Legal innovation for business: Introduction of legal forms of business in
Japan before World War II
Paper for presentation at the 17th Annual Congress of the European Business History
Association, Uppsala University, Uppsala, Sweden, August 22–24, 2013
Preliminary Draft
August 4, 2013
Revised: August 13, 2013
Takashi SHIMIZU, Ph.D.
Department of Advanced Social and International Studies
Graduate School of Arts and Sciences
The University of Tokyo
[email protected]
1. INTRODUCTION
This paper investigates a case of new legal forms of business being used as legal
innovations.
Major economic changes such as industrialization, rapid economic growth, or the
development of business organizations create new challenges for business, which often make
operating according to old legal forms difficult. Chandler (1977) suggested, for example, that,
while the partnership form was popular in some sectors in the U.S. even in the middle of the 19th
century, it was not suitable and thus not popular for “modern business enterprises” (see also
Cochran, 1974).
In response to these changes, governments often introduce new legal business forms. The
rapid expansion of the corporate form is often considered a typical example of this response, but
the European introduction of the “private limited liability company” or “PLLC” (e.g., Gesellschaft
mit beschränkter Haftung [GmbH] in Germany, the Société à responsabilité limitée [SARL] in
France, and the “private company” in the U.K.) can be regarded as an example as well (Guinnane
et al. 2007)
Several questions arise concerning these new legal forms of business. How are they
introduced into an economy? Why are they introduced, and how are they used? This paper is an
attempt to answer these questions by using data drawn from pre-World War II Japan. We focus on
Japan because, at the time of the era under study, it had achieved rapid industrialization and had
introduced completely new legal forms of business from Europe. Japan’s legal forms of business
had not been invented by the Japanese government or Japanese scholars but were introduced as
new legal instruments for the development of the nation’s economy and businesses. Moreover, the
Japanese forms were different from their European originals. Thus, we can consider them legal
innovations and examine their influence on national economic development by investigating their
impact on Japan.
To this end, this paper first investigates the change in Japan’s number of corporations and
other types of legal forms of business (e.g., partnerships, limited partnerships, companies with
limited liability) using Shimizu (2012). It then examines two notable changes—the decline in
partnerships and limited partnerships during the mid-1930s and the growth in companies with
limited liability (a type of private limited liability company) during the early 1940s—and
investigates why those two changes took place from several viewpoints.
This paper shows that those changes occurred because of the expansion in the size of
Japan’s businesses and the accompanying financial and management problems. The management
problems associated with this expansion was the most important factor.
This paper contributes to several streams of research. First, this paper provides insight
into the relationship between legal institutions and economic development (e.g., La Porta et al.
1997, 1998). It also sheds light on the development of legal forms of business (Guinnane et al.,
2007) and discusses an example of the functioning of legal business forms.
2
1. INCREASE IN JAPANESE COMPANIES BEFORE WORLD WAR II
This section conducts a quantitative analysis of the use of legal forms of business in Japan
using data provided in Shimizu (2012).
Shimizu (2012) examined changes in the number of Japanese companies and in Japanese
legal business forms by examining National Tax Agency (NTA) data.1
These data cover all organizations considered “companies” (kaisha) according to
Japanese commercial law; the word “company” denotes a general category of for-profit
incorporated legal entity 2 —including business corporations (kabushiki geisha), partnerships
established under the Commercial Code (goumei-gaisha), limited partnerships established under
the Commercial Code (goushi-gaisha), companies with limited liability (yugen-gaisha), and
partnerships limited by shares (kabushiki goshi-gaisha)—virtually the same as the German
Kommanditgesellschaft auf Aktien (KGaA) and France’s Société en commandite par actions in
France (abolished in 1951). 3 4
＝＝＝＝＝Take in Figure 1＝＝＝＝＝
＝＝＝＝＝Take in Figure 2＝＝＝＝＝
＝＝＝＝＝Take in Figure 3＝＝＝＝＝
Figures 1, 2, and 3 show the results. Figure 1 indicates the change in the total number of
companies along with the contemporary economic growth rates (i.e., the nominal and real GNP
growth rates in yen and the real GDP growth rate in 1990 expressed in International Geary-Khamis
dollars). Figure 2 shows the rate of increase in the number of each legal form (i.e., corporation,
partnership, limited partnership, and company with limited liability); partnerships limited by shares
are not included, as they are too few. Figure 3 shows the component percentages of legal forms
(based on the number of each form, not their aggregate capital value).
1
The data source is the National Tax Agency Annual Statistics Report (Kokuzei-cho Tokei
Nenpo-sho), the Results of the Corporation Sample Survey (Kaisha Hyohon Chosa Kekka), and the
compilation of the Results of the Corporation Sample Survey published as the 30-year
commemoration edition in 1982 (Kaisha Hyohon Chosa 30-kai Kinen Go). See Shimizu (2012) for
details.
2
Not-for-profit legal entities such as cooperatives, religious organizations, and voluntary
associations are excluded from the kaisha even though they sometimes engage in business
activities. Moreover, unincorporated partnerships established under the commercial code (kumiai)
are not regarded as for-profit legal entities and are thus also excluded from the kaisha.
3
The kaisha also includes several specific types of legal forms, such as cooperative partnerships
(kyogyo-kumiai), mutual companies (sogo-gaisha), and special purpose companies (tokubetsu
mokuteki gaisha). The numbers of those forms are included in the total number of companies, but
the number of each form is not indicated in the figures of this paper.
4
In 2006, Japanese corporate law was completely revised, and the company with limited liability
was abolished. A new PLLC form, limited liability company (godo-gaisha), was introduced.
3
Those figures illustrate four important changes: (1) an increased number of companies as
a whole from around 1906; (2) a rapid increase in business corporations after World War I; (3) an
increase in partnerships and limited partnerships from around 1925 to around 1935, a period of
economic recession; and (4) an explosion in the number of companies with limited liability after
their introduction in 1940 (see also Shimizu, 2012).
Between 1906 and WWI, Japan’s economy grew, but the increase in companies was stable
and exceeded the economic growth rate. We can see from Figure 2 that this increase in companies
was initially caused by an increase in partnerships and limited partnerships but was later (from
around 1920) led by the increase in business corporations. During WWI, companies’ rate of
increase was rather low but suddenly spiked after the war’s end. This rate continued until 1921,
sustained mainly by the increase in business corporations. A sudden drop in the number of
companies is registered for 1922 only because most of the 1922 data is missing due to the Great
Kanto Earthquake of 1923. After around 1925, the number of partnerships and limited partnerships
increased even though the economy was in recession. The peak was around 1931, after which the
increase of those two forms slowed. After around 1935, their rates of increase became negative.
After the introduction of the limited liability company in 1940 (through the Company with Limited
Liability Act), their numbers increased sharply, and they had become one of the popular business
forms by 1945.
Of these changes, the first and second can be explained by considering their economic
circumstances—the changes occurred during a time of economic growth—and can thus be
understood as the results of an economic boom. The change the occurred between 1906 and 1914
can be understood as the result of the economic boom after the Russo-Japanese War (1904–05),
and the change after WWI was clearly caused by the postwar economic boom.
During WWI, European imports ceased, and demand for domestic goods consequently
expanded. However, investing was difficult, since people could not obtain enough materials to
establish new facilities (Takahashi, 1977). After the war, this repressed desire for investment was
liberated, and many new companies were established. This boom continued until 1920, when the
repercussions of the postwar economic boom were felt. The rapid slowing of the growth rate after
1920 was caused by those repercussions.
However, the changes after around 1925 cannot be explained as the results of economic
circumstances. The increase in partnerships and limited partnerships after 1925 occurred during a
recession. In this period, Japan witnessed a series of events, such as the Great Kanto Earthquake in
1923, the Showa Financial Crisis in 1927, and the Great Depression of 1929; it was thus tough
economically. Moreover, business corporations’ rate of increase was lower than that of partnerships
and limited partnerships and was almost comparable to the nation’s economic growth rate.
Companies with limited liability were introduced and grew rapidly during the Second
Sino-Japanese War (beginning in 1937) and the Pacific War, when real GNP was decreasing. This
is another change that cannot be explained with reference to the contemporary economic situation.
4
3. CAUSES OF CHANGES AFTER 1925
If we cannot explain the changes after around 1925 by citing the economic circumstances,
why did they take place? Of the several possible explanations, this paper will focus on the three
most plausible:
(1) A change of tax scheme or other legal scheme(s);
(2) The needs for shareholder protection and continuous operation;
(3) The financial and management problems caused by business expansion.
The first explanation posits that the changes were caused by a change of tax scheme or in
other laws related to business activities. For example, we naturally expect that, when tax laws offer
preferential treatment to certain legal business forms, the number of those forms will increase.
American textbooks often observe that the rapid increase in limited liability companies (LLC) in
the U.S. was driven by the desire to obtain tax reductions (see, for example, Allen and Kraakman,
2003). Changes in other laws, such as corporate, anti-monopoly, or labor laws, may also affect the
number of certain legal forms.
The second explanation was proposed by Guinnane et al. (2007), who, in analyzing the
expansion of PLLCs in Germany, France, the U.K., and the U.S., insisted that the PLLC form is
preferred because it combines the benefit of the corporate form (i.e., continuous operation secured
by legal personhood) with that of the partnership or limited partnership form (i.e., the avoidance of
minority shareholder oppression). Since PLLCs’ internal rules tend to be more flexible than that of
business corporations, they can protect minority shareholders by transferring the right to exit from
the company to them or by introducing supermajority voting rules. In other words, PLLCs have the
advantages of both the corporate form and the partnership form.
The third explanation is suggested by Chandler (1977) and scholars of corporate law (see,
for example, Allen and Kraakman, 2003). When companies grow and their management becomes
more complex, expansion problems will occur, such as those associated with managing more
employees, coordinating business activities between distant places, or establishing standard
operating procedures. To deal with this kind of situation, neither sole proprietorships nor
partnerships are suitable because all the general partners (or the sole proprietor) must be
responsible for management, and thus, the partners cannot delegate management responsibility to
professional managers (even when the management was itself conducted by professional
managers).
Moreover, business expansion requires companies to secure capital, and certain legal
forms are more effective ways of increasing money contributors (i.e., shareholders) and thus
securing financing. Moreover, expansion implies increased risk for the sole proprietor or partners,
and using a certain legal form may be a response to the financial problems caused by the
expansion.
We will investigate the abovementioned explanations to determine which is the most
plausible.
5
(1) Change of Tax Scheme and Other Legal Schemes
We will investigate the relationship between changes in tax and other laws and the
post-1925 changes described above by considering the increase in partnerships and limited
partnerships that began around 1925 and then discussing the rapid increase in companies with
limited liability that occurred after 1940.
We have divided each legal company form into two company types according to amount
of capital: companies with capital of 100 thousand yen and more and those with capital of less than
100 thousand. Our data source was the Tables of Company Statistics (Kaisha Tokei Hyo)5 of the
Ministry of Economy, Trade, and Industry. Though the data’s coverage is narrower than that of the
NTA statistics, the data contain more detail about the companies.
Figure 4 clearly shows that only small partnerships and limited partnerships (those with
capital of less than 100 thousand yen) increased from 1925 to 1935. Partnerships and limited
partnerships with capital of more than 100 thousand yen did not increase, and their rate was close
to that of business corporations. Moreover, the rate of increase of small business corporations (with
capital of less than 100 thousand yen) is similar to that of large business corporations (and of large
partnerships and limited partnerships). Table 1 (shown later) shows results consistent with these.
Moreover, Asagi (2005) noted that most partnerships and limited partnerships of this period were
family-owned; thus, most of the companies established as partnerships and limited partnerships at
this time were former sole proprietorships ( Takahashi, 1977).
It thus seems plausible that those companies were transformed from sole proprietorships
into partnerships or limited partnerships for tax reduction purposes (see Takahashi, 1977, p. 207).
However, Takahashi (2009) reviewed the development of Japan’s corporate tax law and indicated
that a family business could reduce their tax by becoming a kaisha (including partnerships and
limited partnerships) until around 1920, after which amendments to the Income Tax Act and to
related laws and regulations made it difficult to reduce tax by becoming a kaisha. Before the
amendments, corporate income had not been taxed; only dividends were taxed. After the
amendments, both corporate income and dividend were taxed. Moreover, the Results of the
Corporation Sample Survey (Kaisha Hyohon Chosa 30-kai Kinen Go), which explains the
amendments to the tax law and related regulations in chronological order, states that the Income
tax Law was amended in 1923 and 1926 to prevent tax evasion by establishing family-owned
companies. Since, as Figure 2 indicates, partnerships and limited partnerships increased even after
1926, it is not reasonable to conclude that the increase in partnerships and limited partnerships
beginning in 1925 was caused by the desire for tax reductions.
Another possible reason is the reduction in the business tax. The business tax, introduced
in 1878 as a local tax, became national in 1896. Small merchants and manufacturers felt that this
tax was a heavy burden and protested against it. In 1926, the old law was abolished, and a new law,
the Business Profit Tax Act, was established (Ushigome, 2013). However, under the Business
5
These data was drawn from the Japan Statistical Association (1988).
6
Profit Tax Act, the tax burden was heavier for companies than for sole proprietorships. Thus, the
business tax explanation is also implausible. There appear to be no other important contemporary
legal changes that could have affected the number of companies.
Using data from the Tables of Factory Statistics (Kojo Tokei-hyo, now the Census of
Manufacturers, or the Kogyo Tokei Chosa), Arisawa, Aihara, and Nakamura (1960) indicated that
small factories (those with between five and 29 employees) increased during this period,
suggesting that the increase in partnerships and limited partnerships may not have been caused by
transformations from sole proprietorships, but by the increase in new market entrants. In other
words, the increase under study may not have been caused by changes in Japanese business law.
We will now examine the increase in companies with limited liability after their
introduction in 1940. This company form was introduced through the Company with Limited
Liability Act (Yugen Kaisha-ho, Law No. 74 of Showa 13) along with an amendment to the
Commercial Code in 1938. It came into force in 1940.6 Legal status for small and medium-sized
enterprises with limited liability (the PLLC) originated in Germany (through the “GmbH”) in 1892
and was later introduced in the U.K. (1907) and France (1925; see Guinnane et al., 2007). Under
the influence of those examples, a proposal to introduce a type of PLLC to Japan was made by the
Tokyo Chamber of Commerce and other institutions in around 1929. At that time, the Legislative
Council of the Ministry of Justice was discussing amendments to the Commercial Code. The
Council delivered its final amendment proposal (The Outline of the Amendment of the Commercial
Code, or the Shoho Kaisei Yoko) in 1931. This proposal insisted that the government establish a
special law and introduce a new legal form similar to the limited liability or private company as
had been established in other countries (Proposal No.23).
Since the company with limited liability was introduced through the above mentioned
process, it could not have been directly related to the revision of the tax law. In fact, Japan’s
corporate tax scheme was amended in 1940, when corporate tax became independent from other
types of income tax. This amendment affected all kaishas, though, and offered no advantages to
companies with limited liability.
Moreover, though several new laws regarding wartime economic mobilization were
promulgated around 1938 (a notable example being the National Mobilization Act), discussions
about amending the Commercial Code and introducing new legal business forms had begun in the
late 1920s. Thus, the amendments to the Commercial Code were not related to wartime
mobilization.
We therefore conclude that the explosion in the number of companies with limited
liability was not caused by changes to Japan’s tax law or any other laws. In other words, the
post-1925 changes cannot be explained with reference to legal changes.
(2) Needs for Shareholder Protection and Continuous Operation
6
See Asagi (1995) for a detailed explanation of this process.
7
As noted, another possible explanation is that a certain legal form may be preferred if it can
combine the benefit of the corporate form with that of the partnership form. To be more precise,
Guinnane et al. (2007) focused on three points to explain why the PLLC is preferable to other
forms:
(1) The PLLC can usually continue operating without risking untimely dissolution; in a partnership,
however, an unsatisfied partner can request the dissolution of the partnership or a refund of the
money she or he contributed.
(2) The PLLC can protect minority shareholders by conferring the right to exit from the company
or by requiring supermajority rule for important matters; this is difficult to do in corporations,
however, since corporate law does not allow such wide flexibility regarding corporate charters.
(3) Corporations require the application of many rules and procedures to protect minority
shareholders, producing complexity and high establishment and maintenance costs, whereas
PLLCs can be established and maintained at relatively low costs.
Of the above explanations, the third is unique, being cost-related; the other two relate to PLLCs’
substantial benefits.
As the focus of Guinnane et al.(2007) was the PLLC form, we will first consider the 1940
introduction of limited liability companies in Japan and then assess the applicability of Guinnane et
al.’s logic to the increase in partnerships and limited partnerships that occurred after 1925.
Guinnane et al.’s logic seems applicable to companies with limited liability, as they were
able to ensure continuous operation through their legal personality and the inability of shareholders
to request refunds.
As to the second point, a supermajority voting rule was introduced to companies with
limited liability. On important matters, a three-fourths majority was required, with the attendance
of those with at least half of voting rights (as per the Company with Limited Liability Act, Art. 42);
in corporations, meanwhile, a simple majority was enough, with the attendance of those with at
least half of voting rights and half of the shareholders (as per the Commercial Code, amended in
1938, Art. 343). Moreover, the Company with Limited Liability Act allowed special treatment
regarding voting rules: a limited liability company was allowed to introduce multiple voting shares,
but shareholders were not permitted to leave the company or request refunds, as mentioned.
However, applying the authors’ logic to the post-1925 increase in partnerships and limited
partnerships encounters a difficulty.
On the surface, their logic seems applicable. Partnerships and limited partnerships
established under the Commercial Code had a legal personality (i.e., were incorporated). Thus, a
partnership could continue even when an unsatisfied partner wished to dissolve the partnership;
such a partner could leave the partnership and/or request a refund. Thus, the first point holds for
partnerships and limited partnerships at least to some extent. The second point also holds since
8
partners had a right to exit the partnerships and to participate in management. Those partnerships
and limited partnerships were still vulnerable, however, since partners could still leave and/or
request a refund, but the risk of untimely dissolution was relatively low.
However, this logic cannot explain the decline in partnerships and limited partnerships
after 1935 (and especially after 1937). Though discussions regarding the introduction of a new
legal form of PLLC had already started, it had not yet been introduced and thus does not explain
the phenomenon under consideration.
As Guinnane et al. (2007) focus solely on the introduction of the PLLC, applying their
logic to other legal forms and finding it inapplicable may not be fair. However, we clearly need
another logic to at least complement theirs in explaining Japan’s post-1925 changes.
(3) Financial and Management Problems Caused by Expanded Business
We turn again to Japan’s economic circumstances during the time under study.
As mentioned, the period from 1925 to 1935 was an era of economic recession but also,
as economists and historians have pointed out, one that saw technological modernization, the
development of supporting industries, and market expansion (Takahashi, 1977; Nakabayashi and
Sasaki, 2010). In fact, the increase in small factories during this period can be understood as an
effect of the increase in new market entrants (Arisawa, Aihara and Nakamura, 1960). We can thus
assume that the increase in partnerships and limited partnerships was caused by those new entrants,
who selected partnerships and limited partnerships as the legal form of their enterprises.
At that time, new entrants (i.e., entrepreneurs) had to select the legal form of their
businesses from among sole proprietorship, partnership, limited partnership, partnership limited by
shares, and corporation. Among these, partnerships limited by shares were seldom used (as will be
discussed later).
We consider that partnerships and limited partnerships were the two best choices.
Business corporations applied several strict rules for the protection of shareholders, such as strict
incorporation procedures, strict rules regarding shareholders’ meetings, directors and auditors, and
the obligation to hold annual shareholders meetings. Thus, establishing a corporation was more
complex and costly than establishing partnerships and limited partnerships. At the same time,
establishing a partnership or limited partnership could be beneficial for securing financing. Even
now, many people prefer to establish a kaisha since it makes it easier to borrow money from
financial institutions.
＝＝＝＝＝Take in Table 1＝＝＝＝＝
Why, then, did those two forms decline after 1935? Table 1 shows the numbers, total
amount of capital, and the average amount of capital for two categories of companies—those with
capital of less than 100 thousand yen and those with more than five million. The former comprises
what were the smallest and the latter the largest companies at that time. This table indicates that the
9
number of small companies declined from 1936 to 1941 while the number of large companies
increased. It also shows that the average capital holding of small companies increased, indicating
that small companies expanded during this period. Nakabayashi and Sasaki (2010) mentioned that
companies’ capital, sales, and numbers of employees all expanded from 1920 to 1937, but Table 1
shows that small companies’ average capital decreased from 1926 to 1936 while large companies’
increased. Thus, small companies’ capital holdings grew after around 1936.
This fact does not only mean that the capital required by businesses expanded. Capital
expansion implies an expansion in the scale of operations and management, such as an increase in
the number of employees and in management complexity, as well as an expansion of the risk
associated with business. Sole proprietors and general partners needed an escape from that risk.
The fact that the expansion of capital and management was accompanied by a decline in
partnerships and limited partnerships implies that those two legal forms did not suit business
expansion. After around 1935, the partnership and limited partnership forms were not attractive to
entrepreneurs, since those forms made them responsible for all management and financial
problems as well as all business risks. We note that corporations, especially those with capital of at
least 100 thousand yen, were increasing at this time.
The rapid increase in limited liability companies can be understood from the same point
of view. As the size of capital and management was expanding (even for new entrants) and as
partnerships and limited partnerships were no longer suitable for new entrants, those people as well
as other small and medium enterprises needed a new legal form suitable from both management
and financial perspectives.
The comparison of limited liability companies with partnerships and limited partnerships
reveals that the former have formal organizations, such as shareholders’ meetings and directors,
and that their shareholders have limited liability, meaning that their risk is limited and their rights
are protected through voting rights exercised at shareholders’ meetings. Moreover, these
shareholders are spared management responsibilities: they can hire professional managers and
delegate management to them or delegate ultimate responsibility to the company itself as a legal
person (in a partnership, general partners cannot do this because of their right to participate in
management and their unlimited liability). This delegation “modernizes” management, since
increased management complexity requires professionals. Moreover, the fact that shareholders
have only limited liability and that their rights are protected makes it is easier for a company with
limited liability to increase their number of shareholders. Furthermore, the legal structure and
formal organizations of companies with limited liability are simpler and easier to establish and
maintain than those of corporations.
Thus, companies with limited liability are suitable for the management and financing of
expanding businesses, and their establishment and maintenance costs are small, which explains
why limited liability companies increased very rapidly while the increase in corporations slowed.
Our last consideration is that limited liability companies were used to deal with
management and financial problems—specifically, to manage the complexity of business, as
implied by Chandler (1977), or secure investment and avoid financial risk. Though we are still
10
unsure on this point, some evidence suggests that dealing with managerial problems was a more
important consideration than financial problems.
Just after the introduction of limited liability companies, the Nagoya Chamber of
Commerce reported on those companies that had established them so far (Nagoya Chamber of
Commerce, 1940). The report showed that among the 26 companies that had used this new legal
form, four had done so to expand their operations, and six had done so to conduct mergers,
integration, or joint management. Thus, ten companies stated that their purpose was to manage
business expansion or mergers. The report includes case studies on three companies. One used the
limited liability company to expand its operations and promote the efficiency of merged
businesses; another used it to integrate its production, distribution, and sales functions, and the last
used it to conduct joint sales. Those examples indicate that the important purpose of introducing
company with limited liability form was to manage expanded business.
Moreover, this report also contains information on the companies’ number of shareholders.
Most of the companies (20 of the 22 that responded) had only ten shareholders or fewer, a number
consistent with the 1975 survey of Kyoto companies with limited liabilities conducted by Shimura
(1975), which reported that most of the companies had two to eight shareholders. If limited
liability companies were used mainly for dealing with financial problems, this number would be
larger. We thus consider that management problems were a more important factor than financial
problems in the decision to use limited liability companies.
Finally, we consider partnerships limited by shares (i.e., limited partnerships with tradable
shares). As with the PLLC, this form is an amalgam of the partnership and corporate forms. It is
essentially the same as the limited partnership, except that limited partners’ shares are tradable. A
partnership limited by shares consists of general partners and shareholders (instead of limited
partners). This form is suitable for securing financing; since the shareholders’ shares are tradable,
their liability is limited, and the general partners are responsible for the liability of the company.
However, it is not suitable for the management of a complex business, since the general partners
are responsible for management, not the directors. This form was not popular, accounting for no
more than 57 companies at any time. It was abolished in 1951. The unpopularity of this form in
Japan is consistent with our argument that people used limited liability companies to deal with
management problems.
4. CONCLUSION
The analysis of data on Japanese companies revealed four notable changes: an overall
increase in the number of companies from around 1906, a rapid increase in corporations after WWI,
an increase in partnerships and limited partnerships from around 1925 to around 1935, and an
explosion in the number of limited liability companies after 1940 (Shimizu, 2012).
While the first and second changes can be explained as the results of economic
circumstances, the third and fourth cannot. After investigating other possibilities, we concluded
that the changes were caused by the desire to provide shareholder protection and continuous
11
operation and the need to address the management and financial problems caused by business
expansion. We believe that the post-1925 changes can be explained as the products of a
management objective—dealing with the management problems caused by expanding and complex
businesses.
Our conclusion implies that the use of legal business forms changes according to the
development of management and that introducing new legal forms is sometimes needed to adapt to
this managerial development. Though this view is consistent with Guinnane et al. (2007), it also
differs from theirs in its focus on management and organization, in contrast to their focus on
shareholders.
Though we believe that our view explains the changes in the number of companies in
Japan, several steps are needed to confirm its validity. One is examining the influence of the capital
market on the number of companies and another is a detailed case study on the selection of legal
business form. Moreover, the relationship between wartime mobilization and the use of limited
liability companies also must be investigated. Those points must be left for future research.
12
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14
Figure 1. Comparison between growth rate of companies and the economic growth rate (1903–1945)
25%
20%
Growth Rate
of the
Number of
Companies
GDP Growth
Rate (million
1990 GearyKhamis $)
15%
10%
GNP Growth
Rate (Real)
5%
GNP Growth
Rate
(Nominal)
0%
1900
-5%
-10%
1905
1910
1915
1920
1925
1930
1935
1940
1945
Figure 2. Growth rate of legal forms (1903–1945)
60.0%
50.0%
40.0%
Limited Partnership
30.0%
Business
Corporation
20.0%
Company with
Limited Liability
10.0%
Nominal GNP
Growth Rate
0.0%
1900
Real GNP Growth
Rate
1905
1910
1915
1920
1925
1930
-10.0%
-20.0%
1935
1940
1945
Growth rate of the
number of
companies
Partnership
GDP Growth Rate
-30.0%
-40.0%
16
Figure 3. Component percentages of legal forms (1903–1945)
100%
90%
80%
Limited Liability
Company
70%
Company with
Limited Liability
60%
Limited
Partnership
50%
Partnership
40%
Partnership
Limited by Shares
30%
Business
Corporation
20%
10%
17
2007
2003
1999
1995
1991
1987
1983
1979
1975
1971
1967
1963
1959
1955
1951
1947
1943
1939
1935
1931
1927
1923
1919
1915
1911
1907
1903
0%
Figure 4. Growth rate of legal forms (1916–1942)
50.00%
40.00%
Business corporation: Total
30.00%
Business corporation: Under
100 thousand yen
Business corporation: 100
thousand yen and above
Limited partnership: Total
20.00%
Limited partnership: Under 100
thousand yen
Limited partnership: 100
thousand yen and above
Partnership: Total
10.00%
19
34
19
35
19
36
19
37
19
38
19
39
19
40
19
41
19
42
32
33
19
19
30
31
19
19
28
29
19
19
26
27
19
19
24
25
19
19
22
23
19
19
20
21
19
19
18
19
19
19
19
19
16
17
0.00%
-10.00%
Partnership: Under 100
thousand yen
Partnership: 100 thousand yen
and above
Nominal GNP growth rate
Real GNP growth rate
-20.00%
18
Table 1. Comparison between capital holdings of large and small companies
Companies with capital of
100 thousand yen or less
Number
of
compani
es
Companies with capital of over 5
million
Total
Average
Number of
amount amount of companies
of
capital
capital
Total
amount
of
capital
Average
amount of
capital
1926
23,085
418
18,107
666
7,689
11,545,045
1931
43,701
739
16,910
726
12,707
17,502,755
1936
70,691
1,121
15,858
842
15,537
18,452,494
1941
57,609
1,270
22,045
1,101
24,706
22,439,600
Source: Table of Company Statistics
19