Acprof 9780198729167 Chapter 7

Change with Continuity
Changing Asian Business Systems: Globalization,

Socio-Political Change, and Economic
Organization
Richard Whitley and Xiaoke Zhang
Print publication date: 2016

Print ISBN-13: 9780198729167
Published to Oxford Scholarship Online: April 2016
DOI: 10.1093/acprof:oso/9780198729167.001.0001

Asian Capitalism in Transition
Gary G. Hamilton
Solee Shin
DOI:10.1093/acprof:oso/9780198729167.003.0007
Abstract and Keywords

This chapter argues that East Asian business systems are best conceptualized as
emergent outcomes of competition in and across capitalist markets. The ways
economies become organized and change over time results directly from
capitalist economic activities, and only indirectly from institutions that in various
ways constitute and frame the economic actors and their activities. Competition
in capitalist markets is directly related to technologies that entrepreneurs adapt
to making money in an ever-changing economic environment. In East Asia, state
officials, as well as the owners and managers of private businesses, are among
those entrepreneurs that attempt to channel market economies according to
their own interests. These interests are in turn shaped by political and social
institutions. We show that, as East Asian economies adapt to global changes in
technologies for making money, there is considerable continuity in how national
business systems reproduce themselves in a global capitalist economic
environment.
Keywords: demand-responsive capitalism, producer-driven capitalism, competition, containerized

shipping, retail revolution, lean-retailing, Korean chaebol, Japanese keiretsu, Taiwanese firms
Introduction
Embedded in the most analyses of Asian capitalism are narratives of how Asian
industrialization emerged and changed over time. These narratives are usually
country stories, told one at a time: One story is how post-World War II Japan
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reindustrialized, and then later fell into a deflationary trap. Another story is
about the rise of the South Korea economy and its later trajectory, and then
another about Taiwan’s economy and its fate, and yet another about Hong Kong
and so forth. There is surprisingly little overlap among these narratives, in part
because the ‘varieties of capitalism’ and the ‘business systems’ perspectives,
broadly defined, encourage analysts to see a variety of emergences and a variety
of changes over time. The narrative for each country incorporates a difference
set of actors and institutions and a different set of circumstances leading to the
emergence of, and later changes in, the respective capitalist economy.
These country narratives imply that a nation’s business system is a product of

institutions ‘governing economic activity inside and outside firms.’ Analysts have
come to view these institutions as, first, ‘societal institutional structure in which
firms are embedded’ and, second, as institutions operating just at the firm level
(Witt and Redding, 2014: 2–3). In practice, analysts mesh the two levels together
in a way that produces an idiosyncratic combination, a unique interweaving of
both levels of institutions that can then be referred as a national business
system, a distinctive set of institutions that produces a nation’s particular form
of capitalism.1
There are problems with this approach. First, the approach overstates the
importance of distinctive endogenous social, political, and economic institutions.
Merely showing that social relations and local institutions somehow influence
(p.162) economic activities does not, at the same time, inform us how capitalist
economies (or any type of economy for that matter) actually work. Many analysts
assume that institutional environments in which economies operate shape the
actual organization of economic activities in those environments. In fact, this
assumption restates DiMaggio and Powell’s dictum (1983; Powell and DiMaggio,
1991) that exterior processes of institutional isomorphism shapes the internal
structure of organizations. Clearly, the institutional argument is easy to make,
because governments certainly have the capacity to define and control aspects
of economic activity within and often beyond their borders. Also, it is obvious
that social institutions, such as the family, shape the organization, for instance,
of family-owned firms, as well as the inter-firm networks in which those firms
operate.
Therefore, it is not surprising to find that many analysts see a one-to-one causal
link between institutional frameworks and organizational outcomes. For
example, developmental state theorists argue that state economic policy causes
the formation and organization of business groups.2 In contrast, in this chapter,
we argue that the organization of national economies is better conceptualized as
an emergent outcome of competition in and across capitalist markets. The way
economies become organized and change over time results directly from
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capitalist economic activities, and only indirectly from institutions that in various
ways constitute and frame the economic actors and their activities.
The equation of state/society with capitalist economy misses the essential

elements of capitalism. This equation misrepresents the ways that economic
players actually orient and organize their day-to-day activities in the world today.
Capitalism should not be thought of in terms of countries, but rather in terms of
people (e.g., entrepreneurs, workers, managers), firms, money, products,
markets, industries, and the interrelationships among all of these. Capitalism
should also be conceptualized as ever-changing movements of these things in
time and space, as having historical and geographical characteristics. And finally
these movements in time and space should be conceptualized as complex
economic activities that people constantly try to control in some fashion. The
owners and managers of businesses try to organize these activities, often in
competition with each other; laborers try to control the conditions under which
they work; government officials try to regulate and tax these activities; bankers
try to channel them, always to their own advantage. The idea is that capitalism
represents contested economic movements in time and space that are always
organized and struggled over to a considerable degree.3
When conceptualized in this way, capitalism is not a stable and readily

identifiable configuration, a thing in itself that suddenly takes shape and
changes over time. Instead, it is a term that covers an extremely wide range of
diverse economic activities organized in the context of often difficult and
contentious competition among participants, who themselves have the right and
obligation to control and dispose of properties, quite apart from the desires of
any state planners. Moreover, planning and strategic action are not sequential;
none of these actors queues to (p.163) take turns making decisions one after
the other. Instead, they all make, more or less, simultaneous decisions, with
individuals each calculating what others will do as a way to decide a course of
action.
Institutions frame such decisions rather than determine their outcome.

Institutions shape business systems, but do not determine how they change over
time. Capitalism, as defined above, does that. People live in taken-for-granted
worlds, accepting a mix of different institutional spheres as a natural part of
their lives. These lived-in spheres of life (for example, politics, and government,
family and kinship) provide possible resources for the contested economic
activities in which participants are themselves engaged. However, these
institutional spheres do not drive capitalist participation, at least not directly.
Rather it is the processes and possibilities of making money and of the rational
calculation that is integral to making money that drives the organization of
capitalist economies.4
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The activity of making money creates a world of meaning that is linked to, but
still separate from political, social, and even economic institutions. If capitalism
involves rational calculation, cost accounting, profit-making, risk assessment,
and some level of visibility and predictability into the future, then capitalism also
involves a high level of inter-subjectivity. Within some range of accuracy, in
order to make informed decisions, participants need to be able to objectify their
own positions relative to the positions of those with whom they are economically
involved. This necessity for making informed decisions pulls participants into
common frames of reference, which are sometimes referred to as markets (e.g.,
capital, labor, property, and product markets), but are also more extensive than
markets. The important point is that these common frames of reference are not
benign. They are historical; they are actively and conjointly constructed by
participants who seek their own advantage, but not always according to their
own dictates.
It is the knowing and active participation in these inter-subjective worlds of

capitalist acquisitiveness that links economic actors, who are grounded in the
institutions of their local society, to the organization of global capitalism. To
analyze the development and spread of capitalism in Asia involves more than
just understanding how social relations and institutions become tools in the
pursuit of capitalist wealth and social honor. It also involves understanding the
capitalist dynamics of Asian economies and how these dynamics are linked to,
and become integrated in, the world economy.
To examine the integration of Asian economies into the world economy is the
purpose of this chapter: We first examine the developments in the twentieth
century global economic conditions that shaped the circumstantial rise of Asia’s
export-led manufacturing. Asia’s export-led development coincided with larger
transformative changes in global capitalism, changes that drove the
reorganization of all East Asian economies. In the midst of this shifting
landscape, Asia’s business and state actors strategized their activities with
efforts to control the flow of global opportunities to their own benefit, and in so
doing they utilized elements (p.164) of their own taken-for-granted spheres of
life as institutional backdrops to shape their concrete action. Therefore, it is
crucial to theorize both dimensions, both the continuous shifts in the global
economy and the continuity in local economic organization that gives some
stability and predictability to the strategic action of participants, thus allowing
them to remain engaged in the capitalist game of making money.
We start by emphasizing two important lessons learned from Alfred Chandler’s

magnum opus, The Visible Hand, and then proceed to post-World War II
economic changes in East Asia.
A Developmental History of the Asian Capitalism
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Producer-Driven Economies before World War II

In his most brilliant book, The Visible Hand, Alfred Chandler, Jr gives a
developmental account of the emergence of American corporate capitalism in
the late nineteenth century. This account, which parallels but in the end is very
different from the one we give for the global economy in the late twentieth
century, coincides with the changes in the system of transportation in the
Northeastern and upper Midwestern parts of the United States. The first era
occurred before 1820 when the primary means of transportation were wagons
over primitive roads and boats before the advent of steamships. It took six weeks
to go from New York City to Chicago. Businesses in all regions of the US were
predominately locally owned and locally or regionally supplied, and, outside of
those in a few major cities, were mainly general stores serving local populations.
The second era, occurring roughly from 1820 until shortly before the Civil War
in 1861, is characterized by the spread of an intensive transportation system of
canals, roadways, rivers, and lakes that linked the Northeast with the Upper
Midwest. In this period, it took three weeks to get from New York City to
Chicago. The development of this transportation network encouraged the
formation of inland cities that served as commercial nodes in increasingly
intensified regional and trans-regional economies. With widening markets,
entrepreneurs could begin to specialize in goods and services that could be
delivered via medium- and long-distance trading within and between regions.
The third era, which is the focus of Chandler’s book, begins shortly before the
Civil War when the railroads began to interconnect all regions in the upper
Midwest east of the Mississippi River in a huge internal domestic economy. It
took only an overnight express train to travel between New York City and
Chicago, but still nearly four weeks to arrive in San Francisco. However, by the
1870s, the railway system had so reduced the travel time among all points in the
US that any major city in the US was only a day or two away from any other
major city. Now entrepreneurs could reasonably create businesses consolidating
factories in one geographic location and distributing manufactured products
throughout the US and, for a few products (e.g., cigarettes), throughout the
world. According to Chandler’s analysis, once the possibility of rapid long-
distance distribution emerged, business people figured out how to build
increasingly large mechanized (p.165) factories and then to reorganize their
enterprises into large multi-divisional corporations that required middle
managers to supervise production, distribution, finance, and personnel. These
middle managers were the ‘visible hand,’ internalizing functions inside the
organization of the enterprise that were previously coordinated through
transactions in regional markets.
There are two important reasons for us to summarize Chandler’s account of

American capitalism in the late nineteenth century. First, his detailed history
gives causal priority to technology (e.g., changes in transportation infrastructure
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and the rise of mechanization), entrepreneurial organization (e.g., the creation

of the multi-divisional corporation), and the expansion of markets (e.g., the
stepwise growth of a huge domestic economy in the US). He hardly mentions
state and national governments or governmental policies and regulations or the
legal framework that ensures the operation of limited liability corporations. All
of these are certainly important factors, but the nation-wide, producer-driven
organization of the economy was the result more of profit-seeking business
activity than of politics and laws.
Chandler has been criticized at some length for these omissions (e.g., Roy, 1997;
Perrow, 2002), but the fact remains that, in the late nineteenth century, neither
government officials nor American social or legal institutions actually caused the
changes that occurred. Rather, the conjunction of technology, entrepreneurship,
and the rapid increase in the size of the markets for products formed the driving
wedge that pushed America’s capitalism transformation forward.5 Government
activity and changes in social and political institutions followed the economy,
and not the reverse. One could argue that, in the late nineteenth and early
twentieth centuries, the American business system was, in the first instance,
shaped more by changes in economic activity that integrated the country than
by the myriad regulations of federal, state and local governments.
Second, and equally important, Chandler’s book gives an account for the US of
what he (1984, 1990) later shows is a global transformation in organization of
economies with the rise of large vertically integrated corporations. Although the
actual organization of these corporations, as well as their industrial specialties,
varied country by country, they soon dominated all industrialized economies
(Chandler and Daems, 1980; Chandler, 1984, 1990). The variation among
countries was certainly due to institutional factors, including social, political,
and legal institutions, but the fact remains that the rise of large industrial
enterprises, whatever their structure, caused a sea change in the organization of
entire economies across all industrializing economies. As Chandler (1984: 487–
8) explains, with the rise of large enterprises, the role of commercial
intermediaries (mostly wholesalers) declined as they ‘lost their cost advantages
when manufacturers’ output reached a comparable scale’ (to the wholesalers’
transactions). At that point, ‘All these new high-volume enterprises created their
own (p.166) sales organizations to advertise and market their products
nationally and often internationally.’ Wholesalers and such mass retailers as the
catalog giant store, Sears and Roebucks, ‘could not be relied upon to
concentrate on the single product of a single manufacturer with the intensity
needed to attaining and maintaining the market share necessary to keep
throughput at a minimum efficient scale.’ Therefore, large enterprises ‘began to
brand and to advertise on a national and global scale’ and began to integrate
forward into distribution. Mass production created the necessity for mass
selling, and the large corporations led the way. To be sure, the many differences
among these large corporations from place to place are important, but unless
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one sees the larger capitalist transformation, the individual differences do not
make much sense. Chandler’s main point is that industrial economies before
World War II were predominately producer-driven economies.
The Retail Revolution and the Rise of Demand-Responsive Economies,

1965–1985
If we jump forward from the economies of the early twentieth century to those
today, we can see that national economies are no longer producer-driven. Only a
few final goods sectors remain dominated by large-scale, vertically integrated
manufacturers, mainly enterprises making automobiles and airplanes. But even
these companies are no longer as vertically integrated as they were before the
1960s. In fact, they have increasingly become final assemblers of parts sourced
globally. There are a few important exceptions to this rule, some of which we will
address below, but in the main, this trend is worldwide.
Another trend is equally apparent. Clusters of firms in one global location

manufacture products for the entire world. Typically, these firms are contract
manufacturers that assemble consumer goods that many different retailers and
merchandisers sell under their own brand name. In the late nineteenth century,
firms sold products that they manufactured to a national market. Now, retailers
and merchandisers sell their contracted products to a global market.
We have traced this global transformation to the last half of the twentieth
century, when large retailers and brand name merchandisers began to order
goods from contract manufacturers instead of selling products made by
vertically integrated manufacturers. Although the outcomes are different, the
drivers of this transformation (e.g., changes in logistics, in entrepreneurial
organization, and in the size of markets) are similar to those in Chandler’s
account in The Visible Hand. We also divide our account into three stages, the
first two before 1985 and the last one from 1985 to the present.
The Shopping Center Boom

The first stage occurs during the first two decades after the war, roughly from
1945 to 1965. While Western Europe and Japan were rebuilding their economies
after being destroyed by war, the US economy quickly moved from
manufacturing the tools for war to making a whole range of durable and non-
durable products for a rising middle-class. This transition received a large push
from a tax reform (p.167) bill initiated by the Eisenhower administration and
passed in 1954 by the US Congress that gave, among other things, accelerated
depreciation to business owners for investments in building and machines.
Congress passed the bill in order to help manufacturers build more factories, but
one of the unintended consequences was to set off a boom in shopping center
construction, which led to an eventual decline in US manufacturing. In 1956,
Eisenhower, the former commanding general of the Allied forces in Europe, used
the Cold War as the reason for Congress to pass a bill initiating a national inter-
Page 7 of 32
state freeway system, this in order for the US military to move quickly from
coast to coast. In the next decade, the number of shopping centers jumped from
500 in 1955 to 7600 in 1964, and the number of miles of high-speed inter-state
freeways jumped from nearly zero to 41,000 miles in the same period. The
number of shopping centers would continue to grow to 10,000 in 1970 and to
over 50,000 in 2006, as would the miles of freeways. Located along major
highways at the periphery of most American cities, these shopping centers were
increasingly resupplied by trucks instead of trains. A combination of trains and
trucks linked all parts of the country in a strengthening and ever more
integrated domestic economy.
At the time of the shopping center boom, retailing in the US was already in the
process of change, moving from independently owned and locally operated
retailers to large chains and consolidated holdings (Bluestone, et al., 1981).6 In
the 1950s and 1960s, large department stores, usually located in the downtown
core of most cities of any size, dominated general retailing. The largest of these
were chain stores. Targeting middle-class households, Sears and J.C. Penney
were the two leading general retailers in the US for most of the first three
decades after World War II. Other downtown stores with famous names, such as
Macy’s, Bloomingdales, Filene’s, and I. Magnin and Company, were in the
largest cities; these were centrally owned by holding companies (for these four,
by Federated Department Stores), but locally managed. These stores targeted
customers more affluent than those targeted by Sears and J.C. Penney.
Supermarket chains, such as Safeway and Kroger, expanded quickly in the post-
war era and controlled the lion’s share of food retailing. Therefore, when the
shopping center boom started in the 1950s, it was merely an add-on to what was
already a full and dynamic assortment of retail stores.
The new shopping centers, however, soon became the leading edge of a
changing retail landscape. By 1964, shopping centers accounted for thirty per
cent of US retail sales. In this period of time, American society was rapidly
changing, driven in part by new sources of entertainment (television), new
consumer niches (adolescents with music and dress; working women with off-
the-shelf fashion products), and an array of social movements for which the
1960s became famous. The freeway system allowed more and more middle-class
families (p.168) to move to the suburbs and adopt a new middle-class
consumer-oriented life style—single family homes with fashionable décor and
special goods for every member of the family.
Unlike the downtown core of small retail stores and a few large locally owned
department stores, shopping centers developed around chain stores. There was
usually one or two ‘anchor’ stores—large department stores—that would bring
shoppers in, and then the aisles of the malls would be lined with specialty
retailers selling clothes, consumer electronics, sporting goods, and so forth.
After price maintenance laws, in place since the Great Depression in the US and
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Europe, were no longer enforced in the early 1960s, many of the newly
established general and specialty retailers (in the US, Toys-R-Us, Wal-Mart, K-
Mart, and Target; in Europe, Carrefour, Metro, Aldi, and Tesco) were ‘discount
retailers,’ that sold brand name products below the manufacturers’ suggested
retail price, or that sold their own brands of goods cheaper than those sold by
their department store competitors.
The changes in society and the changes in retailing in the respective countries
formed a mutually reinforcing cycle that drove the retail revolution forward.
However, in the first decade (1955–65), Asia was not involved in these changes.
In 1965, around 95 per cent of all widely consumed products in the US, ranging
from shoes and apparel to consumer electronics, was manufactured in the US
(Feenstra and Hamilton, 2006).
The Beginnings of Export-Oriented Industrialization in East Asia

The second era begins in 1965 with the build-up of the American troops in
Vietnam. In 1964, the Tonkin Bay Incident led to a rapid increase in the number
of US soldiers in Vietnam, jumping from a little over 100,000 in 1965 to over
500,000 in 1968. This extraordinary increase led to a change in logistics for
supplying the war effort, namely containerized shipping.
The first containerized shipping company was started by Malcom McLean,

initially the owner of a large trucking company, who conceived of and founded
Sea-Land, which had its first run from Newark, New Jersey to Houston, Texas on
April 26, 1956. McLean’s ‘fundamental insight’ was his recognition that ‘the
shipping industry’s business was moving cargo, not sailing ships’ (Levinson,
2006: 52). With this insight, he ‘understood that reducing the cost of shipping
goods required not just a metal box but an entire new way of handling freight.
Every part of the system—ports, ships, cranes, storage facilities, trucks, trains,
and the operations of the shippers themselves—would have to
change’ (Levinson, 2006: 52).
Within just a few years after his first run, a number of different US companies
entered the business, most of them trying to adapt inexpensive surplus World
War II ships to carry containers. However, all the container shipping companies
struggled financially because investors were reluctant to put their money on any
one company in a business that appeared to be marginal to the large internally
integrated US economy. Moreover, standardization was completely lacking. Each
company had a different size and shape of container; the railway were
uninterested in hauling the various types of containers; truck companies did not
have the (p.169) capital to outfit their trucks to haul containers; and ports did
not have the necessary cranes and docks to load and unload containers to and
from the ships.
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All this changed in the years immediately after 1965, for two reasons. First, the
involved parties became committed to standardization so that large capital
investments in containerized shipping could begin. The standardized measure
for container size came to rest on something called a ‘twenty-foot equivalent
unit’ or TEU, but the actual sizes of containers continued to vary in height and
width, depending on the cargo.7 Investments quickly poured in, and a second
generation of much larger ships dedicated to containerized shipping was
ordered and soon built.
Second, the main reason these different players were willing to compromise was
that, starting in 1965, the Vietnam War had initiated a huge build-up of supplies
needed to conduct a war in a faraway, undeveloped country with few roads and
no ports other than one in downtown Saigon. A full scale mobilization of US
resources began, including the construction of a major deep water port at Cam
Ranh Bay. At first the US military resisted standardized containerized shipping,
but by the end of 1968, ‘the military…became its greatest advocate’ (Levinson,
2006: 183). From that time forward, container ports quickly became the most
important hubs for international shipping. The West Coast container ports in Los
Angeles, Oakland, and Seattle became the most advanced container ports in the
US, and many countries around the world scrabbled to construct their own
container port facilities, including Japan, Korea, Hong Kong, Singapore, and
Taiwan, all of which started receiving containerized shipping by 1970, even
before their own container ports were completed.
In 1968, Malcom McLean’s Sea-Land was one of the successful bidders for
military contracts to ship goods to Vietnam (Levinson, 2006: 171–88). The
containers going to Vietnam were packed full of supplies needed for the war, but
they were empty on the return trip. The US military had paid the fare for the
round trip, and so anything that Sea-Land could load into the containers and sell
after the return trip to the US was pure profit for Sea-Land. A part of the build-
up in Vietnam included post exchanges (known as PXs), where anyone with
access, which included US soldiers and most US civilians, could buy cigarettes,
alcohol, and a whole assortment of quasi-luxury goods. Among these luxury
goods was a large variety of items from Japan that the US troops could buy and
then mail as gifts to family and friends back home. There was a general
consensus among US troops that these goods from Japan were not only
relatively inexpensive, but also well designed and well made.
Along with the nearly three million Americans serving in Vietnam from 1965 to
war’s end in 1973, Malcom McLean must have thought so too, because, as one
Sea-Land executive recalled, ‘We’ve got these empty ships coming back from
Vietnam….So we have a meeting, and Malcom says, “Anybody know anybody at
Mitsui?”’ In the 1960s and 1970s, Mitsui, the general trading company of the
huge Mitsui business group, was the largest trading company in Japan. Two
weeks after the meeting, a large delegation from Mitsui arrived at Sea-Land’s
Page 10 of 32
facilities in (p.170) New Jersey and negotiated contracts to build a container

terminal for Sea-Land in Japan, to handle trucking inside Japan, and to act as
Sea-Land’s in-country agent. That was 1968. ‘Before September 1967,’ notes
Marc Levinson, in his history of containerized shipping, The Box: How the
Shipping Container made the World Smaller and the World Economy Bigger,
there was ‘no commercial container service at all…on the Japan-West Coast
route (Levinson, 2006: 188).’ In 1968, seven different companies, including Sea-
Land, were competing to ship containers of Japanese goods to the US, and for a
year or so the business was slow, but then ‘the cargo would soon come, in a flood
that no one could imagine (Levinson, 2006: 188).’
The two decades after 1965 marks the beginning of East Asian export-led
industrialization. Before that time the cost of shipping goods from Asia was too
much for most consumer goods. Bulk items, such as primary resources (e.g.,
steel) and some finished goods (e.g., textiles and apparel) could be loaded and
unloaded from the cargo holds of seagoing freighters, but for most consumer
goods it was neither cost effective nor timely to ship goods from Asia before
containerization changed the entire timetable and cost structure for
transoceanic shipping. However, once containerized shipping was standardized,
the changes in transoceanic shipping and transcontinental communications were
rapid, including the building of ports and intermodal transportation services and
the development of standard procedures for ordering goods and obtaining lines
of credit. All of these new economic institutions happened in a matter of a few
years and were in place by the mid-1970s. There afterwards the volume of traffic
in both shipping and telecommunications soared.
These changes in the physical and financial infrastructure for doing business
opened the way for entrepreneurial activities that began to change the
trajectories of East Asian economies. In particular, the processes of sequential
ordering and progressive differentiation led to different trajectories of economic
development in East Asia.
Sequential Ordering
With its large domestic economy, Japan successfully reindustrialized in the
1950s, partly in response to the Korean War and favorable intra-Asian trading.
But Japanese exports to the US and Europe were marginal to the Japanese
economy until after the late 1960s. By that time, with the advent of
containerized shipping, Japanese trading companies began to look for and found
trading opportunities in the US. With the American apparel factories operating
at full capacity, some established American retailers started to use Mitsui and
other Japanese trading companies to obtain their private label goods (Bonacich
and Waller, 1994). In order to fill these orders, Mitsui, along with other Japanese
trading companies, then began to develop suppliers for these orders (often
through joint ventures) in Japan’s former colonies, first in Taiwan and then in
South Korea. Both locations had more accommodative government policies and
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cheaper prices for land and labor than were the case in Japan. Moreover, by
helping to establish firms in Taiwan and South Korea, the Japanese trading
companies could earn money in multiple ways. They would loan money to, or
invest in, companies or help establish joint ventures to make the ordered
products; they would sell machine (p.171) tools to these firms and then train
workers to use the machines. They would sell the necessary inputs needed to
manufacture the goods, and then would serve as the shipping agents to convey
the goods to the retail firms that ordered the products in the first place.
These multiple roles did not last long because by early 1970s American retailers
began to establish buying offices in Taiwan, South Korea, and Hong Kong, thus
eliminating the Japanese intermediaries (Gereffi and Pan, 1994). These ‘big
buyers,’ as Gereffi (1994) calls them, would work directly with the local
companies to develop and then improve production of the ordered items by
providing specifications, transferring technology, providing loans, and training
local employees. It is not an exaggeration to say that the Japanese and American
buyers created the Asian suppliers for the products that they wanted to sell.
However, once the procedures of ordering were standardized across countries
and once ordering goods became a routine way for firms to procure a large
variety and a large quantity of consumer goods, an order at a time, then the
volume of orders soared and the process of production became more systematic
(Feenstra and Hamilton, 2006).
The big buyers continued to work with Japanese trading companies to process
the orders, but they also increasingly worked with local trading companies. In
South Korea, in order to undercut the prominence of Japanese trading
companies in its export trade, the Korean government, in 1975, began to license
a small number of general trading companies. Those trading companies with a
license could serve as intermediaries between outside buyers and inside
manufacturing firms. With one exception, the government limited the licenses to
the large Korean business groups, the chaebol, and awarded five licenses in
1975, five more in 1976, and three more in 1977. However, by 1985, only seven
chaebol trading companies were still exporting goods. All together, these seven
trading companies handled fifty per cent of all Korean exports (Feenstra and
Hamilton, 2006: 269).
By contrast, in Taiwan, although the government attempted, but failed to

develop a few very large general trading companies, small local trading
companies proliferated, numbering nearly 3000 in 1973 and growing to well
over 20,000 in 1984 (Feenstra and Hamilton, 2006). Taiwanese trading
companies played a dual role in that they first generated demand by obtaining
orders for specific goods and then created supply by organizing small,
independently owned manufacturing firms into assembly systems to make the
batch of products that were ordered in advance. Often, the owners of the
assembly firms also owned the trading companies that generated the orders, so
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that all of Taiwan’s major exporters had multiple trading companies obtaining
and filling orders.
Progressive differentiation
Noble prize-winning economist Thomas Schelling (1978) showed in the case of
urban living that sequential non-racist individual decisions can have macro-
effects over time that lead to racial segregation. Feenstra and Hamilton (2006)
demonstrate similar dramatic macro-effects from big buyers’ sequential orders
in East Asia. They show, for Taiwan and South Korea, that as big-buyer orders
increased every year in volume, variety, and total cost, the economies in East
Asia (p.172) gradually diverged, developing distinctive business systems
producing different products.8
Not long after the big buyers started ordering goods in East Asia, they began to
figure out which firms in which locations were most appropriate to order what
products. In South Korea, for a variety of reasons, the chaebol, mostly located
near Seoul, were prominent before industrialization began, and the independent
firms within the chaebol tended to be somewhat larger and more inclined toward
a Fordist mode of production than other Korean firms (Feenstra and Hamilton,
2006: 327–34). In rural Taiwan and urban Hong Kong, again for a variety of
reasons, small and medium-sized firms provided formidable competition for the
larger firms and were able to predominate in the batch or small-lot production of
final goods (Feenstra and Hamilton, 2006: 334–50). In Japan, the large keiretsu
were primarily oriented to produce a range of sophisticated consumer goods
under their own brand name and to provide highly processed up-stream inputs
(e.g., chemicals and specialty metals) to a wide variety of manufacturers around
the world, including those in Taiwan and South Korea.
Originally the differences among firms in the various countries were not that
large, but the differences grew as time went on. As big buyers began to order
more and a larger variety of products, they began to go to South Korean
factories for large runs of a cheaper version of products that Japanese firms
were selling to retailers (e.g., consumer electronics, microwaves) or very large
runs of products that Japan no longer made for export (e.g., footwear, men’s
dress shirts). The big buyers went to Taiwan and Hong Kong for batches of
differentiated products (e.g., limited runs of fashion clothes for women;
specialized footwear) and for batches of relatively small and inexpensive
products (e.g., kitchenware, plastic household products of every type, small
electrical appliances).
Sequential orders for different products in different locations had the effect of
establishing divergent business systems. These business systems were an
emerging phenomenon, in that they did not pre-exist the process of
industrialization that set them in motion. In the twenty years between 1965–85,
when the leading chaebol became vertically integrated by adding a few new up-
Page 13 of 32
stream firms to their groups to make the intermediate inputs for the mass
production of consumer products, ‘the average firm size (in South Korea)
jumped by 300 percent and its firms grew in number by only 10%’ (Biggs, 1988:
3–4). In Taiwan, during same twenty years, when contract manufacturing of a
huge range of small products by small and medium-sized firms became the
dominate mode of production, ‘the number of reported firms increased by 315
percent and the average firm size expanded by 15 percent’ (Biggs, 1988: 3–4). In
Hong Kong, until the early 1980s, even as the total number of firms and Hong
Kong exports continued to rise, the firm size actually decreased, going from a
mean of over 40 employees in 1968 to (p.173) slightly over 18 in 1984 (Tam,
1990: 61). A great portion of these small firms was making apparel that had
been ordered through such local trading companies as Li and Fung.
It is clear that accelerating orders drove the process of business system

divergence.9 By 1985, Japan and South Korea had become economies of a
limited number of huge business groups that controlled the production of export
products; the largest business groups grew much bigger, and the marginal firms
in the less successful groups became vulnerable in economic downturns. By the
same year, Taiwan and Hong Kong had become an export-led economy of small
and medium-sized manufacturers making goods on contract that relied on up-
stream inputs from a variety of local and foreign sources. Many of the local up-
stream suppliers of goods and services, such as Formosa Plastics, evolved into
sizeable and very successful family-owned business groups that did not
manufacture any final consumer products. This mode of manufacturing would
continue to evolve in Taiwan into the new century, but in Hong Kong, in 1985,
the decline in manufacturing had just begun.
Lean-Retailing and the Rationalization of East Asian Business Systems,

1985–2014
1985 is another watershed year, even though the initial impact of what
happened in that year played out over the next decade. What happened was the
signing of the Plaza Accord on September 22, 1985, in the Plaza Hotel in New
York City. Faced by a recession, sharp declines in US exports, and sky-rocketing
interest rates at home, the Reagan administration negotiated a currency reform
with the major industrial countries, including Germany and Japan. The reform
was gradually to reduce the value of the US dollar against the other major
currencies. During the five years after the agreement, the Japanese yen, the
New Taiwanese dollar, and the Korean won increased in value by around 40 per
cent against the US dollar. Set against the backdrop of changing technology in
the US and changing government policies in East Asia, this currency adjustment
set in motion a transformation that still reverberates across Asian economies
today.
Page 14 of 32
One of the US government’s motives behind the Plaza Accord was to boost the
sagging American manufacturing sector by making US exports cheaper. Even in
the medium term, the Plaza Accord had the opposite effect. It hastened the
decline in US manufacturing by making China the US retailers’ preferred
location for low-cost manufacturing.
(p.174) Leading up to the Plaza Accord, American retailers and brand name
merchandisers had the upper hand in setting prices and other terms of sale in
the supplier markets in Asia for many of the consumer products that they sold in
the US. The increasing leverage was largely an outcome of fierce competition
among retailers and merchandisers in the US, competition that led to a large
number of mergers, acquisitions, and bankruptcies.10 By the 1970s, the
shopping center boom had spawned a rapid consolidation of retail chains in the
US. A few big discount retailers (K-Mart, Wal-Mart, and Target) expanded
geographically to become national chains, and logistically to become general
merchandisers selling groceries as well as an ever widening array of consumer
goods. Their expansion decimated locally owned and regionally operated
retailers across the country. Specialty retail chains, known as ‘category killers,’
also expanded. Large newly established chain stores soon dominated specific
retail sectors: drugstores (e.g., Walgreen, CVS, and Rite Aid), hardware (e.g.,
Home Depot), consumer electronics (e.g., Circuit City, Best Buy).
In full swing by 1985, this comprehensive consolidation was only possible when
the technology and techniques of lean-retailing had become available. This lean-
retailing package included Uniform Product Codes, barcodes, and scanners
(UPC approved in 1969 and first implemented in 1974), computerized inventory
systems (only possible after computers became small enough and cheap enough
for retailers to use them, circa 1980), just-in-time distribution facilities (after
computerization, linked to global logistics), and inter-firm standardization
(allowing for point-of-sales information to drive the integration of firms in retail
and merchandiser supply chains) (Abernathy et al., 1999). Once in place, the
lean-retailing package rationalized the entire system of global ordering and
logistics, allowing retailers and merchandisers to calculate their costs and
evaluate their risks more precisely. Moreover, once the package was available on
a global basis, any retailer or merchandiser could use it, regardless of the size of
their company. In this context, projected price points for selling consumer goods
in the US became serious matters that fed back on the supply chains, which
included Asian contract manufacturers.
These innovations forced retailers to adapt quickly to the new competitive

landscape or lose out to their competitors. Many lost their businesses, but by
1985 the successful retailers and merchandisers had deepened their existing
supply lines and forged new ones. East Asian manufacturers were instrumental
in fostering this competition in the US and were major beneficiaries of it. By
1985, an East Asian division-of-labor was largely in place. East Asian companies
Page 15 of 32
had become the low-cost suppliers of a large share of American consumer goods,
with different countries producing different products for distant consumers.
However, even before the Plaza Accord, profit margins for Asian manufacturers
were starting to decline.
After the Plaza Accord, the enforced currency adjustments over the next five
years produced a paradox: too much money and too little profit. On the one
hand, (p.175) rising Asian currencies brought new wealth. Suddenly the value
of East Asian companies jumped, as their property and stock prices shot up.
Japanese investors went on a spree buying property around the world, and
Japanese companies began to make more money on their stock portfolios than
on selling their products. On the other hand, the prices for labor and inputs were
now much higher relative to the US dollar. Asian manufacturers could no longer
meet the price points demanded by US retailers without eliminating their
profits. The slowness of the currency adjustments induced an initial increase in
efficiencies among Asian manufacturers. Taiwanese manufacturers resorted to
outsourcing a greater part of their production, which further increased the
spread of small firms in Taiwan. The Korean chaebol intensified their vertical
integration and began to specialize in mass producing more technically complex
products, often in competition with those made by Japanese keiretsu. But these
were stopgap measures that did not work as the value of East Asian currencies
ratcheted upward.
By the late 1980s and early 1990s, a crisis point was reached. While property
prices had reached bubble proportions in Japan, Taiwan, and South Korea,
profits from manufacturing had all but vanished for most products except for
those in high technology sectors, which were newly energized by the
introduction of personal computers. Like a frog in a pot of water coming to boil,
East Asian entrepreneurs did not know when to jump. Then, in 1990 and 1991,
the stock and property bubbles burst in Japan, as well as in Taiwan and South
Korea. Many East Asian manufacturers making labor-intensive products felt they
had no choice. They had to move most or all of their factories to low labor-cost
locations, either that or lose their contracts and market share. Japanese keiretsu
moved a significant number of automobile parts and consumer electronic
manufacturing firms into Southeast Asia, Canada, and the US (Yakamura and
Hatch, 1996). After an initial push to Southeast Asia, Taiwanese entrepreneurs
stampeded into southeastern China, in the Pearl River Delta adjacent to Hong
Kong. American retailers and merchandisers kick started this stampede by
threatening to withdraw the contracts of many of their primary Taiwanese
suppliers unless they relocated their factories to Mainland China. When the first
few Taiwanese suppliers left, the others felt they had no choice but to go as well
(Hamilton and Kao, forthcoming). South Korean chaebol moved their light
industries to Southeast Asia, Latin America, and Eastern Europe, and tightened
the vertical integration for those capital-intensive products that could still be
mass produced in South Korea: cars, ships, and high technology products. To
Page 16 of 32
protect their high-overhead operations in South Korea, the top chaebol also
embarked on a strategy to build brand names and to merchandise their own
products. By this time, most Hong Kong manufacturers had already moved their
factories across the border into the Pearl River Delta (Chiu and Lui, 2009).
This regional industrial reorganization had the effect of reinforcing the business
system in each country, as well as extending these business systems to other
parts of Asia and beyond. At first glance, it would seem that the sudden
relocation of industries would hollow out these East Asian economies and alter
the existing patterns of business. However, it was only after 1985 that the
emergent business systems in each country became evident to analysts. This is
the time that the total dollar value of the exports continued to climb in South
Korea and Taiwan and, for a while, in Japan, too. With their labor-intensive
factories now in other countries, (p.176) firms in Taiwan and South Korea
moved toward higher value-added industries, which reinforced the mode of
making inter-firm alliances.
The top four South Korean chaebol (i.e., Samsung, Hyundai, Lucky-Goldstar, and
Daewoo) became even more dominant in the Korean economy as vertically
integrated producers of final products for export. These few business groups
epitomized the Korean business system. Most of the other chaebol were much
smaller and served niche markets in the local economy.11 Aided by the Korean
government, these few top chaebol (along with Sunkyong and Kia) invested
heavily in the capital-intensive mass production of automobiles, semi-conductor
memory chips (especially DRAM), ship-building, and large household appliances.
They competed for market share with each other and with Japanese keiretsu
making the same products, and over the next decade, the Korean firms had
captured a sizeable share of the DRAM market, which increasingly made DRAMs
into a product with commodity pricing, and a small but increasing share of the
automobile market as well. The top chaebol also made a range of computers
marketed under their own brand name as well as the brand names of other
firms.
The chaebols’ foray into computer making was not very successful, however,
because Taiwanese manufacturers were able to capture the lion’s share of the
supplier market for the final products, as well as for most of the component
parts. Similar to the Taiwanese firms in other sectors, these manufacturers,
consisting of small, medium, and modestly large-sized independently owned
firms, organized in satellite assembly systems that excelled in contract
manufacturing. Taiwan’s modular mode of manufacturing proved to have an
affinity with the modular architecture of the consumer electronic industry that
emerged in the 1980s.
Page 17 of 32
In the mid-1980s, the US market for computers turned decisively toward

personal computers (PC). Apple Computers had been among the first to develop
a computer for individual use, but IBM’s (International Business Machines) PCs,
first introduced in 1981, won out. Instead of producing all the parts themselves,
including software, as it did for its mainframes, IBM modularized the
architecture of its PC around Intel’s microprocessors and Microsoft’s software
(MSDOS), and a vast array of individual components (e.g., motherboards,
monitors, and peripherals). Because IBM did not make its technology
proprietary, other US manufacturers also used the Intel and Microsoft core
(sometimes referred to as Wintel) to make clones of the IBM PC. These IBM
compatible PCs soon captured a large part of a rapidly increasing consumer
market targeted at individuals as well as businesses.
From the early 1970s, Taiwanese small and medium-sized firms had been
making component parts for Taiwan’s growing consumer electronics industry,
first for multinational firms making televisions and transistor radios in Taiwan’s
export processing zone and then for Taiwanese assemblers that produced the
same products under contract with Western and Japanese firms. When Apple
Computers and IBM first started to contract the manufacture of some key
components and peripherals, they used a number of Taiwanese manufacturers
who had links to California’s Silicon Valley firms. The PC industry moved very
(p.177) quickly to complete modularization, particularly after the entry of the
online merchandisers, Dell Computers (established in 1984) and Gateway
(1985). These two firms pioneered the direct-sales model for ‘built-to-order’
personal computers, and soon became the leading sellers of PCs in the US
without making any of their own component parts. Just like any retailer, Dell and
Gateway became specialists in supply-chain management. As the Dell model of
PC merchandising prevailed, dedicated computer makers (e.g., Hewlett Packard,
Compaq, and Apple) that designed and partially manufactured their computers
switched to the Dell model, becoming merchandisers themselves (Dedrick and
Kraemer, 2011). With this switch, Taiwanese contract manufacturers became the
world’s leading PC and laptop assemblers and component part makers for these
and increasingly for other merchandisers as well. As consolidation occurred at
the merchandising end, contract manufacturers supplying their products also
consolidated their position as OEM and ODM producers (Dedrick and Kraemer,
2005).
Governments also jumped into the computer business by attempting to make

their national firms globally competitive in the production of high technology
products. Each government, however, embarked on a different strategy. In the
1980s, the Japanese government targeted high technology sectors for growth,
and facilitated their expansion by organizing inter-keiretsu consortia around
selected high technology products. Japanese keiretsu, however, came late to the
global boom in PC production. They had made the same strategic mistake that
IBM made. Hotly competing with each other for global market share, Japanese
Page 18 of 32
business groups initially specialized in making main frame and mini-computers

with proprietary components and software. By the time they entered the PC
industry, with the exception of Toshiba, they primarily made key component
parts (e.g., liquid crystal display panels, DRAM) for Taiwanese and Korean firms.
The South Korean government promoted and gave low-cost loans to the top
chaebol to make DRAMs. In Taiwan, the government sponsored and partially
financed Taiwan Semi-conductor Manufacturing Corporation (TSMC) as an up-
stream contact manufacturer that would make made-to-order chips for any firm.
In its founding charter, TSMC was forbidden to make any downstream products.
TSMC became to the computer industry what Formosa Plastic was to the plastics
industries: the core manufacturer of component parts that other firms used to
make consumer products (Matthew and Cho, 2000).
Each of these governmental strategies formed around what was perceived to be

the economy’s competitive advantages (for Japan, high quality, collaborative
manufacturing; for South Korea, capital-intensive mass production; and for
Taiwan, contract manufacturing). But the strategies were not equally successful.
By the mid-1990s, prices for South Korean and Japanese DRAM prices were
declining, and Japan’s proprietary mini-computers were losing out in the global
market. At the same time, the sales of American PC merchandisers were
booming, as was Taiwan’s contract manufacturing for this entire sector. With the
Asian Financial Crisis in 1997–8, Taiwan’s strategy proved to be the clear
winner, as the South Korean and Japanese global computer exports fell
precipitously. TSMC’s foundry system also proved to be the winning model for
the production of semiconductors, as TSMC added additional plants and other
East Asian firms adopted the foundry model.
(p.178) The next generation of high technology consumer products—mobile

phones—appears to be repeating the product cycle that computers went
through. The early advantages went to the vertically integrated manufacturers:
in Europe, to Ericsson and Nokia; in the US to Motorola; and in Asia, to
Samsung. However, as the mobile phones became more like computers using
standardized parts, Taiwanese contract manufacturers took over a large share of
the market. Designers/merchandisers, such as Apple, led the way and relied on
the Taiwanese firm, Hon Hai (Foxconn), as its leading contract manufacturer.
Among the early manufacturers, only Samsung survives as a manufacturer of
smart phones. Ericsson, Nokia, and Motorola, like Hewlett Packard and Compac
before them, moved from manufacturer to merchandiser within just a few years
after Apple introduced the iPhone, and then later sold their smart phone
divisions to other firms. Samsung was able not only to survive, but also to
succeed globally as the largest maker of smart phones by maintaining its
innovative technology and by devoting a high percentage of its total costs to
advertising. However, Samsung’s long term success in the smart phone market
is an open question. The Apple iPhone is taking a large share of the high-end
Page 19 of 32
market, and much cheaper smart phones, all made by contract manufacturers,
are capturing the low end part of the market.
By the late 1990s, Taiwan’s high technology contract manufactures also began
to move their factories to Mainland China. In the last decade, in China, they are
part of a cluster of component parts manufacturers and assemblers that also
includes Chinese and Korean firms. Increasingly, all smart phone makers and
merchandisers are drawing on components made by firms in this cluster to
design and make their own smart phones, including Samsung and Samsung’s
main smart phone competitor in Korea, LG.
Looking back over the past forty years, we can conclude that Taiwanese
industrialists have developed into the world’s most sophisticated contract
manufacturers today, a development that has had the effect of crowding out
other existing and would be contract manufacturers (Hamilton and Kao,
forthcoming). The three leading South Korean chaebol (Samsung, Hyundai, and
LG) have become three of the world’s most successful vertically integrated,
brand name manufacturers. Their global success has limited entry of firms from
other countries into those areas in which the Korean chaebol excel. The
capitalist endeavors from both countries have substantially shaped the
productive capabilities of other capitalist endeavors around the world.
East Asia’s Retail Revolution, 1985–2014

East Asian countries are no longer just producers of goods; they now rank
among the world’s leading consumers of goods. To capture the rising
consumerism, Asian business groups have entered the domestic markets, not as
producers responding to intermediary demand from Western retailers but as
retailers themselves, as final sellers to consumers located within their own
countries. Their participation in the domestic markets has produced new
commercial landscapes with modern retail infrastructures and distribution
practices across Asia. Again, the patterns of business participation and
competition within the domestic retail (p.179) sector are directly influenced by
prior patterns of business organization and their varying capacities (Shin, 2014).
Prior to the 1980s, Asian business groups played marginal roles in the domestic
retail sectors of Korea and Taiwan except for a few that operated modern
department stores. There were other early modern retail formats, independent
of business groups, such as the local supermarkets (e.g., military-run PX stores).
However, these formats were limited in scale and market influence and had little
significance as modern retail formats. Department store operations mainly
emphasized marketing efforts, targeted small segments of the population, and
largely functioned as a showroom for manufacturers. The early supermarket
chains relied on convoluted distribution networks, often multiple wholesalers,
and showed little rationalization of distribution practices. Wet markets, mom-
and-pop stores, and the large informal economies that were organized through
Page 20 of 32
the activities of small traders and merchants played most significant roles in
fulfilling the daily commercial activities.
These conditions started to change around the mid-1980s, from which point the
domestic retail markets developed through a wave of standardized retail format
diffusion. Following the Uruguay Round of the General Agreement on Tariffs and
Trade (GATT) negotiations, where trade in services appeared as an important
agenda, governments lifted trade barriers (e.g., tariff or foreign-exchange
restrictions) and domestic controls (e.g., real estate or planning laws that
restrict foreign retail entry) that were previously in place to protect their
domestic economies (Davies, 1993). United States Trade Representative also
played a major role in politicizing the trade barriers between the US and its
trading partners and pressured for domestic market liberalization of East Asian
nations (or correction of anticompetitive behavior by keiretsu groups, for the
case of Japan, where alliance-based business dealings were pointed out as the
main barrier for foreign business entry into the domestic market).12 Around this
time global retailers, i.e., Carrefour, Tesco, and Wal-Mart, started to
internationalize by moving into the Asian markets (Wrigley, 2000; Reardon, et.
al., 2003) and played an important role in the diffusion of standardized retail
formats. However, what is less well known is that domestic firms in Asia have
often been more successful in their own countries than these global retailers.
In systematizing the retail sectors, Asian entrepreneurs utilized their capacities

and market position through either cooperating with, or competing against, the
expanding multinationals. In Taiwan, most goods producers remained focused on
export-driven manufacturing by moving operations beyond Taiwan. Only a few
business groups with prior involvement in retailing or other closely related
endeavors (such as department stores, textile, and food production) took up an
interest in developing local consumer markets. However, still outsiders to
modern retailing with limited cross-sector capacities, business groups had to
rely on technology transfers and partnerships with regional and global retailers
to (p.180) complete this task. Before market liberalization, Japanese retailers,
particularly department store retailers, had played crucial roles in Taiwan by
transferring knowledge in management and store operation. The alliance
between Evergreen and Tokyu in 1977 was among the first such collaboration.
Once foreign investment was deregulated, companies could advance further
collaborative partnerships beyond management transfers to run joint venture
operations as seen in Pacific-Sogo and Shin Kong Mitsukoshi (Chang and
Sternquist, 1993).
By the 1980s, business groups started to enter into other retail sectors with
greater potential and scale, especially food retailing. Uni-President, the largest
Taiwanese processed food manufacturer, was among the first business groups to
enter into modern food retailing as diversification provided the group an
opportunity to vertically integrate distribution operations instead of relying on
Page 21 of 32
traditional channels for product distribution. In 1979, Uni-President introduced

7-Eleven stores to Taiwan through a technology transfer agreement with
Southland Corporation. Other business groups, such as Taisun group and Kuang
Chuan group, followed suit to team-up with other foreign convenience store
retailers, such as FamilyMart.
After the retail sector liberalization in 1986, this collaborative pattern of retail
sector development had only strengthened, this time through joint ventures with
global retailers in hypermarket and supermarket sectors. Business groups
introduced hypermarkets through teaming-up with European and American
retailers and operated stores, mainly under foreign brand names. Uni-President
teamed up with hypermarket retailer Carrefour in 1989 and Far Eastern group
teamed up with Promodès and Casino to introduce hypermarkets Hyper-fee and
Géant in 1993 and 2000. In the supermarket sector, investments of Japanese and
Hong Kong supermarket chains heightened in the 2000s.
This dynamic led to a proliferation of local and foreign tie-ups which became the
main mode of market organization for the Taiwanese retail market. The
government’s retail regulations restricting fully-owned retail enterprises by
foreign investors ensured that domestic business groups would be at the front-
end of retail operations. With only a few exceptions, the resulting joint ventures
operate under the name of the foreign partners (e.g., Carrefour, Costco, and 7-
Eleven) and source heavily from the global retailers’ supplier networks that
feature products bearing foreign brand names (even though some of those
products are actually made by Taiwanese contract manufacturers). As a result of
these joint ventures, Taiwan’s retail landscape includes a large list of foreign
retail operations that source globally produced products that bear foreign brand
names, often originating from their national factories. In some specialty retailing
sectors, contract manufacturers, such as Pou Chen (listed as Yue Yuen in Hong
Kong, the largest contract manufacturer of athletic shoes), have also set up
subsidiaries to operate retail stores that distribute Western branded products
that they manufactured.13 Resulting from the successes of these organized retail
activities, the food and (p.181) general merchandising retail sectors are much
more concentrated than they were in the past, but are still not nearly as
concentrated as their Korean counterparts.
In Korea, the retail revolution has been led by core chaebol groups and their
spun off subsidiaries. In the midst of the 1997 financial crisis, IMF mandated
division swaps and chaebol restructuring played an especially large role in
creating focused chaebol retailers that would transform the domestic market.
Newly established retail groups of Shinsegae and CJ Groups (both spun off from
the Samsung Group), Hyundai Department Store Group (spun off from the
Hyundai Group), and GS Group (spun off from LG), all of which are still owned
Page 22 of 32
by branches of the original family that founded the business group, played
crucial roles in reorganizing the retail sector of Korea.
The chaebol retailers utilized their multi-sectoral capacities and ties within the
domestic market to develop and introduce various retail formats—convenience
stores, hypermarkets, SSMs (medium-sized enterprise-class supermarkets),
specialty retailers, catalog retailers, and category killers—and during this
process increasingly posed stronger competition against the incoming global
retailers. Like their Taiwanese counterparts, their early participation in
department stores and convenience stores sectors relied on technology transfers
from Western and Japanese retailers. However, unlike their Taiwanese
counterparts, chaebol retailers became increasingly self-sufficient as they grew
in capacity and accumulated experience in retailing. During the decade
following 1996, they have vastly expanded their portfolios and concentrated the
domestic retail sector by introducing stores that mostly bear domestic brand
names and that increasingly rely on internal capacities and affiliate firms. Their
considerable market power set the stage for competition within the Korean retail
sector, so much so that they were able to quickly drive out multinational
retailers such as Wal-Mart and Carrefour that established stores in Korea. And
they have substantially wiped out the small and medium-sized firms that
previously dominated this sector of the service economy.
The chaebol-led development of organized retailing means that there are now
integrated channels for distributing Korean brand name products within the
domestic market. The retail outlets provide direct channels to distribute various
brand name products systematically into the domestic markets for everyday use.
While foreign branded products dominate some sparsely occupied food sectors
(e.g., Kraft and Nestle in the hot drinks sector; Colgate, and Proctor and Gamble
in pet products; Sony and Nintendo in the video gaming sector), most consumer
products sold in the Korean market are globally sourced products that bear local
brand names; some bear globally known names such as Samsung and LG, and
others bear names of the various domestic goods producing firms such as Lotte,
CJ, AmorePacific, Pulmuone, and E-land.14 These changes together have
increased the overall concentration and demand-responsiveness of the Korean
domestic (p.182) market and the overall power of the chaebol in the economy,
not only as producers but also as integrated retailers. These retail firms now
drive many of the domestic consumer market trends.
Conclusion
In the second half of the nineteenth century, new systems of transportation
opened the way for entrepreneurs to establish centralized manufacturing
facilities that served national and international markets. These new multi-
divisional businesses soon dominated national economies and reduced the
relative prominence of merchants and commerce in earlier periods. A century
later, in the second half of the twentieth century, further advances in logistics
Page 23 of 32
and communication have reestablished the preeminence of modern-day

merchants, the retailers and merchandisers (Hamilton, Petrovic, and Senaur,
2011). These new merchants use point-of-sales information to tap into consumer
demand and use global logistics to fill that demand by ordering consumer goods
from contract manufacturers that could, in principle, be located anywhere in the
world.
East Asian manufacturers, however, were the first to work with these new
merchants and evolved with them over time, by developing increasingly
sophisticated demand-responsive economic systems and, after 1985, by diffusing
those systems throughout Asia. These entrepreneurs developed their own
distinct strategies of being demand-responsive. The divergent patterned
responses of Korean and Taiwanese entrepreneurs, in part, reflect the
embeddedness of economic actors within historical and societal contexts, each
with different institutions supporting how the respective economy is organized.
Nonetheless, the progressive systematization of national economies is as much
an outcome of global capitalist competition, as it is of government intervention.
It is this competition that motivates the entrepreneurial activity of profit-seeking
and the invention of new technologies leading to new and innovative methods of
making money. Government planning and state actions structure and often
provide guidance for economic action, but at times become inconsequential or
even counterproductive in steering directions of economic activities.
Our examination, summarized in Table 6.1 below, showed that Japanese,

Taiwanese, and Korean businesses have each responded to the opportunities
within the domestic, regional, and global economy in different ways. Each
response has built on and reinforced prior differences in economic organization.
Small differences initially led to huge differences as time went on. The large-
scale changes in the 1980s and 1990s—the Plaza Accord, the Asian Financial
Crisis, the restructuring of regional and global production networks and
increasing modularization, developing service landscapes, technological
innovation in logistics and distribution—did not lead to the disappearance of the
previous inter-country differences in economic organization. Rather, the
post-1985 Asian business systems display considerable continuity as each
economy have become more internally cohesive and as national organizational
responses have become more systematic. The Korean economy has become more
concentrated, as the (p.183)
Page 24 of 32
Table 6.1. Summary of changes in Asian economies, 1965–2000
1965–1985 Global Economic Ÿ Retail Revolution

Developments
Ÿ Logistics Revolution
Ÿ Outsourcing by retailers and merchandisers
Regional Ÿ Growth of Asian contract manufacturing (consumer commodity goods)

Developments
Ÿ Sequential ordering ➨ Progressive Differentiation
Local Business Japan Korea Taiwan

Organization
Dominant Business Keiretsu Chaebol SME
Unit
Production Activity Branded consumer Mass production of Batch production of

goods or up-stream cheaper finished differentiated
inputs goods (CM) consumer goods
(CM)
Firm Characteristics Large specialized Large diversified Small specialized
1985–2000 Global Economic Ÿ Plaza Accord (1985) and currency reevaluation of Japan
Developments
Ÿ Development of lean-retailing
Ÿ Increasing modularization of production
Regional Ÿ China’s rise and regionalization of production

Developments
Ÿ Manufacturing relocation and industrial upgrading
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Ÿ Retail development and market concentration
Local Economic Japanese Keiretsu Korean Chaebol Taiwanese firms

Organization
Developments in Early start, but Upgrading (brand Upgrading (Modular
High Technology comparative development, DRAM PC/semi-conductor
Production disadvantage chips) production)
Component part OBM/part supply CM/OEM/ODM

manufacturing
High quality Capital-intensive Contract

collaborative mass production manufacturing
manufacturing
Developments in Formation of Chaebol Collaborative retail

Retailing and independent vertical diversification into development
Domestic Consumer retail groupings retailing between business
Goods Market (from 1950s) groups and global
retailers
Domestic branded Domestic branded Large array of

goods goods foreign branded
goods
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top chaebol continued to vertically integrate production in capital-intensive industries

and to move into higher value added processes (i.e., branding) as they also expanded
into domestic retail operations. These moves have heightened chaebol control of the
domestic market, in which they now play large roles in channeling domestic demand
toward their own branded products.
(p.184) In contrast, Taiwanese businesses continued to consolidate their
position as the world’s leading contract manufacturers through filling the orders
of Western brand name merchandisers. Their operations have ensured the
continued dominance of Taiwanese businesses in key export-oriented OEM and
ODM operations in such sectors as consumer electronics. These moves have
further reinforced their capacities in flexible and specialized production. As a
result of this continued specialization, the Taiwanese domestic economy
developed into a consumer landscape with a vast lineup of foreign brands that
are often produced in Taiwanese-owned factories.
These continuing economic changes lead us to conclude that national economies

continue to exhibit and elaborate on their internal consistencies as well as their
contradictions. The incremental process of making money drives these
economies to further integrate into the regional and global capitalist economic
landscape. This conclusion points to a paradox: Even as the restructuring of
global production, distribution, and logistics has substantially heightened
capitalist interconnectivity, the participation of national actors (including
governments and firms) has only increased their internal cohesiveness and has
maintained the organizational diversity among East Asian economies. From our
point of view, there are not varieties of capitalism, but rather varieties of ways
that different countries may join, or hold back, the main currents of global
capitalism. Therefore, the first object of analysis is the operation of the global
economy. Only then do country stories make any sense.
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Notes:
(1) Although many analysts do this, some distinguish between governing
institutions and their changing nature, on the one hand, and dominant forms of
economic coordination and control, on the other hand, and then attempt to
specify the causal connections between them. The national cohesion and
distinctiveness of business systems are thus empirically contingent, not
theoretically necessary (e.g., Morgan and Whitley, 2012).
(2) See a refutation of this assertion in Feenstra and Hamilton (2006) and
Hamilton and Shin (2015).
(3) It is worth noting that these organizational dimensions are also found in
Economy and Society, where Weber (1978: 108) describes money in capitalist
economies as ‘primarily as weapon’ in the competitive struggle of ‘man against
man.’
(4) Rational calculation directed toward making money in the global economy is,
of course, directly shaped by the institutional environments in which the
decisions are made. However, the efficacy of those decisions is tested in the
context of global economic competition.
(5) Note that we are not assigning causal priority to technological changes in
and of themselves. Changes in technology opened the door to opportunities for
entrepreneurs, whose motivations and possibilities for decisive action are
directly conditioned by social and political factors. Still, without the railways
Page 30 of 32
expanding the size of possible markets, the various changes that did occur
would not have been possible.
(6) When Barry Bluestone and his colleagues, in 1981, used the term ‘retail
revolution’ to describe the transformation in US retailing after World War II,
they were referring to the growing dominance of three types of retailers: large
department store chains, discount stores, and national retail holding companies.
At the time of their research in the late 1970s, Sears and J.C. Penney were the
two largest department store chains, K-Mart the largest discount store,
Federated Department Stores the largest holding company.
(7) Most containers in use are forty foot in length, and thus measure two TEUs.
In 2008, Wal-Mart alone accounted for one out of every twenty-four containers
imported into the US, or 720,000 TEU (Journal of Commerce 2009: 22A).
(8) To continue the analogy between Schelling (1978) and Feenstra and Hamilton
(2006), we note that there are preconditions in both cases. In Schelling’s game-
theory example, moderate prejudice preceded individual decisions. Individual
decisions, however, led to a situation of rigid segregation over time. In Feenstra
and Hamilton’s (2006) explanation small differences in patriarchal family
institutions, as well as small differences in rural/urban economic endeavors, set
the stage for big-buyer decisions on which economy to favor in making orders
for what products. These individual decisions, in turn, led to big and growing
differences in industrial structure.
(9) It is worth noting that this divergence led to continual readjustments in the
organization of the respective business system, and that these readjustments
continued after 1985. As South Korean and Japanese business group grew
larger, they had to work out new ways of financing normal business operations,
new ways to preserve ownership as companies were listed on the respective
stock markets, new ways to maintain control within the group. Not all of these
measures were successful, especially after the Asian Financial Crisis in 1997.
Similarly, business group in Hong Kong left manufacturing sector for property
and infrastructure sectors, all of which required new approaches to old
problems of governance and control. In contrast, as they moved to China,
Taiwanese business groups became more centered on manufacturing and greatly
increased the size and complexity of their operations.
(10) For a list of defunct retail stores and department stores in the US, see http://
en.wikipedia.org/wiki/List_of_defunct_retailers_of_the_United_States http://
en.wikipedia.org/wiki/List_of_defunct_department_stores_of_the_United_States
(11) We should note an exception, the Hanjin chaebol which owns Korean Air.
Page 31 of 32
(12) Between 1989 and 1990, the United States Trade Representative came up
with a list of countries with significant trade barriers. Japan, India, and Brazil
were named as ‘priority states’ on this list, and others such as South Korea,
Taiwan, and Thailand were put on a ‘watch list.’ Both South Korea and Taiwan
opened previously closed market sectors, including retailing, and lowered
import quotas during this period (Davies, 1993).
(13) While a large proportion of products that go into the Taiwanese market are
Western branded, an increasing number of domestic consumer brands (e.g.,
men’s leisure-suit brand Carnival and a denim brand, IBS, ‘Net’ by Madam
group) are being launched to serve the expanding domestic market. However,
most of these products are pushed out of export-producing facilities (Chyr,
2010).
(14) Some of these firms, such as Lotte, CJ, and AmorePacific are smaller
domestic chabol or chaebol spin-offs, that were founded mid-century, while
others, such as Pulmuone and E-Land, are newly founded groups. As domestic
goods producers, these chaebol groups and firms show more cohesive structures
and operate within a few domestic consumer goods sectors such as food,
apparel, and cosmetics. Yet they still characteristically conform to the South
Korean business systems model as their operations are vertically integrated and
their lineup usually includes a large portfolio of brands and subsidiary firms that
target multiple consumer market segments.
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Change with Continuity

Changing Asian Business Systems: Globalization,

Print publication date: 2016

Change with Continuity

Abstract and Keywords

Keywords: demand-responsive capitalism, producer-driven capitalism, competition, containerized

These country narratives imply that a nation’s business system is a product of

The equation of state/society with capitalist economy misses the essential

When conceptualized in this way, capitalism is not a stable and readily

Institutions frame such decisions rather than determine their outcome.

It is the knowing and active participation in these inter-subjective worlds of

We start by emphasizing two important lessons learned from Alfred Chandler’s

A Developmental History of the Asian Capitalism

Producer-Driven Economies before World War II

There are two important reasons for us to summarize Chandler’s account of

and the rise of mechanization), entrepreneurial organization (e.g., the creation

The Retail Revolution and the Rise of Demand-Responsive Economies,

Another trend is equally apparent. Clusters of firms in one global location

The Shopping Center Boom

The Beginnings of Export-Oriented Industrialization in East Asia

The first containerized shipping company was started by Malcom McLean,

facilities in (p.170) New Jersey and negotiated contracts to build a container

By contrast, in Taiwan, although the government attempted, but failed to

It is clear that accelerating orders drove the process of business system

Lean-Retailing and the Rationalization of East Asian Business Systems,

These innovations forced retailers to adapt quickly to the new competitive

In the mid-1980s, the US market for computers turned decisively toward

Governments also jumped into the computer business by attempting to make

business groups initially specialized in making main frame and mini-computers

Each of these governmental strategies formed around what was perceived to be

(p.178) The next generation of high technology consumer products—mobile

East Asia’s Retail Revolution, 1985–2014

In systematizing the retail sectors, Asian entrepreneurs utilized their capacities

traditional channels for product distribution. In 1979, Uni-President introduced

and communication have reestablished the preeminence of modern-day

Our examination, summarized in Table 6.1 below, showed that Japanese,

Table 6.1. Summary of changes in Asian economies, 1965–2000

1965–1985 Global Economic Ÿ Retail Revolution

Ÿ Outsourcing by retailers and merchandisers

Regional Ÿ Growth of Asian contract manufacturing (consumer commodity goods)

Local Business Japan Korea Taiwan

Production Activity Branded consumer Mass production of Batch production of

Firm Characteristics Large specialized Large diversified Small specialized

Ÿ Increasing modularization of production

Regional Ÿ China’s rise and regionalization of production

Ÿ Retail development and market concentration

Local Economic Japanese Keiretsu Korean Chaebol Taiwanese firms

Component part OBM/part supply CM/OEM/ODM

High quality Capital-intensive Contract

Developments in Formation of Chaebol Collaborative retail

Domestic branded Domestic branded Large array of

top chaebol continued to vertically integrate production in capital-intensive industries

These continuing economic changes lead us to conclude that national economies

Abernathy, F. H., Dunlop, J. T., Hammond, J. H. and Weil, D. 1999, A Stitch in

Biggs, T. S. 1988, Financing the emergence of small and medium enterprises in

Bonacich, E., and Waller, D. V. 1994, Mapping a global industry: apparel

Chandler, A. D. Jr. 1984, The Emergence of Managerial Capitalism, Business

Chandler, A. D. Jr. and Daems., H. (eds.) 1980, Managerial Hierarchies:

Chang, D. L. and Sternquist, B. 1993, Taiwanese department store industry: an

Chyr, S. Y. 2010, The challenges of moving towards OBM: a study of Taiwan

Dedrick, J. and Kraemer, K. 2005, The impacts of IT on firm and industry

Dedrick, J. and Kraemer, K. 2011, Market making in the personal computer

DiMaggio, P. J. and Powell, W. 1983, Iron cage revisited: institutional