All About Japan Retailing Model

The abundance of small stores in Japanese retailing is often considered to be an impediment to

imports of American and European products into Japan [US International Trade Commission
(1990)]. Small retailers would not only be more reluctant to sell foreign products than large stores [Batzer and Laumer (1989) and Montgomery (1991)], but also use their political power to prevent the establishment of large stores. Considerable political pressure from small retailers of the leading Liberal Democratic Party has led to the enactment of the Large Scale Retail Store Law [Kirby (1983), Kurebayashi (1991)]. This law favours small stores in three ways. First, the small
stores are allowed to have more flexible opening hours than the large stores. Second, the law only
allows for the establishment of a large-scale retail store with the prior consent of the small retailers
in the area. Third, the complex procedures to obtain the consent of the retailers delay the
establishment of the large-scale stores considerably, sometimes by 10 years .
The US Congress has been exercising strong political pressure on the
Japanese government to decrease the impediments to large-scale retail enterprises and in
particular to repeal this Large Scale Retail Store Law. This pressure resulted in an amendment of
the Law in 1990, which made the establishment procedures of large-scale stores less complicated
and less time consuming.
Small store sales shares in Japan are high. In 1988 these shares were ll%, 28% and 49% for
stores with 1-2, l-4 and l-9 employees (shopkeeper and working family members included),
respectively. This high share of smallness is reflected by the high number of stores per 1000
inhabitants: 13.6 in Japan and 3.5 in the United States for 1985 [Census of Commerce (1985) and
Ravesloot and Vogelesang (1989)]. The high small store presence can be attributed to a number of
factors, First, Japanese prefer fresh goods and usually have only very limited home storage
capacity and therefore greatly value nearby stores [Flath (1990)]. Second, many small stores offer
an important local function as neighbourhood meeting points [Bestor (1989)]. Third, in many
cases stores are established to generate income during retirement years or to supplement family
income. By screening out certain groups, in particular women, and by retiring workers early, large
firms create large pools of people having a high potential of starting their own firm [Caves and
Uekusa (1976), Patrick and Rohlen (1987)]. Fourth, small businesses are protected by laws
imposing obstacles to the establishment of large stores [Kirby (1983), Kurebayashi (1991)]. Small
retailers not only profit from the Large Scale Retail Store Law, but are also not obliged to
administrate their transactions. They pay less taxes, and do not have to collect the 3%
consumption tax. Fifth, small stores profit from low retailer reorder costs [Flath (1990)]. Japan has
a highly developed wholesaling network with relatively small distances between producers,
wholesalers and retailers. And sixth, the purpose of being in business is not always to generate
income, but often to protect claims on land and to maintain advantageous property tax
arrangements [Patrick and Rohlen (1987)].
The purpose of the present study is to explain the differences in the development of small store
presence across shop-types. A fixed effects multinomial logit market share model is used to
investigate the effects of shop-type characteristics (i.e. industry-specific variables) which may
enhance opportunities for large retail store market share expansion, like growing shares of the
shop-type in total consumer expenditures, growing inventory turnover, growing extent of
diversification, and high productivity differentials between small and large stores. Similar
determinants have been used in recent studies to explain the presence of small businesses in the
manufacturing industries [White (1982), Acs and Audretsch (1989a, b), Schwalbach (1989)]. Our
study, however, is the first to explain the presence of small firms in retailing, one of the major
service industries.