The Disintegration of Production

The Disintegration of Production

Firm Strategy and Industrial Development in China

Edited by Mariko Watanabe

In the past two decades, China has experienced rapid industrial and economic growth. This fascinating book explores the unique Chinese business strategy of vigorous market entry and low prices, which has been the key feature of this accelerated industrial growth.

Chapter 2: The “make or buy” decision and supply-chain governance

Tomoo Marukawa

Subjects: asian studies, asian development, asian economics, development studies, asian development, development economics, economics and finance, asian economics, development economics, industrial organisation, institutional economics


Chapter 1 of this volume and my previous study (Marukawa 2007) show that Chinese firms tend to buy key components from independent suppliers, whereas Japanese firms tend to produce key components themselves within their firm or group. In my study, I argued that since Chinese firms often rely on a common supplier for key components, they end up making similar products, which leads to fierce competition and a squeezing of the profit margin. I therefore predicted that some Chinese firms would try to integrate key component production in an effort to differentiate their products and escape from the fierce competition. I further compared the choices taken by pairs of Chinese and Japanese firms with respect to vertical integration versus non-integration, and in instances where both firms chose non-integration, I compared the openness of component procurement. I found that Japanese firms tend to procure components from a closed group of suppliers that they regard as reliable, while Chinese firms are more open to working with new suppliers. This distinction cannot be applied when analyzing the behaviors of Chinese versus European/American firms, however, because European/American firms are also relatively more open to working with new suppliers than Japanese firms.

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