactions. This inter-relationship between the documentary drafts of Bussan and the Bank would be expanded in many fields of trade. In the 1880s, in order to acquire foreign currency for industrialization, the Meiji government consigned Mitsui Bussan for the rice exportation to Europe. Mitsui Bussan got a commission of 2.5~ on both the loading cost and sales abroad. After 1890 when the government ended the consignment, Bussan continued to export rice alone. Bussan pioneered the European market, especially the connection with the London market through these exports, and this connection would be very important for the importation of machinery. In 1890, the London branch achieved its highest sales in the rice trade and miscel]aneous machinery imports to Japan (see Table 12). (b) The Coal Trade35: In 1875 the Meiji government decided to develop the state-owned Miike mines on a full scale. The next year the Minister of Industry, Hirobumi Ito, who was a close friend of Kaoru Inoue, consigned the export of the Miike coal to Mitsui Bussan. Immediately following the establishment of Mitsui Bussan, it got an exclusive sales contract for the Miike coal. These exports were also aimed at the acquisition of foreign currency, so the government subsidized Mitsui Bussan in many ways. For example, in addition to the commission of 2.5~~ on gross sales, Bussan gained 50~~ of the net profit on the sales as a subsidy. Moreover since the shipping business had been dominated by Mitsubishi at this time, the government allowed Bussan to buy its own ships with the subsidies. This was the beginning of Mitsui Bussan's shipping business. Bussan fully exploited these ships, not only for coal trade, but for other imports and exports as well. With the coal trade, Bussan also aggressively pioneered the Asian market. At that time. Bussan had three branches in Asia; Shanghai, Hong Kong and Singapore. These were opened for the coal trade and later would play a significant role in Bussan's Asian trade as a whole. Furthermore, the most important thing was that Bussan had recognized the potential of the Miike mines because of its coal trade and forced Mitsui Bank to outbid for the Miike mines in 1888. As mentioned in Chapter I, Mitsui Mining company concentrated on the Miike mines which would become one of the three pillars of the Mitsui zaibatsu. Thus Bussan integrated mining into Mitsui's main business at the urging of the Bank. In the rice and coal trade, Mitsui's strong connections with the government through Kaoru Inoue brought many advantages. The government subsidized Bussan as a pioneer

" The fonowing chronological facts in this case depend on Nihon Keieishi Kenkyujo, ed., op. cit., pp. 93-ll2. 35 Also the following chronological facts in this case depend on lbid., pp. 1 12-133. 84 HrroTSUBASHI JOURNAL OF COMMERCE AND MANAGEMENT [December in Japanese globalization and industrialization. Mitsui Bussan along with the Mitsui zaibatsu was thus called Seishd (the political merchant). (c) Tlle Cotton Spinning Trade36: In Japan, the Osaka Cotton Spinning Co. Ltd., was the first large modern cotton spinning mill, it was established with 105,000 spindles in 1882. After the business boom in 1886, more than 20 Iarge mills were established and in 1890 the domestic output surpassed that of imports. Furthermore, in order to expel foreign imports, the Japanese industry changed its main product from thick threads to medium threads, and also changed its raw materials from the domestic and Chinese cotton to Indian cotton. From 1893 on, the industry began to export its products to the Asian market. Mitsui Bussan made three important contributions to the development of the Japanese cotton spinning industry. First was that Mitsui Bussan imported most of its cotton spinning machinery from England. For the establishment of the Osaka Cotton Spinning Company, Bussan imported the first spinning machines from Platt Brothers Company and the steam power engines from Hargrieves company. In 1886 Bussan was the sole selling agent for Platt Brothers in Japan. From January 1892 to January 1893, the Japanese cotton spinning industry increased by 218,890 spindles, it imported machines of which 81~~ of this increase was imported by Bussan from Platt Brothers. Bussan got a commission of 2.5 ~ of the total importing cost. The Bussan's London branch, which had been established for the rice trade, as well as the ships which were purchased for the coal trade had played a significant contribution to this importation. A second contribution to the industry was that Mitsui Bussan imported raw cotton for the industry. As the industry changed its raw cotton from domestic and Chinese to Indian, Bussan opened a branch in Bombay and increased the importation. In 1897 Bus- san's imports of raw cotton (~~13.82 million) exceeded those of the coal trade and became the largest trading commodity. Its sales amounted to 26.1~ of the gross sales of Mitsui Bussan. As Table 13 indicates, Bussan imported about 30~ of Japan's gross imports of raw cotton in the beginning of the twentieth century.

TABLE 13. BussAN's SHARE OF TOTAL RAW Co~oN' IMPORTS (fl.OOO & ~) Year Total Imports (A) Bussan's Share (B) (B/A) ~ 1897 43 , 620 13,822 31.7 1898 45,744 13.237 28.9 1899 62,2 1 l 23,984 38.6 1900 59,472 18,282 30.7 1901 60,650 14,697 24,2 1 902 79,785 21,726 27.2 l 903 69,518 17,468 25.2 1904 73,420 l 7.642 24.0 1905 110,623 25,585 23.1 1906 82,622 26,217 3 1 .7 1907 1 15,642 37,214 32.2 1908 90,256 28,357 31.4 1909 l08,308 30,45 1 28.1 Source : Nihon Keieishi Kenkyujo ed.,op, ar p 232

:6 Ibid., pp. 149 159 THE EMERGENCE OF THE PROTOTYPE OF ENTERPRISE GROUP CAPITALISM, THE CASE OF MITSVI

Finally, Mitsui Bussan pioneered and facilitated the export of the final products of the industry. After the Sino-Japanese war (189l~l895), the Japanese cotton yarn industry had become a net exporter, and after the Russo-Japanese war (1904-1905) the Japanese products drove out not only low grade Indian thread but high grade British thread in the Chinese market. Bussan had initiated these exports, and by 1910 Bussan handled one third of the total exports. In Bussan's sales, the cotton yarn trade became the third largest item following raw cotton and coal. Bussan had also been trying to facilitate the export of cotton fabrics to the Asian market, which had been dominated by American and European products. Although this did not develop easily, Bussan organized small and medium sized firms under the trade association and standardized the size and quality of products for exportation in order to increase its international competitive power. In addition, Bussan subsidized Toyoda Loom Works (the forerunner to Toyota Automobile Co. Ltd.) from 1899. After the Russo-Japanese War, the export of cotton was increased and Bussan's export ratio amounted to over 40~ of total exports by 1910.37 The Shanghai, Hong Kong and Singapore branches, which had been opened for the coal trade, played significant roles in pioneering the Chinese and south Asian markets for cotton yarn and fabric exports. Thus Mitsui Bussan, accumulating international trading expertise, fully exploited its business opportunities (including the government subsidies and facilities) in these trades. It established the basic functions of so~gd-shosha as in the cotton trade. In the cotton industry. Bussan imported raw materials and machinery, and initiated its export. It also organized exporting associations, standardized size and quality and subsidized the national- ization of the machinery production. Thus, Bussan participated in the whole activities of the industry, as the organizer and coordinator from the very early stage of Japan's industrialization. Japan as a late developing country with scarce natural resources, there had been a need for an international importer of raw materials and advanced machinery to industrialize rapidly. In addition, Japan did not have a complete autonomy of tarrif right until 1911. At that time free trade with the Western world meant the serious destruction ofthe domestic industries of Japan. Under these circumstances, in order to compete with Western products and to gain foreign currency for industrialization, Japan also needed a strong exporter for its own products. Mitsui Bussan developed to respond to these requirements simultaneously and also to further diversify its trading commodities in order to exploit its facilities and the talented human resources which were precious and scarce in Meiji Japan.38

(2) Managerial Resources and Structures By 1910, Mitsui Bussan transacted about 20~ of all Japanese imports and exports as Table 14 shows. In order to achieve this incredible figure, Bussan had to employ many talented managerial resources and establish a well organized managerial structure. In this section, the transition of the managerial resources and structures will be examined. (a) Accu,nulated Human Resources and Economy of Scope: Although Mitsui Bussan

" Ibid., p. 36. 8. According to E. T. Penrose. The Theory of the Growth of the Firm. Bining & sons, London, 1959, the growth of firm by diversification is one ot the resuhs ot exploitation of underutnized resources. 86 HrroTSUBASHI JOURNAL OF COMMERCE AND MANAGEMENT [December TABLE 1 4. BUSSAN'S SHARE OF TOTAL IMPORTS AND EXPORTS IN JAPAN (Yl,OOO, ~~) Export Im port Total ~~ ~~ Total Bussan Total Bussan Total Bussan ~~ 1897 163,135 10,432 6.4 219,301 33,540 15.3 382,436 43,972 11.5 1898 165,754 13,404 8.l 277,502 38,788 14.0 443,256 52,192 11.8 1899 214,930 25,439 1 1 . 8 220,402 40,015 1 8.2 435,332 65,454 15.0 1 900 204,430 22,093 l0,8 287,262 45,248 15.8 491,692 67,341 13.7 1901 252,350 20,952 8.3 255,817 37,219 14.5 508, 1 67 58, 1 71 1 1 .4 1 902 258,303 24,625 9.5 271,731 44,076 16.2 530,034 68,701 13.0 l 903 289,502 33,043 1 1 .4 317,136 47,956 15.1 606,638 80,999 13.4 1904 319,261 43,764 13.7 371,361 55,285 14.9 690,622 99,050 14.3 l 905 321,534 51,604 16.0 488,538 84,769 17.4 819,972 136,373 16.8 1 906 423,755 71,409 16.9 418,784 74,417 17.8 842,539 145,826 17.3 1 907 432,413 82,107 19.0 494,467 1 04,450 21 . 1 926,880 186,557 20.1 l 908 378,246 71,232 18.8 436,257 102,407 23.5 814,503 173,639 21.3 1 909 329,455 85,241 25.9 334.986 76,282 22.8 663,541 161,523 24.3 1910 457,086 102,570 22.4 440,577 87.071 19.8 897,663 189,641 21.1 1911 455,734 1 1 1 ,644 24. 5 530,069 1 13,336 21.4 985,803 224,980 22.8 source: Nihon Keieishi Kenkyujo ed., Kohon Mitsui Bussan Hyakubeb Shi, p. 1 38. was privately owned by the Mitsui family, it was professionally managed since its inception. Takashi Masuda, who had been the vice president of Senshu-sha, managed Bussan with a long continued strength. Later he also initiated the Mitsui zaibatsu as a whole. Masuda employed a large number of college students as salaried managers. The majority of them came from Tokyo Commerce College which later became known as Hitotsubashi University. He recognized that only well educated students could handle the various domestic and international transactions with the required necessary forms of modern expertise ; such as a knowledge of foreign languages, international trade, finance, insurance, technology and law. Since 1880, Masuda continued to support Tokyo Commerce College by employing its graduates periodically. From the end ofthe century he began to periodically hire students from engineering schools as well. Amazingly by 1914, Mitsui Bussan employed 731 college graduates out of its 1,807 total employees.39 Compared to the theory of economies of scope of intermediaries, the reason for the diversification of Mitsui Bussan as a so~gd-sh5sha can be explained from the point of view of fully exploiting these accumulated human resources40 as well as a single set of physical facilities. To achieve economy of scope means using the same facilities to market and dis- tribute different products. In this sense, Mitsui Bussan fully exploited its human resources for many different products (various throughputs). Theoretically when a manufacturer's volume attained a scale that would reduce the cost of transporting, storing, and distributing its products to the level of that achieved by that of the intermediary through its volume economies, the intermediary lost his cost advantage in the distribution of the product.41 In

*' s. Yonekawa, "Sbgo-shosha Keisei no Ronri to Jittai," Hitotsubashi Ronso, vol. 90, #3. Tokyo, 1983, p. 336. '~ H. Morikawa, "so~g5-shosha no Seiritsu to Ronri," Y. Togai etc., ed., sogo-shosha no Keieishi, pp. 43- 63 . '* A. D. chandler. Jr., "Chapter I drart - Definitions and Explanatory Theory," tor a torthcoming book, p. 18-20. 1985] THE EMERGENCE OF THE PROTOTYPE OF ENTERPRISE GRour CAPrrALISM, THE CASE OF MITSUI 87 the case of Mitsui Bussan, however, its accumulated human resources and facilities sustained its cost advantage after mass production attained a certain level of scale because of Bussan's accumulated human resources; in other words, the information processing abilities of Bussan could add some value which manufacturers couldn't get at that time to the physical distribution. Therefore, within the compet,itive international market. Mitsui Bussan could develop as a so~g5-sh5sha, particularly as a coordinator and an organizer of industries rather than as a simple trading company. In general, so~g5-sh6sha can exploit the advantage of their position in a country where industries are not large enough to compete with foreign companies and which is inevitably involved in the global market. In this sense, so~gd-sh5sha is the result of the pursuit of economies of scope and not scale.42 1 think this may be the same reason why several so~g6- sh6sha emerged in the post World War 11 economy of Japan. Japan was inevitably involved in the post war global market and in order to rapidly recover from the damage of the war so~gd-shosha had to pursue the exploitation of economies of scope as they had done since the Meiji Period.43 Thus the frst exploitation of the economy of scope in Bussan was to achieve economy by various throughputs within a single set of human resources and facilities. Another pursuit of such an economy of scope in Mitsui Bussan was to implement economy of scale by small collective transactions in the same industry. In those days, there were a few industries whose products could bring the scale economy to Bussan. Bussan, in order to fully utilize its accumulated human resources and facilities, collected small quantities of products from many firms in the same industry. Then Bussan could attain an economy of scale through various sources. This was the second exploitation of the economy of scope. This kind

Two KINDS OF EcoNOMY OF SCOPE ･ Sogo shosha=information processing abilities ･ accumulated human resources ･ accumulated physical facilities Various products (throughputs) Various Sources

ProducYScopeVariousImport ..->Single Product scaleImport '~> ( - sho~shaSo~g5 Sogc-shosha scope Global ScopeLEx/;p~?~ VariousProducers Market producersVarious Global¥J Export Domestic Domestic Market Market Market

42 Prof. Yamamura explains the advantage of so~go-shdsha from the economy of scale and risk-reduction by distributing risks over many transactions. (K. Yamamura, "General Trading Company in Japan : Their Origine and Growth," H. Patrick, ed., Japanese Industrialization and Its Socia/ Consequences, Univ, of Calif- omia Press, 1976). But risk-reduction by distributing risks over many transactions contradicts with economies of scale itself. I think it is very difricult to explain the emergence of sogo-shosha from only the concept of risk-reduction and economy of scale. d3 Sogo-shosha (the general trading company) has played significant roles for the economic development in postwar Japan as well as the prewar period. Therefore we must analyze the similarities between the pre and post war economic environment in which sogo-shosha could fully exploit its special characteristics dis- tinguished from an ordinary trading company. In this analyze, the concepts of ceonomies of scope and the information processing abilities are very critical and useful. 88 HrroTSUBASHI JOURNAL OF COMMERCE AND MANAGEMENT [December of scope economy was to be related to the industrial organizing function of a so~g5-sh5sha. In order to achieve the collective scale economy by the scope economy from various sources, the so~g(~-slldsha inevitably have to take on the role of an organizer. The following explana- tion presents a good example of this. The Japanese safety matches industry had been an important and a profitable exporting industry, because the industry was self-sufficient in regards to its supply of raw materials. Also its production process was labor intensive and rather simple. Since 1895, Mitsui Bussan had been exporting matches under its brand name to Southeast Asia. But because each producer was very small and unstable, Bussan formed Osaka Match Co., Ltd. by join- ing three small producers and appointed Bussan's Osaka branch manager the additional post as the president of the company in 1897. The next year, Bussan also made an exclusive contract with a large raw material producer in Kobe to increase and stabilize a collective quantity. As a result, Bussan's exports, which had been less than ~~500,000 in 1900 climbed to ~2,548,000 in 1904. This figure was 26~ of the total exports of the industry at that time.44 Thus, Mitsui Bussan as a so~g5-sll6sha could develop by complementing the economy of scale by pursuing two kinds of economies of scope. The key to Bussan's success in this complementary situation was its aggressively accumulated information processing abilities -that is; human resources. (b) The Transition of the Ma,7aging Structure45: Mitsui Bussan had started with only 74 employees and ~~~545,000 in gross sales in 1875, but it became the largest general trading company with 1,213 personnel and about ~224 million in gross sales by 1909 when it was incorporated. Until then, accompanied by the expansion of business and personnel, the management structure of Bussan evolved and changed extensively. It is impossible to trace each change here so we will examine only the most important changes. As stated in Chapter I, in 1893 Mitsui Bussan was reorganlzed from a private partnership into an unlimited corporation according to the enactment of the Commerce Law. Thus, the Mitsui family members who used to be just owners became the nominal presidents, and Mitsui Bussan introduced the managing director system. At that time, the main office was simply divided into four sections : general affairs, domestic trade, international trade and the controllers' sections.46 As Bussan's businesses boomed, especially abroad after the Sino-Japanese War, Bussan's simple organization was not able to control and coordinate such complicated matters. In 1898 the main office was reorganized into the Administration Department and the Operating Department. The Administration Department was charged with the overall management of Bussan's issues, and the Operating Department was in charge of the day-to-day business.47 By the 1890s Bussan expanded a large number of branches, and each branch was given autonomy based on a self-paying account.48 This positive attitude toward the autonomy

a4 Nihon Keieishi Kenkyujo, ed., op. cit., pp. 260-261. d5 The historical facts of the transition of Mitsui Bussan's managerial structures depend on Nihon Keiei- shi Kenkyujo, ed., op. cit., pp. 197-216. 46 Nihon Keieishi Kenkyujo, op, cit., pp. 198-201. 47 Ibid., pp. 200-207. a8 H. Morikawa, Meljiki Mitsui Bussan no Keiei Soshiki (Organizational Structures of Mitsui Bussan in Meiji Period). Keiei Shorin, Hosei Univ. vol. 9, No. I , Tokyo, 1976. 1985] THE EMERGENCE OF THE PROTOTYPE OF ENTERPRISE GROUP CAPITALISM, THE CASE OF MITSUI 89 made Bussan's employees, especially young college graduates, ambitious, energetic, and powerful. A recent study of organizational behavior shows us that a decentralized and an autonomous organizational structure under the loosely defined mission extracts self- organizing abilities from human beings much easier than a centralized and bureaucratic one.49 The reason why people evaluated "Bussan is strong because of it human resources" is related not only to that is aggressively accumulated highly talented college graduates but also it had an autonomous structure which could fully utilize its human resources. But as Bussan's business diversified and developed internationally, its control and coordination between both branches and commodities became one of the most important issues. In 1893, Bussan already had thirteen domestic branches. By 1908 these branches had reached 22 at home and 38 abroad.50 After the Sino-Japanese War, these branches began to compete with each other, and sometimes one branch might sell short and another might overbuy the same commodity. In order to control and coordinate these branches, Bussan introduced three important systems : Department System .' In Bussan, there were two department systems. One was that of the main office, as stated above (the Administration and Operating Departments) ; another was for special commodilies. This special commodities department was created for the control and coordination of the branches. In Bussan's trade, some commodities, such as rice, coal and raw cotton, became large and important, and many branches overlapped in dealing with these commodities in various stages. The department system for special commodities was established to control all transactions of the same commodity, with authority over all the branches.51 The first department of this kind was established within the Osaka Branch as the Raw Cotton Department in 1894. This department was charged with the control and coordination of all raw cotton transactions over the branches. The concrete way that these departments controlled and coordinated the transactions will be examined in the next chapter. This department system used a common accounting system (ky5tsa-keisan seido). The Common Accounting System: By the 1890s Bussan's branches had developed very independently and on a self-paying basis. Along with establishing the department system for special commodities, Bussan introduced the Common Accounting System. This accounting system was to summarize and settle accounts of special commodities in the main office, rather than in each branch. This system helped centralize the businesses, but sometimes impeded swift transactions at each branch. The system would be, therefore, modified along with the department system for special commodities.52 General Branch Managers Annua/ Meeting (shitenchd shimon kaigi),' In addition to adopting the department and the common accounting systems, Mitsui Bussan established the General Branch Managers Annual Meeting in 1902. This meeting was to be held an- nually in the main office with the general branch managers and the general managers of the corporate office. At this meeting, the managers inquired about important issues for

'D I. Nonaka, Kigyo Sinkaron (The Evolutionary Theory of the Firm), Nihon Keizai Shimbunsha, 1985. 50 Nihon Keieishi Kenkyujo, ed., op, cit., p. 207. 51 Ibid., pp. 209-210. 52 Ibid., pp. 210-212. 90 ElTOTSUBASHHOURNAL OF COMM■RC田AND MANAG田MENT [December

FIGURE3 THE ORGANIzATI0NAL CHART0正MlTsUI BUssAN（1905） PRESIDENT

MANAGlNG DIRECTOR CONTROLLER

R R

－－－－－－－－－－－－＃N OPERAT10NAL DEPARTMENT ADMlNlSTRAT1ON DEPARTMENT

カ向O向－く向俸O向－－く向カ■＞OOO⊂2↓－之Ωω向O↓－OZOOH↓02ω向O弓－O之00＞﹇ω向O↓HO乞犀＞－－カO＞Uω向O↓－O乞竃＞O庄－2向宛くω向O↓－OZOO竃くOU－一「－向ωω＞﹈≦勺﹇向ω同〇一「－O﹈4OO竃ζ⊂2－O＞一「－O之ω向〇一『－O之勾向O向－〜↓ω節U－Oo耐ζ宛ω向H≦向Z↓ωω－O↓－O之＞OOO⊂2↓－老Ωω向O↓－OズΩ目Z向勾＞－＞句勾＞Hカωω向O↓－OZ宛固ω丙＞カO＝ω向O」『H◎Z －≦OZ向くOO－－向O↓－Z①ω向OH－02－≦丙↓＞－ωω向O↓－02－－・；－・・－－－－－－－－－－－－－・批ω一≦あO丙－﹇＞Z向OGωω向O↓－OZ＃H 、、刃向、錐聾葬誌萎畠－1」酪葬鯛霧襲襲蛎OO＞﹇↓宛＞U向ω向O↓HO乞OO∈ZO－－ω向O↓－02

勾＞H－宛o＞－〕H≦丙↓U向『＞宛↓く向z↓■O宍O曽＞一≦＞籟用＞ZO曽＝O宍穴＞－O○勺－巳o＝向肉くO向｝＞射一「竃向2↓ω＞≧司刃＞Zω－ωOOω宛＞乞O＝ω＞勺勺O勾○－沌＞ZO｝くO丙OωO穴＞団宛＞ZO＝

Source Nihon Keieishi K釦kyμjo，op．〃．，p．201 the whole company and exchange information.53 Thus Mitsui Bussan controlled and coordinated its branches and their various transactions. The organizational chart in 1905 is shown in Figure 3.

531b14．，pp．212＿213 1985] THE EMERGENCE OF THE PROTOTYPE OF ENTERPRISE GROUP CAPITALISM, THE CASE OF MITSUl 91

IV. The Relationship~between Mitsui Bussan and Its A liates ffl - The Case of Onoda Cement Co., Ltd. -

In this chapter, the relationship between Mitsui Bussan and Onoda Cement will be examined as a concrete example of the way Bussan controlled its affiliate and integrated it into Mitsui Gomei. Onoda Cement Co., Ltd. was established in 1881 by the ex-samurai (warrior) class in Choshu as the first Portland cement manufacturer in Japan. It was very unique that Onoda Cement was incorporated by using public bonds from the warrior class which had been issued by the government to pacify the declining samurai class at the beginning of the Meiji Era.54 This establishment was supported by Kaoru Inoue who was one of the dominant politicians from Choshu as well as a strong supporter of Mitsui, as mentioned in previous chapters.

(1) Onoda Cement and its Exclusive Sales Contract with Mitsui Bussan

Onoda Cement started with an annual production of only 586 tons and gradually developed along with the slow diffusion of cement into Japan. But as Asano Cement Com- pany, which was established in 1883 by purchasing state-owned facilities, grew into the largest cement firm and many small and medium sized companies were also established during the first business boom (1886-1890) because of the self-sufficiency of raw materials and the ease of production, the cement industry became very competitive. In order to survive in the competitive market and to market widely from 1891, Onoda Cement made a contract with Mitsui Bussan for the sales of its products. The sales portion of Mitsui Bus- san was limited by contract to under l0,000 barrels (about one third of annual production). From 1893, moreover, in order to keep up its competitive advantage by reducing unit costs, Onoda Cement began to scale up its capacity aggressively. In 1893 it decided to increase its annual production capacity from 7,200 to 12,000 tons. At the beginning of the second business boom caused by the Sino-Japanese War (1894-1895), it decided to build a new factory with an annual capacity of 20,000 tons with the latest technology.55 In order to procure the capital for this expansion, it decided to increase the paid-in capital from ~~IO0,000 to ~~600,000 and to sell its stocks to the public (i.e. to the non-samurai class) subscription. With this increase, Mitsui Bussan invested ~l4,000 (2.3~~ of the total capital).56 And Bussan imported the latest machinery (about ~~400,000 worth) for Onoda Cement from Germany and the United States for a commission of 2.5~･57 Thus, Mitsui Bussan gradually began to participate both in the capital procurement and importation of production machinery, and in the distribution of the final products of Onoda Cement, as it had with the cotton industry.

*' s. Yonekura, "Shizoku-Jusan Seisaku to Onoda Cement," Hitotsubashi Ronso, vol. 87, ~3, Tokyo, 1982. 5* S Yonekura "Onoda Cement m okeru Shlzoku Jusan Klgyo Dappl Katei," S. Yonekawa and M. Hirata, ed., op. cit., pp. 237-263. '" Onoda Cement Seizo-gaisha, ed., Onoda Cement Goju Nen Shi, Onoda Cement Seizo-gaisha, Yama- guchi, 1931. 57 The internal document of Onoda Cement Co., Ltd. (1), Melji Sanju-ichi nen Juichigatsu. Kangyo Ginko Kariirekin lkken. Kaikei-ka, in Onoda's Archives, Tokyo. 92 HITOTSUBAsm JOURNAL OF COMMERCE AND MANAGEMENT [December

Because of the war inflation and the decline of the value of Yen currency, this expansion cost much more than Onoda had anticipated. By the end of 1897 it had to increase the capital to complement the construction from ~i~600,000 to ~~~1,000,000. At this time, 40~~ (~l60,000) of the nominal increase was paid in.5B This new factory was completed in the spring of 1900 with a large unexpected deficit. Furthermore the second business boom did not last long and from 1898 the tone of the market, as well as the market price, had gradually declined and developed into the economic depression of 1901. In addition, since one of Onoda's employees in the Osaka branch had forged ~~~160,000 worth of Onoda's bill notes, Onoda Cement fell into a financial crisis at the end of 1901, with about ~~190,000 in losses (their operating loss was about ~~30,000).59 At that point Onoda Cement asked Mitsui Bussan for an exclusive sales contract for Onoda's products, as one of the crisis re- medies. On Bussan's operation side, however, there was strong opposition to such a sales contract, because the cement industry was so competitive and it seemed very difficult for Mitsui Bussan to make a proper profit. In spite ofthe opposition this exclusive sales contract was established in December 1901 with the strong support of the managing director of Mitsui Bussan, Takashi Masuda, who had been persuaded by Kaoru Inoue.60 Thus Mitsui Bussan began to participate fully in Onoda Cement. The main points of the contract were as follows :61

1) Onoda Cement consign all products to Mitsui Bussan, both for domestic and international sales ; 2) Bussan would not transact any other cement, except when a customer designated a special brand ; 3) After the establishment of this contract, Onoda abolished its sales branches; 4) Onoda left the method and places of sales in Bussan's charge. Onoda just in- formed Bussan of the minimum sales price and Bussan sold the products for higher than the minimum price ; 5) As all sales costs (transportation, Iabor, insurance, storing and the like) were borne by Onoda, Bussan could deduct these costs from the gross sales amounts; 6) Bussan got a commission of 3.5~ on the sales amount; 7) Bussan could loan to Onoda a mortgage on products of up to ~~~50,000. Under this contract, Onoda Cement became simply a manufacturer, and Bussan was charged with the sales of all the products that Onoda produced. The next most important thing was for these two companies to establish a means to control and coordinate the production and distribution efficiently.

(2) The Managing Structure of Mitsui Bussan and Onoda Cement In December 1901, according to the contract, Mitsui Bussan established the special commodity Department for cement within its Osaka Branch. As stated in chapter rv. Bus-

*s onoda Cement Seizo-gaisha ed., op. cit., p. 185. 59 The Internal Document of Onoda Cement Co,, Ltd. (2), Melji Sanju-yo Nen Rinji Kabunushi-Sokai, Onoda's Archives, Tokyo. 60 Onoda Cement Seizo-gaish~~ ed., op. cit., pp. 230-233. 61 The Internal Document of Onoda Cement Co., Ltd. (3), Mitsui Bussan Itte-hanbai Keiyakusho, Onoda's Archives. Tokyo. 1985] THE EMERGENCE OF THE PROTOTYPE OF ENTERPRISE GROUP CALITALISM, THE CASE OF Mrrsul 93

FIGURE 4. THE ORGANIZATIONAL CHART OF ONODA CEMENT AND MITSUI BUSSAN (1909) Onoda Ceme*t M*tsu* Bussan

OSAKA BRAN. CH

Penodical BoaTd of Cement Dept Dlrectors Meeting

lvlanagmg Dlrector

Chief Eng]neer Correspondent

Stonng AccountlngSales General productlon Sectlon Section Sectlon Affalr

san's department system for special commodity required that one department was in charge of the entire distribution process (buying-in, transit and sales) of that special commodity, with authority over all branches. The department controlled and coordinated the sales activities of each branch, as the corporate office did. In the Cement Department, the Osaka Branch manager took on the additional job of department manager. A special correspondent for Onoda Cement was also inaugurated into the branch. At the same time, in order to cooperate with Mitsui Bussan efficiently, Onoda Cement organized its structure into five sections (production, general affairs, accounting, sales and storage), and each section was to talk with Bussan concerning each special matter. In 1906, for example, because of the explosion in demand following victory of the Russo-Japan- ese War. Bussan asked Onoda for permission to import foreign cement products. This proposal was sent to Onoda's sales section by Bussan's special correspondent and the sales section analyzed the proposal and presented it at the executive meeting. The executives of Onoda and the Cement Department of Bussan then discussed the matter. Onoda ac- cepted Bussan's import of foreign cement, on the terms of the loan for its capacity expansion from Bussan.62 Instead of this compromise Onoda borrowed ~i~100,000 from Mitsui Bussan. In 1909 the periodical Cement Meeting was established, and the department officers and the cement salesmen from each branch at Bussan as well as the executives, engineers and the sales section officers from Onoda attended. (The managerial structure is shown in Figure 4.) Moreover, every six months Mitsui's Cement Department reported to

" The Internal Document (4). Mezji 39 nen yori Showa 18 nen Mitsui Bussan Tasha cement Toriatsukai lkken. Hisho-ka, Onoda's Archives. 94 HITOTSUBASHI JOURNAL OF COMMERCE AND MANAGEMENT [December

TABLE 1 5. TOTAL OUTPUT AND SALES OF ONODA CEMENT (ton) Year Output Sales Domestic (~~) Export O(;) 1897 1 3 ,447 14,792 14,428 (97.5) 363 (2.5) 1898 14,760 l 4,982 14,837 (99.0) 147 (1.0) 1 899 15,145 14,661 14,395 (98.2) 266 (1.8) l 900 23,141 22,849 20,758 (90.8) 2,091 (9.2) 1901 25,633 23,654 19,610 (82.9) 4,044 (17. 1) 1 902 3 1 ,446 31,815 22,808 (72.5) 9,007 (27.5) 1 903 30,069 27,782 12,810 (46. 1) 14,972 (53.9) 1 904 34,434 32,924 23,875 (72.5) 9,049 (27.5) 1905 34,080 36,695 25,165 (71.7) l 1,530 (26.3) 1906 35,437 37,354 20,173 (54.0) 17,182 (46.0) 1907 33,926 34,298 23,447 (68.4) 10,851 (31.6) 1908 54,648 52,961 37,936 (71 .6) 15,023 (28.4) 1 909 58,582 61,430 42,467 (72.5) 18,963 (27.5) Source : The Statistics of Onoda Cement (Onoda's Archives).

Onoda information about domestic and foreign biddings, market conditions, and the sales and commission amounts from each branch.63

(3) Mitsui Bussan, Onoda Cement and Mitsui Gomei Under the exclusive sales contract, Mitsui Bussan and Onoda Cement, avoiding fierce domestic competition, focused their efforts on the increasing exports. As Table 15 shows, after 1901 the export percentage of Onoda's sales rapidly increased. These increases de- pended on the strong pioneering of the Asian market by Bussan. Mitsui Bussan expanded its marketing power deeply into China, especially after the Russo-Japanese War (1904- 1905). In addition, as the third business boom caused by the war victory began, Mitsui Bussan began to play the more positive role of industrial organizer for Onoda Cement. First, Bussan financed Onoda's capacity expansion. Because of the demand explosion of the third business boom, Onoda's production capacity gradually began to fall behind Bussan's sales ability. So in November 1906, Onoda asked Bussan for a loan of ~~~IO0,000 for their capacity expansion in the result of the compromise as stated above. After Bussan got permission for the loan from the Mitsui Family Council, it gave the loan to Onoda with 7.5~~ annual interest.64 Second, Bussan initiated the construction of a new factory in Tairen (Dalian) in Man- churia. After the Japanese victory in the Russo-Japanese War, the Chinese market, particularly the Manchurian market, was opened to Japan. Bussan aggressively pioneered this market. In 1906 as the semi-public and semi-private railroad company named Minami Mansha Tetsudo (the South Manchurian Railroad) was established by the Japanese government, Mitsui Bussan noticed the potential for a cement demand in Manchuria and the Tairen

63 These periodical reports are kept in Onoda's Archives. 6i The Intemal Document of Mitsui Bussan, Meiji 39 nen yori dou 40 nen Kanribu Kaigian, (Bussan 1 30), in Mitsui Bunko (Archives). 65 The Internal Document of Onoda Cement (5), Mitsui Bussan Itte-hanbai Keiyakusho Tsuzuri, Onoda's Archives. 19851 THE EMERGENCE OF THE PROTOTYPE OF ENTERPRISE GROUP CAPITALISM THE CASE OF MITSUI 95

(Dalian) branch officer of Bussan proposed at the Cement Meeting to research the possibility of constructing a new factory in Manchuria. Bussan then initiated market research through Manchuria. China and Korea and sent a precise report to Onoda. In 1907 they decided to build a new factory, and Bussan imported the production machinery for the new factory from Germany at a commission of 2~~ of the total cost.65 Third, Mitsui Bussan integrated Onoda Cement as an affiliate company into the Mitsui business combine through further financial aid. At the end of 1907, in order to procure the construction capital for the Manchurian factory, Onoda decided to increase its paid-in capital from ~~600,000 to ~~~l,200,000.66 In this increase, the Mitsui Family Council invested ~~~150,000 (12.5~ of the total paid-in capital) at the request of Mitsui Bussan and became the largest stockholder. When Mitsui Gomei was established in 1909, these Onoda's securities were transferred to the assets of Mitsui Gomei as the holding company (as we have seen in Chapter II). Finally. Mitsui Bussan supplied managerial resources. In 1906 when the relationship between these two companies was becoming closer, Bussan sent Eitaro Fukuhara to be managing director of Onoda Cement. At that time Onoda adopted the five directors administration system, and the managig dirnector was chosen by the mutual vote by the directors. Fukuhara, who had graduated from Keio College entered Mitsui Bussan in 1 880 and successively held many posts (such as branch manager in Hong Kong, assistant branch manager in London and Osaka, sections chief of the coal, the research and investigation, and fire insurance sections in the Tokyo main office).67 Fukuhara was also the nephew of Kaoru Inoue, who was influential in both companies. So that Fukuhara, as managing director of Onoda Cement, was an important mediator for both Mitsui Bussan and Inoue, In 1916 Fukuhara relinquished his post as managing director to the director Shinzo Kasai, who was not only the founder's son, but also an excellent cement engineer in Japan.68 Until then the Fukuhara-Kasai managing tandem led to a rapid growih in Onoda Cement. This combination was the best administration for the strategy of the two companies. While Fukuhara was charged with the distribution and the negotiations with Bussan. Kasai was charged with the production and the improvement in quality.69 Thus Bussan participated to the whole activities of a firm and integrated it into the Mitsui zaibatsu as an affiliate. Now let's go back to the story of Mitsui Gornei and the emergence of interlocking shareholding.

V. The Collapse ofMitsui Gomei and The Emergence of Interlocking Shareholding

The economic boom caused by World War I offered great opportunities to the medium- sized (cha-kibo) zaibatsu (such as Asano, Furukawa, Okura and Fujita) and the late-coming

66 Because of the financial crisis in 1901, Onoda had to reduce its nominal capital from fl.OOO,OOO to f600,000 in 1903. (Onoda Cement Seizo-gaisha, ed., op. cit.) 67 K. Iseki, Gendai Bocho Jinbutsushi, Hatten-sha, 1917. 68 Kasai had studied in Munich University in Germany and got his Ph.D. there. He was evaluated as a frst rate engineer in those days in Japan. 6D Kasai Shizo den Henshu linkai, ed., Kasai Shizo Den, Onoda Cement, 1954. 96 HrroTSUBASHI JouRNAL OF COMMERCE AND MANAGEMENT [December (k5hatsu) zaibatsu (such as Suzuki, Kuhara, and Kawasaki-Matsukata) as well as the established ones (Mitsui, Mitsubishi, Sumitomo, and Yasuda). While the medium-sized and the late-coming zaibatsu aggressively expanded their business to catch up with Mitsui & Mitsu- bishi, the two giants pursued a steady business strategy accompanied by a modest development. In the serious depression following this boom, however, the medium-sized and late- conung zaibatsu suffered from their expanded and diversified businesses and some of them went bankrupt. On the other hand, the established zaibatsu frms, because of their steadiness during the boom, grew more rapidly and even merged with some of the bankrupt medium- sized firms.70 In addition to this post war depression affected by the Great Depression in the United States, the Japanese economy deteriorated and the Showa Depression began. The unemployment in urban cities and "the selling daughters to bondage" in the agricultural area became serious problems and the seed-bed of Japanese imperialism and militarism. In contrast to these economic and social problems, the prosperous zaibatsu grew larger and larger and became the object of social criticism and popular odium. Furthermore, because the established zaibatsu, especially Mitsui, were conservative and hesitant, they were re- luctarlt to get involved in the new heavy industrialization. This became a source of confiict with the militarists and the progressive bureaucrats (kakushin-kanryd) who had been trying to promote the development of heavy and advanced industries in Japan and Manchuria. The main reason the established zaibatsu were hesitant to participate in such costly new businesses was that any further involvement in heavy industry would make it impossible for them to maintain family domination over the ownership and control of subsidiaries. Therefore, new frms that had aggressively participated in demanding heavy industrialization and new business opportunities grew to be the "new zaibatsu" (shink5-zaibatsu), such as Nippon Sangyo (Nissan) and Nippon Chisso (Nicchitsu). In contrast to the established frms, these new zaibatsu had openly gathered capital from the public which propelled their costly heavy industrialization.n The militarists and the progressive bureaucrats, therefore, supported new zaibatsu and criticized the established zaibatsu and family domination over ownershi p. These anti-zaibatsu feelings reached a peak in 1932, when the money speculation of the zaibatsu banks was revealed. In order to tighten and stabilize the Japanese economy, the Minister of Finance, Junnosuke Inoue, in 1930 removed the ban on gold exports and restored the gold standard system. However the zaibatsu banks (Mitsui, Mitsubishi, Sumi- tomo) and Mitsui Bussan, anticipating the re-embargo on the export of gold and the con- sequent slump in the yen value, had speculated in dollars in 1 931. Although the government resisted this speculation by selling its dollars, by the end of the year the administration had to resign en bloc. The succeeding administartion restored the gold embargo as the zaibatsu banks had expected. Finally they and Mitsui Bussan made a big profit from this speculation.7a This caused further popular resentment and fueled the anti-zaibatsu movement. "Although zaibatsu is proud of its prosperity, they have no mercy for the people" is a phrase from one of the very popular songs of the time (Sh5wa Ishin no Uta).

" M. Udagaw~~ Shiko Zaibatsu, Nihon Keizai Shimbunsha. Tokyo, 1984, p. 263. 71 Ibid., p. 265. " Okumura, op. cit., p. 3 and M. Takayanagi and T. Takeuchi, ed., Nihonshi-Jiten. Kadokawa, Tokyo, 1966, p. 699. (Dorugai Jiken) 1985] THE EMERGENCE OF THE PROTOTYPE OF ENTERPRISE GROUP CAPITAusM, THE CASE OF MITSUI 97

As a result of this resentment, the extreme right terrorist group ketsumei-dan assassinated Takuma Dan, the chief director of Mitsui Gomei, in March of 1 932 in front of the newly constructed Mitsui main building. This caused unrest at the Mitsui zaibatsu and forced it to change its system and behavior. This was the so-called zaibatsu-tenk5 (Conversion of Zaibatsu).

(1) The Conversion of the Mitsui Zaibatsu For the Mitsui zaibatsu, the assassination of Dan was much more serious than simply the assassination of the chief director of Mitsui Gomei. Dan had been not only the leader of the Mitsui business combine but was also one of the few men who had initiated the development of Mitsui from its beginning. He could also mediate conflicts between the family and the businesses.73 In addition, the economy deteriorated into the Showa Depression, and in September 1931 the military invaded Manchuria and the war of aggression expanded. During such a critical time, when the most important zaibatsu was forced to deal with these new conditions, it lost Mitsui its chief director in the assassination. In this section we will examine what Mitsui did following the assassination because it indicates how the Mitsui zaibatsu tried to cope with the new environment. (a) The Reforms in the Management Structure: Ten days after the assassination, on March 15, 1932, Umekichi Yoneyama (Mitsui Trust Bank), Kan Makita (Mitsui Mining), Shigeaki lkeda (Mitsui Bank) and Yunosuke Yasukawa (Mitsui Bussan) were designated as the new directors of Mitsui Gomei. Mitsui Gomei would be managed by a council system headed by these four directors until September of 1933, when lkeda was designated as the head directors (hitt(~-jo~munji). These four men were professional managers in each subsidiary, but none of them was powerful enough to lead the Mitsui zaibatsu as the sole leader as Masuda and Dan had done. The Directorate (njich5-sei) collapsed when Dan was killed.74 In February 1934, in an attempt to pacify popular resentment, all the family members resigned their presidential posts in the direct subsidiaries of Mitsui Gomei. As we have seen earlier, these posts were nomjnal, so that the actual managements of the subsidiaries were not affected by these resignations. Moreover, within the family, the succession of generations was carried out.75 The coup d'etat of the military in February 26, 1936 facilitated the final big reform in Mitsui. This was the introduction of the age-1imit system in April 1936. During the coup d'etat, Ikeda, the head director, who escaped from the assassination, was not able to attend the scheduled meeting. He decided to introduce the age-limit system, in order to impress upon the public the further renewal of Mitsui's personnel and openness. This move was aimed not only at the renewal of the personnel, but also at the reduction of the enlarged personnel expenses. By that time, Mitsui's financial situation was also getting

" Morikawa, "Management Structure and Control Devrces for Drverslfied Zaibatsu Busmess " (Naka gawa, ed., op. cit.), p. 55. Even for Dan, it had been difficult to coordinate the conflicts between the fatnily members and the subsidiaries and because of these conflicts he could not make quick desicions. So Dan was called "Indecisive Dan." '4 Matsumoto, op. cit., p. 240. '* Ibid., p. 239. Ih 1933, the family head, Mitsui Takato, retired and in 1936 the branch family heads, Mitsui Motonosuke and Gen-emon also retired. 98 HrroTSUBASHI JOURNAL OF COMMERCE AND MANAGEMENT [December deteriorated. In order to set an example to others, Ikeda resigned his post during the same year, according to his system. (b) Social Contributions of Mitsui76.. At the same time as Mitsui Gomei was making these reforms, the Mitsui zaibatsu made social contributions to show its positive attitude and cooperation towards the government and social relief works. In April 1932, the establishment of a ~20 million loan agreement to Manchukuo by Mitsui and Mitsubishi was announced. In addition to the fact that the Japanese govem- ment had strongly supported this loan, the assassination of Dan must have facilitated this agreement. Mitsui and Mitsubishi each loaned ~~IO million. In June of the same year, Mitsui donated ~~3 million to the unemployment relief fund of Ministry of Interior and ~50,000 to Matsuzaka town, which is the birthplace of Mitsui. In order to procure these funds, Mitsui Gomei sold the national bonds worth ~!~IO million. In November 1934 it donated ~~3 million to the famine relief fund for northern Japan. Furthermore, Mitsui Gomei established a social work association with a ~~30 million donation. This association was named Mitsui Ho~-on kai and it began its work in April 1934. Of course, even for the Mitsui zaibatsu these donations of ~~13 million in 1932 and ~~30 million in 1933 were not small ones. We can see from these donations how seriously Mitsui tried to pacify popular resentment during the Showa Depression. In 1933 Mitsui Gomei contributed ~~lO million cash and ~20 million in subsidiary bank notes (~~17 million from Mitsui Bank and ~i~3 million from Mitsui Trust)77 to the Ho~-on kai fund. As a result ofthis procurement, Mitsui Gomei had to sell ~~20 million worth of its stock holdings. That

TABLE 16. THE SALES OF STOCKHOLDlNGS BY MITSUI GOMEI (1933-1934) Date Com pany Stocks Amount (f) Buyer Sep. 1933 Oji Paper 1 1 5,000 9,485,000 Syndicate of Life Insurance firms* Oji Paper 16,000 1 ,304,000 Mitsui Life Insurance Oji Paper 10,000 l ,040,000 Hisakichi Maeyama Hokkaido Coal & Ship 6,000 372,300 Mitsui Life Insurance 147,000 12,201,300 Jan. 1934 Mitsui Bank 5 ,OOO 407,500 Mitsui Life Insurance Feb. 1934 Tokyo Electric Power 3 1 ,415 1 ,027,270 Yamaichi Stock Co. Onoda Cement 54,000 2,835,000 Mitsui Bussan Taiwan Electric Power 6,925 305,867 Mitsui Trust Bank Kita Karafuto l,OOO 20,625 Mitsui Trust Bank Hokkaido Coal & Ship 90,000 3,500,000 Syndicate of Life Insurance firms Hokkaido Coal & Ship 10,000 700,000 Mitsui Life Insurance 198,840 8,796,262 Total 345,840 20,997,562 Source : Hiroshi Matsumoto, op. cit., p. 245. Note: this syndicate was consisted of Showa, Aikoku Chiyoda Yasuda, Teikoku, and Dai-ichi Life Insurance Companies.

'6 The following chrono]ogical facts in this section depend upon Matsumoto, op. cit., pp. 242-259.

7T Mitsui Trust Co., Ltd. and Mitsui Life Insurance Co Ltd, were established as semi-direct subsidiaries in 1924 and 1927 respectively. In order to mobilize capital much more flexibly, Mitsui Gomei had estat~ lished these financial hrms in addition to the Bank, 1985] THE EMJ3RCENCE OF THE PROTOTYPE OF ENTERPRISE GROUP CAPITALISM, THE CASE OF MITSUI 99 is, Mitsui Gomei had to change its raison d'etre to cope with the new environment. As Table 16 indicates Mitsui sold at this time ~ll.8 million worth of Oji Paper's stock, ~~4.6 million worth of Hokkaido Coal and Shipping's stocks and ~2.8 million of Onoda Cement's stocks. These sales totaled about ~i~20 million. The reason why Mitsui Gomei sold so much of its Oji Paper Company stock was that Mitsui was trying to avoid being invohed in the social indictment of the unprecedented paper trust. In 1933 Oji Paper Company, the largest paper company in Japan, marged with the second and third largest companies, Fuji and Karafuto. This merger also contributed to the anti-zaibatsu movement. It must be noticed, though, that about ~5.9 million (28.1~) worth of these sales were made to Mitsui's subsidiaries. In addition to the interlocking directorate, then, the interlocking shareholdings also appeared in Mitsui (see Table 16). These two important characteristics of the Japanese enterprise groups (kigy5 shadan) emerged at this time in Mitsui.

(2 } The Emergence of Interlocking Shareholding (a) The Expansion of the Aggressive War and the Increase in Capital Demands78: From 1931 Japan's aggression towards Manchuria expanded and developed into a full scale war between China and Japan in 1937. This aggressive war brought special war demands to the Japanese industrial world. Mitsui's subsidiaries and affiliates, which had been frustrated

TABLE 1 7. TOTAL INVESTMENT OF MITSUl GOMEI IN THE 1 930s (flO Thousand)

Firms in Afiiliate Manchuria Mitsui Mitsui firms Bussan Others Total ~ & China Mining ~ ~ ~

193lsh-1937fh 1,233 25.2 405 8.3 1,900 38.8 1,246 25.4 114 2.3 4,898 100.0 1937sh-1940fb l,506 16,0 575 6.1 6,065 64.3 997 10.6 284 3.0 9,427 100.0 Total 2,739 19.1 980 6.8 7965 55 6 2243 15.7 398 2.8 14,325 1000 Source: Hiroshi Matsumoto, op. cit., p. 257. Notes: (!) th-the frst half of the fisical year. sh-the second half of the fisical year. C Affiliates frms: Shibaura Manufacturing Co., Tokyo Electric Co. Tokyo Shibaura Electric Co., Oji Paper Co., Hokhaido Coal & Shipping Co., Dai Nippon Celluloid Co., Kanegafuchi Boseki Co., Nihon Seikosho Co, , Denkikagaku Co. @ Firms in Manchuria & China : Manshu Gosei Nenryo Co., Manshu, Takushoku, Manshu Airline, Hokushi Kaihatsu, Chushi Shinko, Chosen Ringyo Kaihatsu C Others : Tokyo Kaijo Kasai, Tokyo Kosoku Tetsudo, Nippon Aluminum, Kanebo Jitsugyo, Toshin Storing, Teikoku Nenryo Kogyo R Rounded off figures under Yl0.000.

78 The following chronological facts also depend on Matsumoto, op. cit., pp. 262-75. lOO HrroTSUBASHI JOURNAL OF COMMERCE AND MANAGEMENT [December

TABLE 1 8. SALES OF MITSUI S

Sales Amount of Affliates' Stocks Tosh in Total Amount Sold to Direct Sub. Storehouse (f) (Stock) (f) (Stock) (f) (Stock) I 1933-1934 20,997,562 345,840 5,945,292 99,425 II 1936-1936 22,269,592 302,04D 12,665,492 198,676 lll 1937-1938 14,678,950 178,750 8,859,100 l08,750 9,990,000 123,400 IV 1938-1939 5,744,823 93,363 2,688,698 44, 1 67 V 1939-1940 63,690,927 919,993 30,158,582 45 1 ,O 1 8 9,990,000 123,400 (47.4~) (49.0~) Source: Hiroshi Matsumoto, op. cit., pp. 26~265.

TABLE 1 9. EXPENSE STRUCTURE

Personnel Tran s- Communi- Consumer Miscel- Interest Expense Taxes portation cation Expense laneous Donations Expense 1933 1,381,564 1,384,315 14 719 1 5,150 32,621 1,240,974 83,852 1 ,494,344 2,796,239 10,321 14,528 32,999 1,633,788 43,947 1934 1,957,566 4,768,206 9,072 14,122 35,754 1,345,771 38,570 1,457,864 2,039,422 32,180 15,049 38,337 763,784 4,010,934 33,350 1935 1 ,394,670 2,039,472 12,688 1 6,624 42,669 674,669 795,316 32,062 1 ,494, 578 1 ,823 ,050 34,03 1 1 6, 1 56 42,942 671,602 626,01 8 25,689 1936 1,251,004 1,880,395 12,951 13,067 43,989 532,882 511,710 24,980 1,910,546 1,937,223 2,896 14,319 46,936 752,521 646,917 32,730 1937 995,958 3,720,331 1,835 18,396 41,704 620,050 467,335 37,595 987,069 3,823,586 37,395 15,314 47,060 736,505 428,971 36,315 1938 2,333,638 4,207,536 1,785 17,497 50,304 556,269 597,341 597,341 1,084,785 5,872,807 1,393 19,481 51,136 635,326 262,785 262,785 1939 1,092,861 4,918,573 69 16,847 51,617 581,617 740,536 1,307,878 1,028,546 6,208,313 1,213 16,873 42,6 1 2 561 ,299 1 ,62 1 ,898 1 , 384,473 1940 1,013,561 9,871,894 696 16,548 70,028 585,206 245,355 1,154,689 source: Hiroshi Matsumoto, op. cit. , pp. 230-231. during the Showa Depression, began to expand their activities by the end of the 1930s. Re- sponding to this expansion, Mitsui Gomei, as the holding company, had to procure the capital which the subsidiaries required. Table 17 shows the total investments of Mitsui Gomei in the 1930s. In the beginning, Mitsui Gomei resumed payment of the rest of the increased capital of Mitsui Mining which had ceased in 1920. From 1934 to 1938, Mitsui Gomei paid ~~30 million to Mining. Soon after this payment Mitsui Mining decided to increase its capital again, from ~~IOO million to ~i~200 million, in order to further expand its capacity to meet the war demands. Mitsui Gomei had to pay about ~~49,6 million to Mining by 1940. Mitsui Bussan also decided to increase its capital from ~IOO mililon to ~~150 million in 1937. By 1940, Gomei had paid about ~~22.4 million. As Table 17 indicated, after 1937 when the war became full scale, Mitsui Gomei increased its level of investments to twice 1985] THE EMERGENCE OF THE PROTOTYPE or ENTERPRISE GRoul? CAPrrALISM, THE CASE OF MrrsUI 101

STOCKHOLDlNGS (1 933-1 940)

Nitto Mitsui Takushoku Mining Total (f) (Stock) (f) (Stock) (f) (Stock) ro,997,562 345,840 22,269,592 3 02,040 891,000 19,800 25,559,950 321,950 5,744,823 93,363 27,720,400 649,2co 27,720,400 649,260 891,00019,800 27,720,400 649,260 102,292,327 1 ,712,453

OF MITSUI GOMEI (1933-1940) Agri Deprecia-Real Deprecia-De precia- Stock- Estate tion tion Others Total ExpenseBusinessExpense (2)tion losses 284,669 276,367(1) 25 1 (3),471 320,077 12,9072,619 5,300,313 1,314 469 195 253 327 315 023 300,485 2,035,803 (1)754,000 10,155,323 2,159 454,572 267,377 253,135 282,649 1 19,809 1 ,748,910 (2)900,000 12,197,680 631,412 305,040 272,633 298,713 308,339 101,0363,675 10,311,778 476,989 290,ao9 243,165 255,360 40,695 1 ,150,118 (3)112, 139 7,577,054 698,229 289,089 247,137 232,539 148,5216,327 6,355,917 461,636 247,983 239,966 218,407 2,888,288 89,000 6,815 8,423,085 - 358,265 207,402 270,409 1 ,250 (4)200,548 6,381,969 50,836 390,784 488,375 5,737 10,000 287 6,848,330 48,514 343,130 482,143 4,603 6,990,610 50,265 579,533 502,960 4,93125,250 9,498,480 58,861 415,641 522,477 4,767 10,111,1926,872 60,58265,214 415,179398,627 500,591506,329 3,7794,092 11,845,3659,683,917 76,642 400,530 565,42S 40,400 (5)329,75914,370,739 that of the pre-1937 period. (b) The Collapse of Mitsui Gomei: The increasing capital demands caused by the war, as well as the donations, inevitably tightened the financial condition of Mitsui Gomei. First, Mitsui Gomei began to sell its stocks of affliate companies, such as Oji Paper, Hokkaido Coal and Shipping and Onoda Cement, as seen in Table 1 6. Then Gomei sold its stocks of Shibaura Manufacturing, Dai-Nippon Celluloid (formerly Sakai Celluloid), Denki-Kagaku (Electronics and Chemical) Company and Kanebo Cotton Mills. Table 18 is a list of the stock sales. From this table we see that 47.5~ of the total of these stocks had been purchased by Mitsui's direct subsidiaries (chokkei). In 1938. Gomei began to sell even those stocks it held in one of its direct subsidiaries, Toshin Storing. The revenues from these sales were applied to the rest of the increased capital of Mitsui Bussan and Mitsui Mining. In other words, Mitsui Gomei had concentrated its investments ro2 HITOTSUBASHI JOURNAL OF COMMERCE AND MANACEMENT [December on the big three businesses, the Bank, Bussan and Mining. In 1940, however, Mitsui Gomei sold some of the stocks of Mitsui Mining, worth ~i~27 million. At last, the increasing capital demands made it inevitable for Mitsui Gomei to sell the stocks of its direct subsidiaries. But the sales of these stocks were limited only to direct subsidiaries or executives of the Mitsui busines_s combines. Moreover Mitsui Gomei made these sales on the condition that "the person who buys these stocks cannot sell to anyone and Gomri can repurchase them any time."79 Although it was only a small portion of its holdings, Mitsui Gomei had to give up its monopolized ownership over one of the big three subsidiaries and the basic principle of family domination of the ownership of those firms. In addition, the increasing expenses of Mitsui Gomei, especially the taxation and interest payments, began to collapse the function of Mitsui Gomei as a holding company. Table 19 is a list of expenses from 1933 to 1940. Taxation had increased rapidly during the second half of the 1930s, because the more Mitsui Gomei sold it sticks, the more it was subject to taxation. Therefore. Gomei borrowed money from the Bank to pay in the increased capital of Mining and Bussan. This increased its interest payments. Furthermore, in 1937, because of the war economy, the government increased corporate and income taxes. As a result of these increases, the dividends from Gomei to the Mitsui family would be subject to income tax in addition to the corporate tax on Mitsui Gomei. During the 75th Diet in 1939 further increase in taxation proposals which would begin in April 1940 was passed. This government decision had a serious impact on Mitsui Gomei. A decision was made to investigate the future financial state of Gomei. According to the report of this investigation,80 in order to pay for these new taxes, Mitsui Gomei would have to borrow money or sell its assets in every fiscal year. In addition to this new tax, it revealed that if Mitsui Gomei had to pay the inheritance taxes for the family members, it would go bankrupt. Under the private partnership system, over 50~ of the corporate profits of Mitsui Gomei and more than 70~ of the income of the family members would be subject to taxation, so the Mitsui family would only get 1 5~ of the amount of sales of its assets. In addition, because under the government regulations for the war economy, it was difficult to earn extra dividends for the family.81 Furthermore, the increasing interest payments, as Table 19 indicates, had further tightened the financial condition of Gomei. Thus it became clear that Gomei could no longer function as a private partnership. Therefore, in March of 1940, just before the en- forcement of the new taxes, Mitsui Gomei gave up its holding company system as a private partnership and merged with Mitsui Bussan. Only by merging with Bussan and becoming an incorporated firm could Mitsui avoid a huge liquidation tax on the dissolution of Gomei.82 Thus Mitsui Gomei, having controlled and coordinated the Mitsui business combine as the corporate office and as the holding company since 1909, collapsed in 1 940, (c) The Emergence of Interlocking Shareholding: The increasing capital demands and

7B Matsumoto, op. cit., p. 265. 80 Ibid. , pp. 262-267. 81 Ibid., pp. 268-271. 82 Ibid., pp. 273-275. The Mitsui Bussan merger with Mitsui Gomei was newly incorporated in August of 1940. After the merger, the private association, "Mitsui Somotokata" was established to succeed the function of the central office of Mitsui Zaibatsu. And in March 1944 Mitsui Honsha (the central office) was separated and incorporated. 1985] THE EMERGENCE OF THE PROTOTYPE OF ENTERPRJSE GROUP CAPrrALISM THE CASE OF MITSUI 103 the increasing taxation, as well as the anti-zaibatsu movement, had made it impossible for Mitsui Gomei to concentrate its capital and to maintain its family domination over the capital. In order to supply the capital demands which its subsidiaries required, Mitsui Gomei sold the stocks of its affiliated (hokei) firms to its direct (chokkei) subsidiaries in the beginning. Following this, Gomei sold the stocks of its direct subsidiaries to other subsidiaries and their executives. As a result, one of the important characteristics of Japanese business groups in the postwar period emerged in Mitsui zaibatsu in the 1 930s-that is, interlocking shareholding. Unfortunately we do not have any detailed data on interlocking shareholding, such as how these stocks were interlocked and in what portions they were shared, but at least we can see that the concentrated capital was distributed among the subsidiaries, and these stocks were interlocked in Mitsui's subsidiaries during the prewar period. In other words, vertical control of the capital structure had begun to change into horizontal control.

VI. Concluslon

In this paper, the historical development of the managerial structure, the establishment of Mitsui Gomei as the holding company, the role of Mitsui Bussan as the so~g5-sh6sha, and the emergence of interlocking shareholding in the Mitsui zaibatsu were examined. In the Mitsui zaibatsu, the basic managerial structures of the corporate office and each subsidiary and the capital control system were complete in 1909, when Mitsui Gomei was established. From the Meiji Restoration period until the establishment of Mitsui Gomei, the leading professional managers had been struggling to create a managerial structure, a capital control system, and the separation of family power from the professional management. In this process, in order to control and coordinate the diversified and independent subsidiaries, the interlocking directorate system was developed instead of the central corporate office. In order to control and coordinate the capital resources, Mitsui Gomei as the holding company was established. The interlocking directorate system meant horizontal integration of the subsidiaries including the managerial resources into the business group, and Mitsui Gomei was to control them vertically by the capital resources within the group. We can say that instead of the full development of the corporate ofiice which is com- pletely separated from day-to-day business operation, the interlocking directorate, imple- menting the coordinating function, was developed in the Mitsui zaibatsu. In addition, Mitsui Bussan had developed into the so~gd-sh6sha by fully exploiting its highly educated human resources, its international trading know-how, and facilities while being supported by the government. In this development process, Mitsui Bussan pursued two kinds of economy of scope : one was the economy of scope attained from the various throughputs through the single set of human resources and facilities. The other was the collective scale economies from the various sources. Because of this pursuit of the scope economies, Mitsui Bussan had inevitably participated in all the activities of the industries, upstream and downstream and domestically and internationally. Thus Bussan had played the significant role of industrial organizer. These pursuits of the scope economies and the organizing activities were magnificently important for the rapid industrialization of Japan, which had been a late-developing country in the competitive world market. Further- 104 HITOTSUBASHI JOURNAL OF COMMERCE AND MANAGEMENT

more, Bussan had integrated many companies into the Mitsui business combine through these organizing activities. Onoda Cement was a good example of this integration. In the 1 930s, however, social criticism of the monopolistic behavior of the zaibatsu firms and conflicts with the militarist and progressive bureaucrats stirred up the anti-zaibatsu movement. Accompanying the expansion of the aggressive war in China, the capital demands of Mitsui's subsidiaries increased. These factors as well as increasing taxation made it impossible to maintain the capital concentration and family domination over the capital. In other words, in order for the Mitsui zaibatsu to pursue expanding business opportunities, especially in the costly heavy industries, it had to give up its family domination over the capital and had to mobilize public capital widely. This meant that the Mitsui zaibatsu had to create a way to modestly mobilize public capital and to rationally manage the business group as a whole. This was the interlocking shareholding system, in addjtion to the interlocking directorate. Because of the interlocking directorate and shareholding, the Mitsui zaibatsu could mobilize public capital and make long-term strategies without losing stable control over the group. Mitsui Bussan as the organizer complemented these interlocking systems by controlling and coordinating the activities in many stages of the affiliate firms. Thus the prototype of the enterprise group (kigyd-shadan) had already emerged before World War II.83 My hypothesis is that rationale and usefulness of these systems had been recognized by the Mitsui people through the many business activities before the war. Therefore, as soon as the Anti-Trust Law was relaxed in 1 949, former Mitsui subsidiaries and affliates, which had been dissolved into many small firms, began to form a group again.84 This newly formed the Mitsui group, called kigy5-shtidan was quite different from the family dominated prewar zaibatsu. Instead of vertical and centralized control of the capital, in newly formed kigy5-shadan the interlocking shareholding was further developed into a horizontal and decentralized capital control system. Because of this characteristic, the Japanese enterprise group could focus its long-term strategy on developing the pie as a whole, rather than on short-term oriented strategies primarily concerned with the individual interests of independent stockholders. Of course, these post war process of the group formation must be analysed much more deeply by historians. This will then be my next work. At the last I must admit that this paper has a serious defect though. It did no deal with the role of the bank in the Mitsui zaibatsu. Time and space for this paper prevented my discussion of it. This will be also my next work.

HITOTSUBASHI UNIVERSITY

88 According to S. Yasuoka, "The tradition of Family Business in the Strategic Decision Process and Man- agement Structure of Zaibatsu Buniess; Mitsui, Suntitomo, and Mitsubishi," K. Nakagawa, ed., op. cit., in addition to the Mitsui zaibatsu, in Mitsubishi and Sumitomo the same prototype of the business group emerged during World War II. 8~ K. Shibagaki, Mitsui-Mitsubishi no Hyakunen (The One-Hundred Year History of Mitsui and Mitsu- bishi). Chuo Koron, Tokyo, 1978, pp. 155-175. After the war, Mitsui Honsha was abolished and Bussan was dissolved into about 200 small fiuns. After the reluxation of the Anti-Trust law, however, these firrns formed a large group again soon.