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Japanese and Indian Subcontracting Practices in Small and Medium Industries, SME

Updated on February 5, 2014

The subcontracting system in Japan

The subcontracting system in Japan was a spontaneous outcome of its economic structure. Late start of industrialization with imported technology enabled the growth subcontracting system in its own way. Big industries and monopoly capital exploited the situation and as an outcome, the merchant capital took advantage of the household and the domestic industries and then the putting-out system. These facilitated the entry of industrial capital as parent company and its relations with the small and medium industries, who took the role of subcontractors.

Less competition between the large scale modern sector and the small and medium sized indigenous industries and practically no change in the mode of life of the people enabled the small and medium sized industries to survive and prosper. Availability of used or secondhand machinery and gradual automation and motorization through the local production of these machines for these smaller industries made it possible to have constant updating of the technology in these industries. Infrastructural facilities were created by the government through the development of transport and communication, development of power, financial institutions, and creation of specialized financial institutions for the small and medium sized industries. Many training, counseling, and consultation organizations for these industries were also promoted by the government. At the same time they were encouraged and initiated through other means to form cooperatives and associations. Above all, the near hundred per cent literacy of the people, the favorable law and order situation and appropriate policy measures of the government for the industrialization , together resulted in the present stage of the subcontracting system in Japan.


Although the large parent companies tended to exploit the subcontractors, they never failed to guide and assist them. These parent companies continuously helped the subcontractors in finance, management, technology, personnel and marketing and even encouraged them to form their cooperatives. The close and cordial relationship between employers and employees and between the parent companies and subcontractors have all contributed to the success. The Japanese case is one of subcontractors' subordinate position with their parent companies. Advantage has been taken of the wide wage gap between the workers of large and small industries, and the efficient work force in the small firms. Since the Japanese small and medium industries or subcontractors are week- financially and technologically- they were dependent on their parent companies for survival and later the parent companies provided these subcontractors with necessary assistance to make them capable and reliable. Except for minor instances, the subcontracting practice in Japan has been a spontaneous one.

Subcontracting System in India

In case of India, we find some form of imposed subcontracting. The government restricted the production capacity of large industries, reserved the area of operation of small scale and village industries and through state policies made subcontracting a compulsory provision in some cases. This has forced the parent co\companies to use inefficient subcontractors and a cost-plus pricing system, which will hamper progressive industrial efficiency . India lacks proper industrial skills, trained personnel, adequate infrastructural facilities and institutional supports for promotion of small scale industries, SME.

However, the Indian subcontracting forms do not have a subordinate position in relation to the parent enterprises. Because of the government patronage of the subcontracting system, the parent firms find it costly to develop subcontractors, who may no longer serve the parent firms once they become capable.

The Japanese experience shows that there has been a continuous growth of industrial combines which increased the capacity and power of the parent firms, enabling them to expand and assist the subcontractors. Whereas in India, the restriction by government on the expansion of the large firms, making it difficult for them to accommodate a large number of subcontractors with enough volume of orders. This , in turn, restricts the expansion of the subcontracting system. One interesting point of the Indian subcontracting system is that the small scale industries have increased their technological level through international subcontracting. The MNCs and foreign companies have been able to raise the level of the technological base of their subcontractors through offering training facilities and arranging visits to their factories. Since India is poor in industrial experience, specially in technological fields and marketing, the well experienced MNCs and foreign companies enabled the Indian subcontractors to develop their industrial efficiency. This is a positive contribution of industrial subcontracting which should be considered in case of such development in other countries like Bangladesh.

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