Economic Reconstruction in Postwar Hiroshima: Formation of Industrial Clusters and Application of the Diamond Model

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Economic Reconstruction in Postwar Hiroshima:

Formation of Industrial Clusters and Application of the Diamond Model
Fumi Okawa

Researcher, Peacebuilders

1. The Importance of Research on Hiroshima’s Economic Reconstruction
1.1 The Purpose of this Research
Hiroshima City, which has a population of approximately 1.17 million, is located in the western part of Japan. For a long time, it has been maintaining its position as a regional hub city along with other similar-sized cities such as Sapporo, Sendai, and Fukuoka. Presently, the city is very lively; thus, it is difficult to imagine that Hiroshima was bombed and had turned into a burned field 63 years ago.

During World War II, on August 6, an atomic bomb was dropped by the US at the center of Hiroshima City, which was completely destroyed within moments. It is well known that after the atomic bomb was dropped, an American researcher predicted the future of Hiroshima stating that “Nothing will grow for 70 or 75 years.”

How could Hiroshima be reconstructed in such a short time after it had been almost completely destroyed? This is a common question raised by many visitors to Hiroshima, particularly overseas visitors. After looking around the Peace Memorial Museum, which was devastated by the destructive power of the atomic bomb, and stepping out of the museum, your eyes catch a very modern and vivacious city; it appears as an unbelievable scene. For people who endeavor to reconstruct their country or region after a conflict, Hiroshima might serve as a good example of a rebuilt city.

However, compared to the enormous amount of studies on the damage caused by the atomic bomb, the reconstruction of Hiroshima, particularly its economic reconstruction has not been a subject for research thus far. One of the probable reasons for the lack of studies might be that it required a long time and considerable effort to come to terms with the scale of the entire damage. Some aspects related to the manner of reconstruction can be found in the official documents published by Hiroshima’s prefectural office and city government; however, it remains to be clarified as to what enabled the city to rebuild its economic base and progress on the path of development.

Can we learn something from Hiroshima’s experience of economic reconstruction and apply it to other postconflict areas in the world? In order to answer this question that originated from the Hiroshima Office of United Nations Institute for Training and Research, we initiated this research.

    1. Resuming from the Destruction brought about by the Atomic Bomb

Hiroshima Prefecture, one of the 47 subnational jurisdictions of Japan, has a population of about 2.88 million, which makes it the 12th largest prefecture of Japan. Hiroshima’s gross prefectural domestic product is ¥11.649 trillion, positioning it at the 11th place (according to the “Prefectural economic calculation annual report 2004,” published by the Cabinet Office). The numbers are not remarkably high considering the fact that Hiroshima City, a government-ordinance-designated city of more than 500,000 inhabitants at its center, is included in the estimation of the prefectural gross products.

The prefecture comprises both mountainous areas with skiing grounds and seashores suitable for swimming. On the one hand, there is an industrial area along with the coastal area of Seto Inland Sea. On the other hand, agriculture and fishing have been flourishing in this prefecture. Hiroshima represents the typical features of Japan’s geography and industries. Therefore, it is often referred to as “miniature Japan” or the “miniature garden of Japan.”

At the end of the Meiji era, Hiroshima, which was the western end of the railway services at that time and where a big port was constructed, was selected to become a military city. In Kure City, approximately 20 km away from Hiroshima City, a naval arsenal was established, and Kure became Asia’s largest military port.

An atomic bomb, which was dropped from Enola Gay by the US Army Air Forces, annihilated Hiroshima City. The total number of victims including the dead, injured, and missing exceeded 200,000.1 The population of Hiroshima City before the bombing was estimated at 280,000–290,000, and the death toll as of December 1945 was calculated to be approximately 140,000 (possibly ranging from 130,000–150,000); however, the precise scale of damage has not been clarified even until today.2 According to the research conducted by Hiroshima City, more than 90% of the buildings in the city appeared to be damaged; the committee that edited documents related to the damage in Hiroshima and Nagasaki estimated that the total value of the damaged assets amounted to ¥884.1 million. Moreover, 80% of the 512 factories upstream within 3 km from the hypocenter were heavily damaged; therefore, they could not be operated any more. Further, with regard to banks and companies, 80% of the total 292 banks and companies within 3 km were ruined.3

In this manner, Hiroshima City, which was once the largest industrial city in the Chugoku region and known as a “military city” before and during the war, was in complete ruins.

Considering this historical truth and Hiroshima’s present level of prosperity as the largest industrial city among the regions of Chugoku and Shikoku 63 years after the tragedy, except for some reserved bombed buildings in the city, we can state that the expression “rose like a phoenix from the ashes” is very suitable for Hiroshima. Moreover, the remarkable aspect of Hiroshima’s reconstruction is that the city was not been rebuilt gradually for as long as 60 years; instead, the reconstruction was accomplished in only 20 years after the bombing, with a per capita prefectural income surpassing that of the per capita national income.
1.3 The Methodology of Industrial Development in Hiroshima and its Characteristics
The history of postwar Hiroshima’s economic growth relied on the manufacturing industry centered on shipbuilding, which had flourished before the war, and on the machinery industry along with the development of the coastal region. The manufacturing industry has been led by heavy industries, mainly automobiles and shipbuilding. With regard to the amount of manufactured products in 1950, chemical industrial products accounted for 22.1% making it the leading industry, followed by food with 19.8% as the second, and transportation equipment including sea vessels and automobiles as the third leading industry. By 1955, transportation equipment accounted for 20.8% of the manufactured products and became the leading industry; it has maintained its leading position until the present day.4

It is often pointed out that one of the characteristics of Hiroshima’s manufacturing industry is its advanced technology, which had contributed to the military industry during the war and was later converted into a civil industry; an example of this is the well-known automobile company Mazda. Since the late Meiji era, Hiroshima had been developed as a military city, which stationed provisions depots, clothing depots, and arsenals with the naval arsenals located at Kure City. In addition to the automobile and shipbuilding branches, many of the representative firms in shipping, steel, and general machine industries were engaged in the military machine industries during the war. For instance, the Japanese sake brewing company Miyake Honten was licensed to serve the Imperial Navy during the war, and Aohata began producing cans of jam for military use. Military-related industries included food and clothing industries. Many of them have their origins in traditional industries at Hiroshima such as “Tatara” steel manufacturing, whetstones, and needles that existed prior to the Meiji era. Moreover, even manufacturing machines studied and developed at the naval arsenals can be traced back to weaving machines required for the textile industry of the Bingo region (Eastern part of Hiroshima Prefecture) where the cotton growing industry had traditionally been prospering.5

This wide range of industries formed a machine-related industrial cluster including the automobile-related, shipbuilding, and steel manufacturing industries. The machine-related industrial cluster can be observed in the present economic structure of Hiroshima. For example, the world’s leading sports ball manufacturer, Molten, is included in the cluster since it manufactures the rubber parts of automobiles. Various types of small and mid-sized machine parts manufacturers constitute the machine-related industry in Hiroshima.6 As mentioned earlier in this essay, this industrial agglomeration spread all over Hiroshima, including its eastern part. However, the main region of the postwar formation of the machine-related industrial cluster is the western costal area covering the gulfs of Hiroshima and Kure. Hence, this essay focuses on the greater area of Hiroshima City comprising seven cities and five towns.7

In short, it can be said that Hiroshima’s postwar economic reconstruction was based on strong fundamentals; it was based on the manufacturing industry that had been growing since a long time, and it took firm roots and developed after the war.

The industrial cluster has been cultivating many companies that have expanded their businesses in the world, such as Mazda, an automobile manufacturer; Molten, a sport ball manufacturer; and Kumahira, which is well known for its safes and vaults.

The influence of regional and locational advantages on competitiveness or economic growth has lately attracted global attention, as mentioned by a professor of Harvard Business School, Michael E. Porter, who is also a leading authority on competitive strategy and international competitiveness. Porter notes that prosperity depends on the productivity at that time when companies grade up their businesses by using the specified area’s productive elements.8 He focuses on the role of the country and local conditions for determining the competitive advantages. He presents the so-called Diamond model for illustrating the competitive advantage of a nation, which comprises four important factors.9

    1. Factor (invested resources) conditions comprising skilled labor, natural resources, capital, and infrastructure

    2. Firm strategy, structure, and rivalry including a high level of local rivalry

    3. Demand conditions including the conditions at the local market level for a peculiar product of high quality

    4. Related and supporting industries including the competitive local supporting industries and suppliers10

A cluster is defined by Porter as the “geographic concentration of interconnected companies and institutions in particular fields. Critical masses—in one place—of unusual competitive success in particular fields.”11 A cluster is a part of the fourth pillar of the Diamond model, i.e., related and supporting industries; however, it is, in fact, regarded as a “factor of reciprocity among the four conditions,” and it can have tremendous influence on the competitiveness of the industries.12 Another key point for the formation of clusters is that it often originates from historical factors. Clusters with a wide range of industries can usually be found in developed countries.13

If this Diamond model and Cluster theory can be applied to the case of Hiroshima, the following supposition might be made: Hiroshima possessed high technologies and skilled labors in industries that were derived from traditional industries in the prewar era. The machine-related industry, which was converted from a military industry to a civilian industry, gave rise to intense competition and with governmental support, Hiroshima succeeded in its economic reconstruction.

In Chapter 2 of this essay, M. E. Porter’s Diamond model and Cluster theory will be examined. Chapter 3 will deliberate on the application of this model to the case of Hiroshima during the postwar period (between the end of the war and the high-growth period). Each aspect of the four factors of the Diamond model will be considered separately. Chapter 4 will briefly refer to the contemporary economic situation in Hiroshima.

2. Industrial Clusters and the Diamond Model
2.1 Research History of Industrial Clusters and Porter’s Theory
Since Alfred Marshall and Max Weber, numerous economists have conducted research on industrial agglomeration as a factor that contributes to competitive advantages. Marshall discussed industrial agglomeration since 1890 and observed that the traditional productive factors of comparative advantages such as climate, soil, and mineral resources existed at specific locations; moreover, when these factors are associated with religious, political, and economic factors, a localized industry is established. He pointed out that industrial agglomeration stimulates the spillover of technology and knowledge and promotes innovation and improvement in production processes and organizations. On the other hand, Weber defined the factor of agglomeration as the reduction in the costs of production and sales by the integration of production processes at a specific location. Paul Krugman focused on the external demands; he established the geographical concentration model of industries, which was founded on high demand and increasing returns obtained by cutting down on transportation costs.14

In Japan, industrial agglomeration has been referred to as a collection of mutually-related companies in a rather small area, and it is believed that the development of Japanese manufacturing industries has been supported by industrial agglomeration for a long time. Industrial agglomeration has been mainly formed by small and mid-sized enterprises, and they have laid the “technical foundation” of the industry.15 Industrial agglomeration has drawn considerable attention, particularly after the collapse of the bubble economy in the beginning of the 1990s. The “deindustrialization” caused by the overseas transfer of the production base of major companies could lend a vital blow to manufacturing firms that had contributed to the development of local economies in Japan. Therefore, a considerable amount of research on small and mid-sized companies or “technological agglomeration” was conducted in addition to the research on the relationships between the center (Tokyo) and the local areas.16

It was Michel Porter who emphasized on economic agglomeration as a dynamic impulse for generating innovation that would be critical for producing national competitive power. In the 1990s, he advocated the importance of industrial clusters. He introduced the concept of industrial clusters by expanding the conventional framework of clusters that comprised only companies in order to include various institutions such as research institutes and networking organizations as components of the clusters. He also focused on cooperation and competition between actors within the clusters.17 Porter identified that successful industries tended to concentrate on specific areas or nations. He suggested that geographical factors would contribute to the competitive advantages; thereafter, he presented the so-called Diamond model consisting of four factors. The Diamond model was aimed at analyzing the reason as to why some companies located within a specific area could grow rapidly, implement continuous innovation, and produce high-quality merchandise.18

Since 1990, the Industrial Cluster theory based on the Diamond model has been highlighted throughout the world. In both the US and Europe, the effectiveness of industrial clusters in promoting innovation and maintaining high growth has been highly acclaimed. Moreover, the formation of industrial clusters served as a policy to strengthen the competitive power.19 Since the latter half of the 1970s, when the high growth era was ending, Japan has been reviewing the significance of the agglomeration of small and mid-sized companies with interest in achieving local autonomy.20 The Japanese central government and local governments have been attempting to foster industrial agglomeration in order to develop local economies in Japan. We can find that some new industrial clusters such as information technology (IT) industries have emerged, while most existing clusters were formed based on old traditional industries. In Hiroshima, high-level military technologies that had aggregated before and during World War II remained unaffected and became the base for reconstruction and high economic growth in the postwar period. However, the existence of industrial clusters is not the only factor strengthening regional competitive power. The following discussion closely examines the four factors that constitute the competitive advantages of a location.

(1) Factor Conditions
“Factor conditions” comprise land, labor, capital, infrastructure, natural resources, and scientific knowledge. For a long time, general managerial resources such as transportation systems and availability of college graduates as workers were considered as requirements for gaining geographical advantages. Currently, managerial resources require high-quality and special skills as well as information corresponding to the demand of each industrial branch. For instance, software-related industrial agglomeration in the US has attracted many experts in computer science and programmers with high skills.

The existence of specialized high-quality institutions in the fields of education, training, research, and data collection, is also an important factor for the agglomeration, creation, and reproduction of advanced managerial resources in a region. Porter points out that the seemingly disadvantageous factors such as expensive land prices or poor natural resources can often work to stimulate innovation and lead to competitive advantages. This is an interesting observation for Japan, which has poor natural resources, and particularly for Hiroshima, which was heavily damaged by the atomic bomb.

(2) Firm Strategy, Structure, and Rivalry
As the second factor, Porter mentions the following two points: (1) controls, social norms, and incentives that promote investment in a specific industry as well as the macroeconomic conditions and political stability and (2) intense rivalry in a local area or competition with a multiple number of powerful companies in the same domestic industry.

Investment in this context includes investments on research and experimentation, education and training, and market exploration. For instance, in the US, systems such as venture capital or public stock offerings contribute to the stimulation of economic activities. The rivalry mentioned in category two is a crucial factor for realizing the competitive advantages by geographical conditions. This is because experiences with difficult domestic competitive conditions are essential for achieving success in the global market. As Porter cites, the intense rivalry among nine global automobile manufacturers in Japan has enhanced the quality of their automobiles.

(3) Demand Conditions
Demand conditions refer to the quality of the local market, namely, the existence of local customers with a high level of demand and sufficient knowledge of merchandise or of local customers with exceptionally stronger demands for special merchandise that are in demand in other areas. Such customers motivate local companies to produce merchandise of a higher quality. On the other hand, demand conditions stimulate companies to innovate continuously by providing them with clues to identify their customers’ future needs. This is particularly true when the local customers’ needs reflect those of customers in foreign countries. What results in competitive advantages is not the size of local demands but their quality. The central government’s policies such as regulation on production safety or environmental standards may have direct or indirect impacts.


(4) Affiliated and Supporting Industries

The last factor of the Diamond model refers to the presence of competent suppliers and affiliated industries. Local suppliers and affiliated industries in the vicinity offering special parts, machines, and services can lead to competitive advantages with respect to efficiency, knowledge, and innovation. Businesses with companies in the vicinity cut down trade and negation costs and facilitate smoother improvement and problem solving. Very competitive firms in the same field could complement each other with regard to research, development, distribution, and marketing. This affects innovation in terms of dissemination of information and joint development of new products. Raw materials and standardized parts can be efficiently procured from outside the country, but high-level applied technology and special skills are difficult to systematize, accumulate, and transfer. The advantage of location plays an important role in these cases.21

    1. Industrial Cluster and Interaction among the Diamond Factors

Porter explains that a cluster comprises specialized suppliers, service companies, distribution chains, customers, information providers, infrastructure companies, and affiliated industries. Moreover, industrial associations, institutions to accredit regulations, and university faculties can form parts of clusters. A cluster is an asset as a group.22

Clusters often have historical origins. For instance, clusters in the US state of Massachusetts emerged from the research conducted at universities; many clusters in Finland are based on natural resources; and the transportation cluster in the Netherlands was formed on the basis of geographical location factors such as highly-developed watercourses and a long history of the shipping business. Some clusters are spinoffs of other related industries. The presence of the aeronautics and space science cluster at Southern California led to the formation of the cluster of golf equipment manufacturers at the outskirts of San Diego. Thus, the formation of a cluster is difficult at a location that lacks historical advantages.

Therefore, more profound and wider clusters have been formed in developed countries than in developing countries. This is due to the fact that the industries of the latter mainly depend on imported parts, service, and technology from the former. Even when some clusters can be observed, the number of participating companies and organizations is limited. According to Porter, competitive companies in developing countries tend to work independently rather than as participants of a cluster.23

It can be noted that the paradigms of the Diamond model and industrial clusters do not simply predict that the satisfaction of the four conditions would automatically produce competitive advantages. The more important aspect is that the state of a certain part of the Diamond model can easily affect its other parts and create huge ripple effects. In other words, the existence of weak parts in the Diamond model would lead to limiting the productivity of the industry. For example, even if a certain industry faces intense competition, mere provision of discounts would not contribute to the competitive advantages. When the local environment becomes ripe for investments and customers demand high-quality merchandise, intense rivalry stimulates the productivity of companies.

Porter’s ideas of an industrial cluster and the Diamond model have offered the basis for recent debates among economists concerning competitive advantages.

Kanai divides the effects of industrial agglomerations into the following three categories: (1) improvement of productivity of firms and industries that are part of the cluster, (2) enhancement of firms and industries’ innovation capacity and the growth of their productivity, and (3) promotion of innovation and formation of new businesses to expand the cluster. He stressed on three basic factors that contributed to the formation of clusters: (1) the existence of resources and demands unique to the region, (2) the existence of affiliated and supportive industries, and (3) the existence of innovative companies in the region.24 These points coincide with Porter’s theory.

Furthermore, with regard to the development of clusters, Yamamoto emphasizes Porter’s suggestion that private companies contribute to the growth of clusters more significantly than the government’s policies. To be more precise, Yamamoto emphasizes the importance of initiatives taken by the private sector and not those by the government; he thereby refers to the greater effectiveness of supporting industrial policies initiated by local governments that are closer to the local companies.25

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