Externalization of Organizations and the Dual Governance Structure

Abstract

Japanese corporations have developed organizational structures that differ from their Western counterparts. One important difference lies in the externalization of organizational units as legally independent firms, rendering the typical large Japanese firm a collection of inside divisions and outside subsidiaries (corporate group). This arrangement has a number of positive effects on firms’ performance due to a blend of external and HQ evaluation, a reduction of governance costs and dysfunctional control functions, and the facilitation of organizational learning through the exchange of (‘uncomfortable’) information across companies. Based on an indepth case study (Matsushita Electric Industrial), the paper argues for the successful implementation of ‘dual governance structures’.