Make or Buy, and/or Cooperate? The Property Rights Approach to Auto Parts Procurement in Japan

We conducted an empirical analysis on the hypothesis on auto parts procurement in Japan, raised by Asanuma (1989; 1992). The Asanuma hypothesis of Japanese subcontractors claims that there is a new classification of auto parts and their producers according to the degree of initiative for product and process designs. The initiative results in "relation-specific skills" acquired by the suppliers in relation to the auto manufacturers in the first tier. Among the responses to the hypothesis, Milgrom and Roberts (1992) and Holmstrom and Roberts (1998) focused upon a role of the supplier association in the Japanese hierarchy system, where communication among the suppliers alleviates opportunistic misbehavior of the automakers. This paper, instead of the reputational role of the association, takes an alternative stand on the technology cooperation association, from the property rights theory, especially a general setup of Whinston (2003). Participation in the associations should be considered as non-contractible investments for the relation-specific skill. The empirical implications of some specified models concern the effects on a vertical integration likelihood of both the importance of buyers' or sellers' non-contractible investments and specificity in the acquired relation-specific skills. We estimate an equation of vertical integration wherein the determinants are dummy variables of the parent firm and the subsidiary's participation in the cooperation associations and variables representing the degree of their relation specificity. The significance and the signs of these variables suggest that, other than a model of exogenous acquisition of relation-specific skills, a model can be also applicable to the Japanese auto parts suppliers-manufacturers, where it is not the manufacturers' but instead are the suppliers' investments which create their own relation-specific skills through the association activities. The Asanuma hypothesis turns out to be alive.