Institutional Change and its Economic Consequence in Japan: The bright and dark sides of hybridization

Central to recent changes in corporate Japan is the dominance of hybrid firms which combine market-based principles and relational governance in different economic domains such as finance and organizational architectures (employment system). Since hybridization is opposed to the institutional complementarity that is at the core of the varieties of capitalism argument, the natural questions are whether it is transitional to the Anglo-Saxon model or if it has stabilized in a new equilibrium, and whether it is productive or counterproductive. The purpose of this paper is to address these questions. First, by examining several key variables concerning corporate governance, the paper tentatively concludes that the hybrid pattern has been more dominant. Second, this paper illustrates the impact of changing governance arrangements on corporate behavior such as research and development (R&D) investment, mergers and acquisitions (M&A), business reconstruction decisions, distribution policy, and performance. Overall, the hybrid pattern of corporate governance has actually affected corporate behavior, and by doing so, had productive effects among Japanese firms. Lastly, the paper considers the potential costs of hybridization. Hybridization, almost by definition, implies declining system effects of former complementarities (e.g. main bank system and long-term employment), but what we are concerned with is whether the hybrid pattern of institutional change is associated with additional costs that diminish the competitiveness of Japanese firms. The paper raises some conjectures on this issue.