General trading companies and Japan's accelerated economic growth
Monday, 5 November 2007
Hasan Mahmud
IN the history of development, Japan stands as what is commonly called "miracle" because of her accelerated pace of growing literally from the dust of the World War II to the pinnacle of economic world order. With extremely limited natural resources, Japan has come up with the economies of the western developed countries within very short period of time-some 50 years. In 1953, per capita gross domestic product (GDP) in Japan was $133, which has culminated to more than $30,000 in 1993 and $40,000 in 2006. What did make Japan's such acceleration possible?
It can be argued that the whole project of industrial development in Japan depended on different actors in different sectors. As such, Zaibatsu and Keiretsu (large industrial groups) contributed to establishing heavy industries, Sogo Shosha (general trading companies) to developing the demand and supply chain and thus ensuring the flow of production, the government to guiding and proving policy and protection for justice and equal rights of the people. Most discussions conventionally tend to focus either on the industrial groups or the government as the motor of spectacular surge of Japanese economy while leaving aside the role of general trading companies that have been indispensable in the passage. My intention is to detail the role of the general trading company in national economic development, and to show how this holds much potential for the development in Bangladesh economy.
General Trading Company: The role of the general trading companies in Japanese economic and industrial development is unparalleled in history. The primary function of the general trading companies is trading, matching the buyers and sellers of diverse products. The first trading house -- Mitsui Trading Company -- was established in 1876, shortly after Japan opened her doors to the outside world. Its major export item was coal and major import items were cotton and spinning machines. It procured spinning machinery and spinning technology from abroad, and when the domestic supply of raw cotton was exhausted, it also started buying raw cotton from abroad and thus ensured a consistent supply to the manufacturers. It also played an important role in creating demand for cotton by developing weaving industries. Then it bought their textile products and distributed it over the domestic and international market through their distribution channels. It performed these activities in such a highly imaginative manner by organising a myriad of small weavers who sprung up in the early days of the nation's industrialisation.
In 1874, Japanese foreign trade was almost completely handled by the foreign merchants. The Japanese trading companies' share grew to 7.3 per cent of the total amount in 1880 and it grows further up to 18.5 per cent in 1890. However, the share of Japanese trading companies continued to grow at a rapid rate and in 1916 it reached at 56.5 per cent. Their operations were so diversified to include as many as 2000 products.
All the functions they performed can be categorised as follows: first, financial services especially to the small and medium enterprise (SME). They borrowed from the banks that did not risk lending the small producers. In such cases, they acted as the sole guarantors of the loan with minimum risk. For it had knowledge of the market, ability to sale the products and the technological knowledge. Secondly, it collected information of the market, the partners, political systems of the operation areas, the development of new technology, etc., and informed the producers when it deemed necessary. Thirdly, it performed an important function of risk reduction through bulk purchase, maintaining customers' network and risk hedging of exchange, especially in foreign trade.
Fourthly, it coordinated among several farms all through the demand and supply chain. This included from supply of raw materials to the distribution of finished goods. In doing so, it often established plants of production either by themselves or by providing necessary supports to others capable of developing the targeted plants. Fifthly, it provided many auxiliary services to both the producers and sellers including customs and clearing, shipping, warehousing, paper-work, etc. Sixthly, it helped the medium and small producers to reach economy of scale and thus helped reduce costs. Seventhly, it invested a large amount of capital. The higher the capital, the higher the efficiency. Hence all the farms operate with trading companies enjoyed the capital efficiency. Eighthly, one of the factors that enabled trading companies to emerge up to that prominence was its human development services. It provided necessary training to the staffs to become specialists in their respective functions. Ninthly, it continued searching out for new sources of raw materials for industries and market for the products. It also kept looking for new business abroad. Therefore, its role in developing network on the global scale became formidable. Lastly, it developed global network of business relations, hence establishing a corresponding global system of communication. And through this communication, it was able to collect any information regarding new technological innovation or business potentials.
The advantages generated by these services fall into four broad areas: scale, diversity, preferential access to capital and information.
The competitive dynamics and the strategies of the trading company was the search for volume growth and they followed two strategies: one was to maintain, and if possible, to expand its influence over the existing production system and the other was to create new production system. While the first one was required for a trading company to ensure its stipulated share of business, the other seemed necessary for the backward areas where economy as well as business was largely unorganised and required a sound planning for further development.
As the trading company managers constantly sought opportunities for expansion of their business through an expansion of relationships, they approached a number of means. Among those were discovering new sources of supply and demand, developing and arranging for innovative forms of financing, and collecting and providing information to the client's attention and helping them to structure a response.
The function of trading company in developing new product system is the one that attracts attention of the new entrant economies like Bangladesh to the world capitalist system. The pulling together of several farms, negotiating common understandings and arrangements to govern the production system, and establishing the initial flows may contribute significantly to the development of particular industry. This can be elaborated by an analysis of the role of trading company in the development of the poultry industry in Japan.
Like an underdeveloped country today, the traditional method of producing and marketing in Japan had been small-scale and secondary activities of the families. The trading companies -- through their innovative involvement -- enabled this traditional, small-scale work develop as a modern, mass industry. The range of services of the trading companies that made this revolutionary upturn possible included importing technology and breeding stock necessary for mass production; arranging capital for building infrastructures i. e. poultry houses, processing plants, etc; importing grains and other ingredients of poultry feeds; managing the production and processing of birds; setting the supply route for the distribution of chicken meat, eggs and the by-products; and managing the delivery.
The trading companies participated in this production system mainly in two ways: by owning some units wholly or partly, and by acting as a commissioned agent on behalf of the farms. The trading companies' main earning source, however, was the commissions based on the volume of services and goods. They could also earn ownership profits at certain stages. One of the trading companies -- Mitsubishi -- succeeded even to expand its operation by joint venture with KFC to enter into global business.
As an organisation, a trading company is essentially a linkage mechanism between the buyers and sellers in a multi-stage system. And it also has continuously to face two challenges -- to maintain its achieved linkages and to strive to expand beyond the sustained level by creating further new linkages. However, all such linkages are basically long-term relations that are governed by mutual commitment and trust rather than contract.
The basic characteristics of such organisational network can be summarised as follows:
i. Commitment must be there among the administrative managers and others so that the managers believe that others will try to reciprocate the managers' favour.
ii. Credibility must adhere to others so that the managers will know that others are capable to reciprocate, and to the managers so that others will be sure of the fact that the venture they are in is a worthy one.
iii. There must be a mutual understanding of the nature and potential of the favour being performed.
iv. There must be agreed standard of fairness in assessing the obligation so that both parties can agree on what constitutes full reciprocation in the contingent future.
In a nutshell, a trading company consists in a network of informal relationships among individuals. It requires strong commitment and obligation in the part of the individuals involved. As long as a trading company can inculcate these virtues among its employees, it can expect to run successfully.
Japanese Distribution System: One of the characteristics that contributed competitive advantage to Japanese economy is its distribution system. A dense network of retail outlets, a multi-layered and multi-stage whole-selling set up, interdependence between the individual links in the distribution network and provisions of service are the most noticeable features of Japanese economy. A formidable traditional and cultural influence on Japanese marketing system is easily observed the salient features of which are as follows:
i. The Japanese consumer likes to be able to choose from among unlimited number of types of shops offering wide-ranging, personal service in the vicinity of his/her residence.
ii. The personal contact while shopping in the neighbourhood is crucial for Japanese housewives since it provides an opportunity to get together.
iii. The retailers provide service to the customers in the form of comprehensive personal advice, guarantee of efficient maintenance, repair service, etc. and the sales persons are exquisitely polite.
iv. The government policy seems to have been favouring the small retailers since this provides earning livelihood to considerably large number of people.
One of the essential characteristics of the retailing business is that majority of it is a family business. In 1982 nearly 58 per cent of total retail shops were purely family endeavours, operated by not more than three persons at the most.
Within the distribution channel, the wholesalers general trading companies- are at the top and at the bottom are the retailers. The retailers, with there extremely limited capital, space and other resources heavily depend upon the whole sellers. The trading companies bear much of the risks associated in the marketing of a product passed to them by the retailers and sometimes also by the small manufacturers. They reduce the retailers' risks in the following ways:
a. They receive payments of goods after the retailers' selling.
b. They take the unsold goods back without any claim,
c. They share the responsibility of storage by ensuring ready supply to the retailers.
d. They provide financial assistance to the retailers for necessary investments and services. They provide credit to the retailers for unusually long period of time.
e. They provide sales back-up, especially in launching new products, even they assist them by sending their sales personnel working at the retail shops.
As a consequence, it is usually observed that most of the retailers receive products directly from the whole-sellers. As in 1982, about 86 per cent of all good purchased by the retail trade came through the wholesalers, 11 per cent from the manufacturers and only 0.5 per cent came from direct import.
Social Relations between Business Partners: the social bond between Japanese business partners in Japan plays absolutely crucial roles traditionally. Here the personal and emotional ties are considered more important than the abstract laws, even more important as a long-term relationship like marriage. These personal relationships between the business partners take expressions in the form of --
i. Regular visit,
ii. Providing assistance, even personal problems,
iii. Frequent exchange of gifts,
iv. Refusal to put pressure on a lower stage in the change.
The payment by the retailers to the trading companies, in most cases takes 90 to 150 days by a bill of exchange. Such type of relation requires a high degree of trust, encourages the traders to involve in business with the same tried and trusted partners.
All the features of Japanese economy described above reveal two essential points to be noted. One is that Japan has developed a sound economic base over nearly a century through an articulate arrangement of its supply and demand chain. The other is, in doing so, socio-cultural factors played an important role along with the economic factors. Traditional human relations in Japan actually contributed a lot to the creation of their own systems of production, distribution, trading and above all, the strong fabricated structure of Japanese enterprises. These influenced Japanese ways of using western technology and thus stimulated the development of innovative systems of production, distribution, trading, etc. Therefore, it can be argued that Japan could manage to get the most benefit from their connections with the west in terms of modern technology and ideas.
Japan had established close relationships with western industrial countries, but did not fall victim to the unabated exploitation of the international financial capital that seems to have been operating over other developing countries by opening up their market in the name of free market economy. Japan had succeeded in developing what may be called a trap for the western influence, in that Japan could regulate their influence and even entry into its domestic economy. It invited the foreigners who had improved knowledge and technology from which Japan could gain while it prevented those who had nothing but to take something away. Few aspects of Japanese economy can highlight the issue:
a. The foreign trading companies could not have direct entry to Japan's domestic market, for the tightness of the social relations cemented by social and cultural traditions made it quite impossible for foreigners to enter without collaborations with Japanese trading companies who, in turn, claimed much of the profit margin. Thus, Japan gained leverage on the foreigner traders and ensured its own share.
b. The Japanese trading companies got access to modern technology and foreign market through the collaboration with foreign companies and thus had become able to go beyond the national boundary. In fact, trading companies had played a major role in Japan's economic development through their international connections.
c. Japan borrowed technology from the west, but in practice, it always showed selectivity so that the technology could be accommodated into the local context. Thus, for instance, Toyota invented the just-in-time and zero-defect production system which enabled it, with its very limited resources, to compete with the world leaders of mass production and won over in a short period of time.
However, such a strategy of selective approach is not explicitly possible in this age of globalisation when the market is assumed to remain free from government control. Yet Japan has successfully managed it by its informal mechanism-social and cultural factors. The government policy of Japan seems to have been liberal, but its social structure and cultural tradition have contributed to ensuring the maintenance of its exclusive existence.
The writer is a Monbusho Scholar in the Global Studies Programme, Sophia University, Japan. He may be reached at '[email protected]'
IN the history of development, Japan stands as what is commonly called "miracle" because of her accelerated pace of growing literally from the dust of the World War II to the pinnacle of economic world order. With extremely limited natural resources, Japan has come up with the economies of the western developed countries within very short period of time-some 50 years. In 1953, per capita gross domestic product (GDP) in Japan was $133, which has culminated to more than $30,000 in 1993 and $40,000 in 2006. What did make Japan's such acceleration possible?
It can be argued that the whole project of industrial development in Japan depended on different actors in different sectors. As such, Zaibatsu and Keiretsu (large industrial groups) contributed to establishing heavy industries, Sogo Shosha (general trading companies) to developing the demand and supply chain and thus ensuring the flow of production, the government to guiding and proving policy and protection for justice and equal rights of the people. Most discussions conventionally tend to focus either on the industrial groups or the government as the motor of spectacular surge of Japanese economy while leaving aside the role of general trading companies that have been indispensable in the passage. My intention is to detail the role of the general trading company in national economic development, and to show how this holds much potential for the development in Bangladesh economy.
General Trading Company: The role of the general trading companies in Japanese economic and industrial development is unparalleled in history. The primary function of the general trading companies is trading, matching the buyers and sellers of diverse products. The first trading house -- Mitsui Trading Company -- was established in 1876, shortly after Japan opened her doors to the outside world. Its major export item was coal and major import items were cotton and spinning machines. It procured spinning machinery and spinning technology from abroad, and when the domestic supply of raw cotton was exhausted, it also started buying raw cotton from abroad and thus ensured a consistent supply to the manufacturers. It also played an important role in creating demand for cotton by developing weaving industries. Then it bought their textile products and distributed it over the domestic and international market through their distribution channels. It performed these activities in such a highly imaginative manner by organising a myriad of small weavers who sprung up in the early days of the nation's industrialisation.
In 1874, Japanese foreign trade was almost completely handled by the foreign merchants. The Japanese trading companies' share grew to 7.3 per cent of the total amount in 1880 and it grows further up to 18.5 per cent in 1890. However, the share of Japanese trading companies continued to grow at a rapid rate and in 1916 it reached at 56.5 per cent. Their operations were so diversified to include as many as 2000 products.
All the functions they performed can be categorised as follows: first, financial services especially to the small and medium enterprise (SME). They borrowed from the banks that did not risk lending the small producers. In such cases, they acted as the sole guarantors of the loan with minimum risk. For it had knowledge of the market, ability to sale the products and the technological knowledge. Secondly, it collected information of the market, the partners, political systems of the operation areas, the development of new technology, etc., and informed the producers when it deemed necessary. Thirdly, it performed an important function of risk reduction through bulk purchase, maintaining customers' network and risk hedging of exchange, especially in foreign trade.
Fourthly, it coordinated among several farms all through the demand and supply chain. This included from supply of raw materials to the distribution of finished goods. In doing so, it often established plants of production either by themselves or by providing necessary supports to others capable of developing the targeted plants. Fifthly, it provided many auxiliary services to both the producers and sellers including customs and clearing, shipping, warehousing, paper-work, etc. Sixthly, it helped the medium and small producers to reach economy of scale and thus helped reduce costs. Seventhly, it invested a large amount of capital. The higher the capital, the higher the efficiency. Hence all the farms operate with trading companies enjoyed the capital efficiency. Eighthly, one of the factors that enabled trading companies to emerge up to that prominence was its human development services. It provided necessary training to the staffs to become specialists in their respective functions. Ninthly, it continued searching out for new sources of raw materials for industries and market for the products. It also kept looking for new business abroad. Therefore, its role in developing network on the global scale became formidable. Lastly, it developed global network of business relations, hence establishing a corresponding global system of communication. And through this communication, it was able to collect any information regarding new technological innovation or business potentials.
The advantages generated by these services fall into four broad areas: scale, diversity, preferential access to capital and information.
The competitive dynamics and the strategies of the trading company was the search for volume growth and they followed two strategies: one was to maintain, and if possible, to expand its influence over the existing production system and the other was to create new production system. While the first one was required for a trading company to ensure its stipulated share of business, the other seemed necessary for the backward areas where economy as well as business was largely unorganised and required a sound planning for further development.
As the trading company managers constantly sought opportunities for expansion of their business through an expansion of relationships, they approached a number of means. Among those were discovering new sources of supply and demand, developing and arranging for innovative forms of financing, and collecting and providing information to the client's attention and helping them to structure a response.
The function of trading company in developing new product system is the one that attracts attention of the new entrant economies like Bangladesh to the world capitalist system. The pulling together of several farms, negotiating common understandings and arrangements to govern the production system, and establishing the initial flows may contribute significantly to the development of particular industry. This can be elaborated by an analysis of the role of trading company in the development of the poultry industry in Japan.
Like an underdeveloped country today, the traditional method of producing and marketing in Japan had been small-scale and secondary activities of the families. The trading companies -- through their innovative involvement -- enabled this traditional, small-scale work develop as a modern, mass industry. The range of services of the trading companies that made this revolutionary upturn possible included importing technology and breeding stock necessary for mass production; arranging capital for building infrastructures i. e. poultry houses, processing plants, etc; importing grains and other ingredients of poultry feeds; managing the production and processing of birds; setting the supply route for the distribution of chicken meat, eggs and the by-products; and managing the delivery.
The trading companies participated in this production system mainly in two ways: by owning some units wholly or partly, and by acting as a commissioned agent on behalf of the farms. The trading companies' main earning source, however, was the commissions based on the volume of services and goods. They could also earn ownership profits at certain stages. One of the trading companies -- Mitsubishi -- succeeded even to expand its operation by joint venture with KFC to enter into global business.
As an organisation, a trading company is essentially a linkage mechanism between the buyers and sellers in a multi-stage system. And it also has continuously to face two challenges -- to maintain its achieved linkages and to strive to expand beyond the sustained level by creating further new linkages. However, all such linkages are basically long-term relations that are governed by mutual commitment and trust rather than contract.
The basic characteristics of such organisational network can be summarised as follows:
i. Commitment must be there among the administrative managers and others so that the managers believe that others will try to reciprocate the managers' favour.
ii. Credibility must adhere to others so that the managers will know that others are capable to reciprocate, and to the managers so that others will be sure of the fact that the venture they are in is a worthy one.
iii. There must be a mutual understanding of the nature and potential of the favour being performed.
iv. There must be agreed standard of fairness in assessing the obligation so that both parties can agree on what constitutes full reciprocation in the contingent future.
In a nutshell, a trading company consists in a network of informal relationships among individuals. It requires strong commitment and obligation in the part of the individuals involved. As long as a trading company can inculcate these virtues among its employees, it can expect to run successfully.
Japanese Distribution System: One of the characteristics that contributed competitive advantage to Japanese economy is its distribution system. A dense network of retail outlets, a multi-layered and multi-stage whole-selling set up, interdependence between the individual links in the distribution network and provisions of service are the most noticeable features of Japanese economy. A formidable traditional and cultural influence on Japanese marketing system is easily observed the salient features of which are as follows:
i. The Japanese consumer likes to be able to choose from among unlimited number of types of shops offering wide-ranging, personal service in the vicinity of his/her residence.
ii. The personal contact while shopping in the neighbourhood is crucial for Japanese housewives since it provides an opportunity to get together.
iii. The retailers provide service to the customers in the form of comprehensive personal advice, guarantee of efficient maintenance, repair service, etc. and the sales persons are exquisitely polite.
iv. The government policy seems to have been favouring the small retailers since this provides earning livelihood to considerably large number of people.
One of the essential characteristics of the retailing business is that majority of it is a family business. In 1982 nearly 58 per cent of total retail shops were purely family endeavours, operated by not more than three persons at the most.
Within the distribution channel, the wholesalers general trading companies- are at the top and at the bottom are the retailers. The retailers, with there extremely limited capital, space and other resources heavily depend upon the whole sellers. The trading companies bear much of the risks associated in the marketing of a product passed to them by the retailers and sometimes also by the small manufacturers. They reduce the retailers' risks in the following ways:
a. They receive payments of goods after the retailers' selling.
b. They take the unsold goods back without any claim,
c. They share the responsibility of storage by ensuring ready supply to the retailers.
d. They provide financial assistance to the retailers for necessary investments and services. They provide credit to the retailers for unusually long period of time.
e. They provide sales back-up, especially in launching new products, even they assist them by sending their sales personnel working at the retail shops.
As a consequence, it is usually observed that most of the retailers receive products directly from the whole-sellers. As in 1982, about 86 per cent of all good purchased by the retail trade came through the wholesalers, 11 per cent from the manufacturers and only 0.5 per cent came from direct import.
Social Relations between Business Partners: the social bond between Japanese business partners in Japan plays absolutely crucial roles traditionally. Here the personal and emotional ties are considered more important than the abstract laws, even more important as a long-term relationship like marriage. These personal relationships between the business partners take expressions in the form of --
i. Regular visit,
ii. Providing assistance, even personal problems,
iii. Frequent exchange of gifts,
iv. Refusal to put pressure on a lower stage in the change.
The payment by the retailers to the trading companies, in most cases takes 90 to 150 days by a bill of exchange. Such type of relation requires a high degree of trust, encourages the traders to involve in business with the same tried and trusted partners.
All the features of Japanese economy described above reveal two essential points to be noted. One is that Japan has developed a sound economic base over nearly a century through an articulate arrangement of its supply and demand chain. The other is, in doing so, socio-cultural factors played an important role along with the economic factors. Traditional human relations in Japan actually contributed a lot to the creation of their own systems of production, distribution, trading and above all, the strong fabricated structure of Japanese enterprises. These influenced Japanese ways of using western technology and thus stimulated the development of innovative systems of production, distribution, trading, etc. Therefore, it can be argued that Japan could manage to get the most benefit from their connections with the west in terms of modern technology and ideas.
Japan had established close relationships with western industrial countries, but did not fall victim to the unabated exploitation of the international financial capital that seems to have been operating over other developing countries by opening up their market in the name of free market economy. Japan had succeeded in developing what may be called a trap for the western influence, in that Japan could regulate their influence and even entry into its domestic economy. It invited the foreigners who had improved knowledge and technology from which Japan could gain while it prevented those who had nothing but to take something away. Few aspects of Japanese economy can highlight the issue:
a. The foreign trading companies could not have direct entry to Japan's domestic market, for the tightness of the social relations cemented by social and cultural traditions made it quite impossible for foreigners to enter without collaborations with Japanese trading companies who, in turn, claimed much of the profit margin. Thus, Japan gained leverage on the foreigner traders and ensured its own share.
b. The Japanese trading companies got access to modern technology and foreign market through the collaboration with foreign companies and thus had become able to go beyond the national boundary. In fact, trading companies had played a major role in Japan's economic development through their international connections.
c. Japan borrowed technology from the west, but in practice, it always showed selectivity so that the technology could be accommodated into the local context. Thus, for instance, Toyota invented the just-in-time and zero-defect production system which enabled it, with its very limited resources, to compete with the world leaders of mass production and won over in a short period of time.
However, such a strategy of selective approach is not explicitly possible in this age of globalisation when the market is assumed to remain free from government control. Yet Japan has successfully managed it by its informal mechanism-social and cultural factors. The government policy of Japan seems to have been liberal, but its social structure and cultural tradition have contributed to ensuring the maintenance of its exclusive existence.
The writer is a Monbusho Scholar in the Global Studies Programme, Sophia University, Japan. He may be reached at '[email protected]'