Selection and Imitation in Institutional Evolution: Analysis of Institutional Change in Japan, 1960-1999

In this paper I applied the ideas of evolutionary biology and evolutionary ecology to the empirical analysis on the development of the institutions in postwar Japan. The basic question is how selection and imitation have worked in the evolution of the economic institutions in Japan. I focused on four factors of fitness, namely (i)growth rate, (ii)exit (death) rates, (iii)entry (birth) rate, and (iv)rate of the change of attribute. (i) and (ii) represent selection, while (iii) and (iv) represent imitation in the process of evolution. Constructing a data set on the population of the industrial firms, I examined how the composition of the population has changed over time with respect to institutional attributes, specifically main bank relationship, and to what extent the fitness factor (i)-(iv) contributed to that change. The major findings are as follows. First, in case we measure the pervasiveness of main bank relationship in terms of firm number, main bank system expanded until the 1970s and after that it contracted, while the share partially recovered in the 1990s. The fitness factors which have mainly contributed to the change of the composition of population are (iv)conversion rate and (iii) entry rate. While entry rate has continued to give a substantial negative effect of the share of the firms with main bank relationship, the change of the sign of the conversion effect between the 1970s and 1980s brought about the turning point of the main bank system from expanding phase to contracting phase. Second, in case we measure the pervasiveness of main bank relationship in terms of sales, main bank system started to contract earlier, in the 1970s. Growth rate as well as entry rate and conversion rate contributed to the change of the population. While the factor of growth rate had a positive effect in the 1960s, after that its effect has been negative, which brought about earlier decline of main bank system and its continuing decline in the 1990s. Next, I econometrically analyzed the effect of exit and growth rate factors on the evolution of main bank system, using sample selection model. I found that main bank relationship was basically neutral with respect to exit and growth until the 1980s, and that it had a negative effect on survival in the 1990s. Finally, I examined the institutional complementarity between main bank relationship and long term employment to find that in the 1960s those two institutions cooperatively worked on the firm growth. In this sense, main bank system and long term relationship were complementary and they co-evolved in this period. After that the co-evolution is not observed.