The Coasian culture that is Japan

by on December 1, 2012 at 4:17 pm in Economics | Permalink

A forthcoming paper* in the Journal of Financial Economics finds not only that inherited family control is still common in Japanese business, but that family firms are “puzzlingly competitive”, outperforming otherwise similar professionally managed companies. “These results are highly robust and…suggest family control ‘causes’ good performance rather than the converse,” say the authors.

Japan boasts some of the world’s oldest family-run businesses, and many family firms—Suzuki, Matsui Securities, Suntory—break the rule of steady dynastic decline. So how do Japanese firms do it? The answer, says the paper, is adoption.

Last year more than 81,000 people were adopted in Japan, one of the highest rates in the world. But, amazingly, over 90% of those adopted were adults. The practice of adopting men in their 20s and 30s is used to rescue biologically ill-fated families and ensure a business heir, says Vikas Mehrotra, of the University of Alberta, the paper’s lead author. “We haven’t come across this custom in any other part of the world.” Though the phenomenon has been previously documented, its impact on a company’s competitiveness has not.

The story is here and for the pointer I thank Leonardo Monasterio and Claudio Shikida.  There are various copies of the paper here.

Bob Knaus December 1, 2012 at 4:53 pm

It worked well for the Romans, as any reader of Gibbon should recall:
http://en.wikipedia.org/wiki/Adoption_in_ancient_Rome

Adam Calhoun December 1, 2012 at 6:48 pm

Damn, and here I thought that I’d be so clever by pointing that out. Anyway, it’s worth emphasizing that not only was Octavius adopted (re: michael below), but the Five Good Emperors were also all adopted.

Rahul December 1, 2012 at 11:53 pm

The Tata-Group conglomerate in India is a ~150 year old Parsi (Zorastrian) family operated company with a similar history of succession through adoption.

One difference is that adoption has largely been within branches of the family tree.

Michael Tinkler December 1, 2012 at 4:58 pm

Exactly. Octavius was Julius Caesar’s GREAT-NEPHEW, grandson of J.C.’s only sister, and had hardly met his adoptive father before the assassination. Roman adoption frequently went through maternal connections like that.

asdf December 1, 2012 at 5:07 pm

Don’t know if its the same study or another, but they found that family heirs do very well in about 80% of cases. It’s the 20% of cases where the kid is a fuck up that destroy family businesses. The Japanese simply adopt the 20% of the time the kid if a fuck up.

zxcv December 1, 2012 at 8:43 pm

“The Japanese simply adopt the 20% of the time the kid is a fuck up”
……except in politics

Ted Craig December 1, 2012 at 5:47 pm

Ford Motor Co. is the strongest performing domestic brand in California, ranking third behind Toyota and Honda.

John Thacker December 1, 2012 at 6:02 pm

Some of these “adoptions” might be a translation of another common thing in these families, having a man marry into the family and change his last name to that of the wife.

Japan requires that husband and wife have the same last name, but when the wife comes from a prominent family the husband will change his name and be adopted into the new family.

Fazal Majid December 1, 2012 at 6:13 pm

There are religious implications to adoption. The adopted transfers ancestor worship to his new family, which is why it was traditionally considered a desperate measure.

Kerub December 1, 2012 at 6:13 pm

adoption=hiring
heirs=managers

C December 1, 2012 at 6:15 pm

That’s not “causal” as is represented in the original article, but just a sample selection…

Chris D December 1, 2012 at 6:18 pm

FWIW, this is common in lineages like schools of tea ceremony and martial arts. A dozen generations is an unlikely period to constantly be having children competent or interested enough to carry the thing forward successfully.

byomtov December 1, 2012 at 6:24 pm

Very interesting item.

Thanks.

FredR December 1, 2012 at 6:34 pm

Alan Macfarlane, in “Savage Wars of Peace”, writes that adult adoption has been fairly common in Japan for a long time.

near kyoto December 1, 2012 at 7:31 pm

This is a coincidence.

A week ago I was talking to a woman in Japan who is married to a president of a mid-sized company about her recently adopted 35 year old daughter. I’d never heard of that. The Economist article says that it is men who are adopted since a male face is needed at the top, but in this case it will be a daughter, who is apparently highly skilled at the company.

The data stops at 2000, so it looks like times are changing with the adoption of an adult female.

jc December 1, 2012 at 8:21 pm

My first thought upon reading this post… Steve Jobs: “Tim, I’ve been thinking about adopting you.”

Ed December 1, 2012 at 8:28 pm

In addition to the Roman example, this practice was at the center of George Bernard Shaw’s play “Major Barbara” .

(http://en.wikipedia.org/wiki/Major_Barbara#Plot)

Steve Sailer December 1, 2012 at 10:41 pm

That’s what the Romans did. It’s the plot device of “Gladiator:” Emperor Marcus Aurelius is going to adopt Gen. Maximus, but then his evil biological son Commodus poisons him.

Steve Sailer December 1, 2012 at 10:45 pm

It’s not unknown among Europeans for the son-in-law to take on his father-in-law’s surname, either as a hyphenated double surname or solely. For example, that recently caught German art forger dropped his surname and took his wife’s surname because she came from a more respectable family and his name was getting a little soiled.

Rahul December 2, 2012 at 4:01 am

Does an adult adoption carry the same legal rights as a childhood adoption? I suspect there might be differences, but does anyone know more?

Cliff December 2, 2012 at 12:18 am

Why do they have to adopt? Why not just leave the company to the person in your will? Do they really treat them like family and start having them for the holidays or something?

Brian Donohue December 2, 2012 at 9:31 am

Some tax/succession thing? Don’t see how this differs from a protege concept.

near kyoto December 2, 2012 at 12:55 am

One reason is that the president retires, not dies, before handing the company over to the adoptee.
I assume this works for only privately held companies.

So Much for Subtlety December 2, 2012 at 2:36 am

This practice is not unknown in the West either. Germany’s traditional weapon maker was the Krupp conglomerate. Frederich Krupp committed suicide in 1902 leaving 16-year-old Bertha in charge. The Kaiser personally led the search for a husband and found Gustav Georg Friedrich Maria von Bohlen und Halbach. He was told to adopt the Krupp name and became Gustav Georg Friedrich Maria Krupp von Bohlen und Halbach. Which I am sure was an improvement.

TGGP December 6, 2012 at 7:38 pm

Now I wonder if that was a source for “Halbech” in Alpha Protocol. I had assumed it was just “Halliburton” (admittedly not a defense contractor), which still seems more likely.

Perros y Gatos December 2, 2012 at 6:39 am

Japanese culture and their way of thinking makes them strong and submissive workers.

dearieme December 2, 2012 at 9:00 am

Another way is to skip a generation. The father of a friend of mine was hauled out of school to be given an accelerated training and then put in charge of his maternal grandfather’s company. It was not the career he had planned for himself. I don’t suppose that his mother’s generation of the family was over the moon about it either.

billb December 2, 2012 at 2:41 pm

Do we care to guess how often the adoptee is an actual bastard child of the father?

pre-Coasian intellect December 2, 2012 at 9:27 pm

Could someone please explain why this is Coasian? I’m trying to think of transaction costs, property rights, and externalities, and I’m struggling to understand how these concepts apply to this situation.

Thanks for the clarification.

Brian Donohue December 2, 2012 at 10:30 pm

internalizing externalities?

pre-Coasian intellect December 2, 2012 at 11:02 pm

Hi Brian,

– What is the externality?
– How is it being internalized?

Thanks.

Brian Donohue December 2, 2012 at 11:26 pm

um…I’m not an economist, just a guy, but…

I’m thinking the costs and risks associated with the transfer/succession of the business, which are now internalized within the family structure.

Brian Donohue December 2, 2012 at 11:31 pm

or maybe it’s the idea that if an optimal solution can be found via tradable property rights, including familial inheritance, it will be, regardless of starting position.

Or maybe I’m the shephard, and you’re the tyranny of evil men.

/not an economist

Theresa Klein December 2, 2012 at 10:15 pm

Adoption of this sort was also very common in ancient Rome, and seems to have been effectively used for many of the same purposes.
For instance, Ceasar Augustus was adopted by Julius Ceasar, which is what enabled him to succeed Julius and become Emperor.
http://en.wikipedia.org/wiki/Adoption_in_ancient_Rome

freethinker December 4, 2012 at 8:01 pm

Will family owned businesses be more sustainable in a society where the extended family, in some form, still survives?

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