High-tech start-ups, unconventional management, and a party atmosphere: it sounds like a scene from a modern business incubator, but it also describes Japan’s cotton-spinning industry in the late 19th century.
At that time, entrepreneurs opened dozens of new yarn companies in the rapidly industrializing country. Most were doomed to be taken over before 1920. But their acquirers—bigger, older spinning companies with outmoded equipment—quickly converted their new technology into an industry boom.
Chicago Booth’s Chad Syverson and his fellow researchers describe how talented managers raised the fortunes of an entire country through mergers and acquisitions. Their research uncovers common traits of successful acquirers: they effectively balance operations and customer relationships, and they use resources more efficiently than their targets.
Syverson and his collaborators find that the acquirers did not, as business theory predicts, simply buy less-productive plants and then raise the plants’ productivity to match their own factories. On average, the acquirers’ original holdings were no more productive than the plants they purchased. Nor did the buyers invest in modern technology before hunting for acquisitions, a common first step for boosting profits.
Instead, managers at the acquiring companies found clever ways to handle fluctuating demand for yarn. One strategy was to include prominent yarn traders among their board members and shareholders. Trading houses were the middlemen of the industry, buying and distributing almost all the yarn Japan produced. When demand was low, the traders purchased yarn only from the manufacturers with which they had close ties.
Even before they made acquisitions, these older manufacturers were using their capital much more efficiently than the newer plants were using theirs. As a group, they mobilized 25 percent more of their combined inputs, such as labor and capital, toward production than the companies they later took over.
The researchers’ data set encompasses 110 Japanese cotton-spinning plants and 74 mergers and acquisitions between 1896 and 1920. Japanese yarn production exploded in the late 1890s with the introduction of raw-cotton imports and more-efficient machinery. The number of spinning companies in Japan tripled, output increased 17-fold, and yarn exports helped the country become an international trade leader.
But the industry was hard hit by China’s Boxer Rebellion in 1900, which temporarily disrupted trade. An ensuing glut of cotton yarn discouraged new entrants to Japan’s industry for almost two decades. It also sparked a wave of mergers and acquisitions. Between 1897 and 1915, there was little entry into the industry, but 75 percent of its capacity changed hands.
As a result of these acquisitions, Japan’s cotton-spinning industry experienced rapid growth. Between 1900 and 1914, domestic output of cotton yarn more than doubled. By 1914, the industry was supplying all of Japan’s domestic yarn and exporting more than a quarter of its production.
The industry’s resurgence came from the combination of the acquirers’ superior managers and their targets’ advanced technology. The new owners immediately began using the modern machinery more intensely. Capacity utilization jumped 9 percent in acquired plants in the first few years. Payrolls rose even while inventories dropped. By four or five years after the purchase, profits at the acquired plants had almost doubled. Collectively, these changes helped pull the country into a new era of prosperity.
Well-preserved records gave Syverson and his co-researchers insight into each plant’s operations and profitability before and after mergers. Syverson worked with Serguey Braguinsky of Carnegie Mellon University, Atsushi Ohyama at Hokkaido University, and Tetsuji Okazaki of University of Tokyo to sift through century-old documents, many housed at the Osaka University Library. Among these were prefectural statistical yearbooks; copies of Geppo, the bulletin of the All-Japan Cotton Spinners’ Association; semiannual financial reports on the yarn industry in Reference on Cotton Spinning; and individual company reports.
The research compiles plant-by-plant details such as the daily number of spindles in operation, output of finished cotton, average daily wages, and prices for raw materials and finished products. These unusual data enable the researchers to see operations-level changes inside the plants, rather than just the resulting differences in financial performance, which are often the only measurements that companies will make public in recent industry consolidations.
Judging by inventory levels and capacity utilization at each plant, the takeover targets had a harder time managing the demand for yarn, often halting production during downturns. Unsold yarn piled up, and revenues were not invested. The acquired plants worked only about 80 percent of the days that the acquiring companies were open. While finished yarn from most manufacturers sold for roughly equivalent prices, the acquirers were a considerably more profitable group.
The researchers show how one board member reformed a plant in 1898. Heizaemon Hibiya’s first visit to Onagigawa Cotton Fabrics in Tokyo appalled him (see “Gambling, smoking, loafing: How factories operated,” above). He immediately banned loafing and fired workers who complained. He made daily trips to the plant to discuss production practices and to inspect the quality of the yarn. Realizing that factory resources were spread too thin, he shut down parts of the plant and concentrated production in key areas.
The researchers estimate that Hibiya achieved double the average industry productivity gains at Onagigawa within three years, about a 70 percent increase in labor productivity. Hibiya’s strategy was similar to that of successful acquirers of Indian textile firms more than a century later. The Indian plants improved productivity simply by adopting basic management practices, such as providing routine maintenance on equipment, according to research published in 2013 by Stanford University economist Nicholas Bloom.
The experience of the Japanese cotton-spinning industry underscores the role that established markets can play in a developing country’s growth. The orderly sales of these businesses were possible largely because they were set up as joint-stock companies, with shareholders and regular reports on operations and finances, rather than as the closely held family businesses that typically define industries in developing regions. The growth produced by these transactions helped elevate Japan, more rapidly than many other countries, to the status of a developed economy.