Capital Markets and Corporate Governance in Japan, Germany and the United States: Organizational Response to Market Inefficiencies

Published by EH.NET (October 1999)

Helmut Dietl, Capital Markets and Corporate Governance in Japan,

Germany

and the United States: Organizational Response to Market Inefficiencies.

London and New York: Routledge, 1998. 208 pp. $75.00

(cloth), ISBN 0415171881

Reviewed for H-Business and EH.NET by Hideaki Miyajima, School of Commerce,

Waseda University.

miyajima@mn.waseda.ac.jp

Helmut Dietl deserves credit for authoring a first comparative study on capital

markets and corporate governance across three nations using an integrated

theoretical framework. Previous works have focused on two-country comparisons,

typically the US and Japan, Japan and Germany,

or the US and Germany. There have also been a number of non-theoretical

studies discussing these three nations within a coherent framework. The

author’s efforts reflect steadily increasing interest in the institutional

characteristics of capitalism, and theoretical developments regarding firm

behavior, agency problems, and corporate finance. Dietl succeeds in examining

this theory in a three-nation context, although the validity and persuasiveness

of his final conclusions can be regarded with some skepticism.

The book consists of two parts: theoretical framework and empirical evidence.

The first section introduces basic concepts for analysis.

Key concepts include: investment relationship (the relation between investors

and firms), investment plasticity (reflecting agency and governance problems),

industry maturity, regulatory environment

(neoclassical or relational is the author’s basic dichotomy), and

organizational mode (unintermediated capital markets

, intermediated capital markets, holding company, multi-divisional

organization, LBO association, financial keiretsu). The goal of the second,

shorter,

section of this book is to characterize organizational responses to capital

market inefficiencies, corporate governance structures, and regulatory

frameworks among three nations.

The framework of this book is coherent, and well organized. Prior theoretical

results are fully utilized in building up this framework,

although references are mainly limited to the 1980s. Descriptions of the

regulatory systems for all three countries appear quite balanced. I feel

little complaint when reading the portions regarding Japan. It is respectable

that a single author could explain complicated aspects of all three

nations’ institutional characteristics without any serious discrepancy.

Accordingly, this book offers the reader a useful summary of corporate

governance systems, regulatory frameworks, and organizational characteristics.

There are, however, several points which I found frustrating. First,

the contribution of existing standard works to the author’s study is not made

clear. With regard to the Japanese capital market and corporate governance

system, several important works were published in the 1990s.

Representative texts include Aoki and Patrick (ed., The Japanese Main Bank

System: Its Relevancy for Developing and Transforming Economies,

Oxford University Press, 1994). Additionally, Aoki and Dore (ed., The

Japanese Firm: Sources of Competitive Strength, New York, Oxford University,

1994) includes several important papers concerning this topic. To my

understanding, Edward and Fisher (Banks, Finance and Investment in Germany,

Cambridge University Press, 1994) has become a standard text in the case of

Germany. Dietl makes no reference to any of these works in his book.

Consequently the reader finds it difficult to separate previous results from

the author’s own research.

Second, with regard to Japan, the author’s main message is that the regulatory

environment is a hybrid neoclassical and relational system, with a

corresponding multi-divisional, financial keiretsu organizational

response. However, it would be more helpful if the conceptual

relationship between financial keiretsu and the main

bank system were made clear, given recent emphasis on the main bank system as

an alternative mechanism of corporate governance. Care should also be used

when the multi-divisional form is identified as an organizational mode in

Japan, based on the consensus that the multi-divisional form in Japan is quite

different in comparison to its US counterpart (see Mark Fruin, The Japanese

Enterprise System. Oxford, Clarendon Press, 1992).

Another weakness with regard to Japan concerns the author’s evaluation of

the effectiveness of Japan’s regulatory environment. Dietl very acceptably

stresses the strong influence of the American model on Japan’s regulatory

framework. He then goes on to implicitly assume that the Japanese hybrid

system is a combination of the

advantages of both neoclassical and relational systems. However, there are

other possible combinations. Although financial keiretsu may allocate

resources efficiently and reduce agency costs, it is also highly possible that

keiretsu could increase

allocative inefficiency. This cost of financial keiretsu should be

considered, especially when considering the causes and effects of the late

1980’s “bubble” economy and its subsequent collapse in the 1990s.

My final complaint is that the presentation

of empirical work could be more complete. First, the author uses random

selection, which is in itself not bad, for sample selection. However, given

that previous empirical studies have normally based sample selection on

objective criteria such as firm

size or industrial category, the decision to use random selection requires

explanation. Similarly, the composition of sample firms in terms of size,

industry affiliation, and rank in assets should be added. Secondly, it is

regrettable that the time period for empirical evidence is not shown.

Although it seems clear that sampling began in the early 1990s (possibly 1993

or 1994), the time period under consideration remains unclear. The relation in

time relation between dependent and independent variables is also unclear.

Lastly, the description of variables seems somehow unclear, and slightly

subjective. There is no sample distribution given for the variable,

organizational mode.

While the variable, investment plasticity, is clearly defined as R&D investment

plus service related sales to total revenues, from the viewpoint of a

fellow researcher, it would be more reader friendly if the source of this

information was fully described. Similar comments can be made regarding the

variable, industry maturity, which is a discrete number from one to five. No

basis is given for determining industrial maturity values, nor does the book

include a distribution of samples.

In general, it would be helpful if the author provided a descriptive summary

for each variable before reporting its estimation results.

Similarly, tabular data for organizational form, industry maturity, and

investment plasticity could have been provided in appendices. Although

empirical results as presented support the author’s theoretical framework,

this conclusion is not robust and persuasive, given the evidence provided and

statistical procedure.

Hideaki, Miyajima is the co-editor of Policies for Competitiveness

(Oxford University Press, 1999), and author of “The Impact of Deregulation on

Corporate Governance and Finance” (Carlile and Tilton

(eds.), Is Japan Really Changing Its ways? (Brookings Institution Press,

1998).