Japan’s business sys tem consists of relational banking, lifetime employment, and long-term contracting in inter medi ate product markets. These institutions had been highly com plement ary, resulting in rel at ively homogenous organ iza tional practices, which sustained Japan’s inter na tional com petit iveness in specific industrial sectors. But since the late 1990s, substantially more diverse forms of organ izing emerged, which were different from those in the more traditional characterization of the dual eco nomy. For instance, venture capital funds and new stock exchanges appeared alongside relational banking, in order to finance start-ups, and atypical forms of employment emerged to challenge the lifetime employment norm. It is not certain whether these departures from a coherent sys tem would under mine or sustain Japan’s eco nomic performance. The Jap an ese business sys tem has become more diverse within. But when, why and how has such organ iza tional diversity come about in Japan? And is such diversity a sign of a gradual breakdown of the sys tem, or has it become the defining charac ter istic of the Jap an ese sys tem? If it is the former, what is the pro cess by which we should expect the emergence of a new sys tem? If the latter, how much diversity can be sustained within a sys tem? This chapter addresses these questions. The chapter begins by de veloping a framework linking institutional change and organ iza tional diversity in Section 1. Then Section 2 examines the timing and the extent of diversity in fin an cial markets at the economy-wide level. Section 3 conducts an equi val ent ana lysis for labour markets. The chapter concludes by comparing the extent of institutional change and diversity in the two markets. The key con tri bu tions of this study are as follows. First, the chapter advances a model of institutional change, more specifically from co ordinated to more liberal, and identifies organ iza tional diversity as a feature of such change as well as of the new emergent sys tem. Second, this study identifies the late 1990s as the time when organ iza tional diversity began to take off in the Jap an ese eco nomy. Third, the study dem on strates that institutional change and consequent diversity have gone much further in labour markets than in fin an cial markets. We argue that this is due to the stronger polit ical power of agents for change and the greater ambiguity of institutions in the former than in the latter.
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