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Abstract:
Sovereign wealth funds (SWFs) have increased dramatically in size as a result of increased commodity prices and the increase in the foreign currency reserves of Asian trading countries. SWF assets now roughly equal those in hedge and private equity funds combined. This growth, and the shift of SWF investment strategy toward equities and increasingly high profile investments like capital infusions into U.S. financial institutions following the subprime mortgage problem, have generated calls for domestic and international regulation. The U.S. and other western economies already regulate the foreign acquisition of control of domestic corporations. However, acquisitions of significant but non-controlling positions are not regulated. The danger is that new regulation will compromise the beneficial recycling of trade surpluses accomplished by SWF investments.

In this paper, we situate the controversy over SWF investments in the increasing global trend toward direct governmental involvement in corporate activity, a phenomenon we label the New Merchantilism. We explain why increased transparency of SWF investment portfolios and strategy, the most commonly advanced policy recommendation, does not respond to the chief concern that SWF investments have engendered. We offer a regulatory minimalist response to fears that SWFs will make portfolio investments for strategic rather than economic reasons. Under our proposal, voting rights of SWF equity investments in U.S. corporations would be suspended but reinstated on sale. Thus, SWFs would buy and sell fully voting rights, thereby assuring that the incentives to make non-strategic investments would be unaffected, while the capacity to exercise influence for strategic motives would be constrained. The paper concludes by assessing the extent to which even a regulatory minimalist response remains both over and under inclusive; however, the limited imprecision does not undermine the effectiveness of the response.

Abstract:
The fact of a small number of hostile takeover bids in Japan the recent past, together with technical amendments of the Civil Code that would allow a poison pill-like security, raises the question of how a poison pill would operate in Japan should it be widely deployed. This paper reviews the U.S. experience with the pill to the end of identifying what institutions operated to prevent the poison pill from fully enabling the target board to block a hostile takeover. It then considers whether similar ameliorating institutions are available in Japan, and concludes that with the exception of the court system, Japan lacks the range institutions that proved to be effective in the United States. As a result, the Japanese courts will have a heavy responsibility in framing limits on the use of poison pills.

Abstract:
This Article offers new perspectives on the market for corporate control, the convergence debate, and Japanese corporate governance. We begin by applying in the corporate governance setting two related insights from other fields: from economics, the theory that there is no universally efficient organizational model; from organizational behavior, evidence that diverse groups outperform homogeneous ones. We then consider the potential for convergence toward a particular governance technology - the market for corporate control - to increase the desirable trait of diversity within economic systems. Takeovers, we argue, are not exclusively a disciplinary device, but also an engine of managerial and legal innovation.

We apply these insights to Japan through a detailed examination of previously unexplored data on Japanese M&A. We first link the historically low level of Japanese M&A activity to a thick institutional environment much more complex than the conventional focus on cross-shareholding suggests. Among the more startling findings is the existence of negative control premiums in Japanese tender offers and the role of legal shareholder protections in dampening the market for corporate control. Next, we show how the dearth of takeovers is inextricably linked to the lack of diversity in Japanese corporate practices. We then explore how recent changes in "institutions for deals" in Japan correlate with increased takeover activity, which in turn is linked to the creation of a broader range of governance practices, managerial innovations, and structural shifts in corporate lawmaking processes. The Article concludes by analyzing the implications of our findings for two academic debates: the role of functional substitutes in comparative corporate governance theory, and the impact of legal investor protections on corporate governance patterns.

Abstract:
The transplantation of legal rules from one country to another is commonly observed around the world. Legal transplants can range from the wholesale adoption of entire systems of law to the copying of a single rule. Despite the importance of transplants to legal development around the world, scholarly understanding of this ubiquitous form of legal development is still fairly rudimentary. For example, there is little agreement among scholars on transplant feasibility and the conditions for successful transplants, or even how to define "success." Moreover, there is little analysis of how the success or failure of legal transplants relates to the achievement of larger goals, such as economic development.

Japanese law, particularly the legal rules governing economic organization, is a prime example of the transplant phenomenon, both in its systemic and single-rule variations. Japan imported its original Commercial Code (including legal rules on business corporations) from Germany in 1898 as part of a fundamental reform of its legal system, and made large-scale amendments to the corporate law in the immediate post-war period by importing many specific legal rules from the United States. This article attempts to shed light on the role of legal transplants in corporate law by examining Japan's transplantation of a single corporate rule: the director's duty of loyalty, which was added to the Commercial Code in 1950 as a direct import from the United States. For almost forty years after it was transplanted, however, the duty of loyalty was never separately applied by the Japanese courts, and played little role in Japanese corporate law and governance. It finally began to be used in the late 1980s, long after Japan had achieved high economic growth. Using a simple theory of legal transplants, we explain the initial non-use and subsequent use of the duty of loyalty transplant in Japanese corporate law.

Part I of the paper provides a simple analytical framework for determining the success or failure of a legal transplant. Part II takes up the specific case study of the transplantation of the duty of loyalty into Japanese corporate law. It begins with a brief examination of the central role of duty of loyalty doctrine in U.S. corporate law. We then contrast the situation under Japanese corporate law, tracing the duty of loyalty from its transplantation to its eventual application by the Japanese courts. Part III evaluates the transplantation of the duty of loyalty in Japan in light of our theoretical discussion.

Abstract:
This book explores the relationship between legal systems and economic development by examining, through a methodology we call the institutional autopsy, a series of high profile corporate governance crises around the world over the past six years. We begin by exposing hidden assumptions in the prevailing view on the relationship between law and markets, and provide a new analytical framework for understanding this question. Our framework moves away from the canonical distinction between common law and civil law regimes. It emphasizes the constant, iterative, rolling relationship between law and markets, and suggests that how a given country's legal system rolls with economic changes depends significantly on its organization rather than its formal characteristics or legal origin. We find that legal systems around the world differ significantly along two crucial organizational dimensions: their degree of centralization of the lawmaking and enforcement processes, and the primary function law serves in support of market activity, ranging from protective functions to coordinative functions.

We use this analytical framework to understand why countries as diverse as the United States, Germany, Japan, Korea, China, and Russia have all experienced corporate crises in recent years, and to analyze the different institutional responses to these crises. These case studies provide insights into the diversity of legal systems and institutional arrangements that support capitalist activity over time and across a range of societies. They also suggest that systemic legal change is rarely achieved by changes in formal law alone, but is the result of changes in the composition and identity of core constituencies within a given system who use (or avoid) law to advance their position in the market. Among other things, our study suggests the need for new thinking about how and why legal systems change, the limits of convergence even in a world where national laws increasingly look alike, and a new emphasis on the demand for law in the process of legal adaptation and change.

legal systems, economic development, corporate governance

Abstract:
Analysis of Japanese corporate law reveals a striking amount of formal institutional change in the past ten years, occurring at an ever-accelerating pace. This feature of law reform can be traced to a heightened awareness of the organizational straightjacket imposed on Japanese firms by the Commercial Code, and to a more competitive and market-responsive environment for the production of corporate law. It has been a "sea change decade" for Japanese corporate law.

Yet it has been an ambiguous decade for Japanese corporate practices. Signs of change in response to the new institutional environment can be found in the areas of shareholder activism, corporate mergers and acquisitions and other organizational changes, board structure, and corporate finance. At the same time, however, domestic institutional investors remain passive, management remains largely insulated from the market for corporate control, and "lifetime" employment practices, while covering a shrinking subset of the Japanese workforce, remain firmly in place.

This paper accounts for the observed pattern of change and non-change by analyzing the political economy of corporate law reform, the complementarities at work between corporate law and other institutions, and the relationship between corporate law and corporate governance. Japanese corporate law has become more adaptable and responsive to "demand-side" impulses, but it also increasingly reflects the interests of Japanese management, an organized group potentially threatened by corporate law reform. Without external pressures, Japanese managers are able to use the newfound flexibility of the corporate law to entrench themselves as well as to improve returns to shareholders. Moreover, while the corporate law has improved, several complementary institutions needed to complete the institutional package are still incomplete. Ultimately, corporate law bears only a limited relationship to corporate governance. Changes in corporate practices are brought about by dynamics external to the formal corporate governance institutions. Thus, the sea change in Japanese corporate governance must await further changes in the distribution of shareholders, in the capital markets, and in the incentive structures for management, and the further erosion of corporate norms that promote employee and managerial interests over shareholder interests.

Abstract:
Despite longstanding predictions to the contrary, hostile takeovers have arrived in Japan. This essay explains why, and explores the implications of this phenomenon, not only for Japanese corporate governance, but for our understanding of corporate law development around the world today. Delaware law figures prominently in the recent Japanese events. A high profile battle for corporate control has just generated a judicial standard for takeover defenses that might be called a Unocal rule with Japanese characteristics. Meanwhile, ministry-endorsed takeover guidelines have been formulated that adopt wholesale the familiar threat and proportionality tests under Delaware law, along with virtually every related doctrinal nuance following Unocal. If, as now seems distinctly possible, the world's second largest economy is in the process of embracing hostile M&A, along with Delaware takeover jurisprudence, it represents a remarkable moment for Japan and for the global standards movement in corporate governance.

At one level, these developments provide powerful support for convergence theories, illustrating the intellectual appeal of Delaware corporate law's shareholder-oriented model in the world today. But closer analysis suggests that a far more complex, strategic process of legal reform and selective adaptation is under way. The process suggests not so much a convergence of Japanese and Delaware law as a highly unpredictable telescoping and stacking of two decades of Delaware takeover jurisprudence onto existing Japanese institutions - a process whose important features are masked by the prevailing analytical constructs in the comparative corporate governance literature. Successful economies do not abandon their institutions for foreign models, they adapt features of other systems that offer the potential to address emergent shortcomings in their own systems. The true appeal of Delaware corporate law may reside in its suitability to this process of selective adaptation, rather than in its superior shareholder protections.

Abstract:
This paper analyzes the origins, persistence, and current evolution of a series of non-legal rules (or "norms") that have played an important role in Japanese corporate governance. The four central features of the governance environment examined here include: 1) the main bank system, in which banks voluntarily restructure loans to some distressed borrowers, 2) a social distaste for hostile takeovers, 3) implicit promises of employment stability, and 4) belief systems about the proper role and structure of the board of directors. I show that, despite virtually ubiquitous claims to the contrary, these norms do not enjoy a long history of practice in Japan, but rather emerged only in the immediate postwar period. I hypothesize that they emerged for two reasons: First, they served as a low-cost substitute for a troubled formal institutional environment beset by the "transplant effect" that imperils legal reform in transition economies today. Second, they provided private benefits to the small number of interest groups that emerged intact from World War II. The flow of private benefits to norm adherents explains the persistence of the norms despite clear evidence of their inefficiency over the past decade.

I demonstrate that current models of norm reform, which emphasize the role of exogenous shocks, the workings of norm entrepreneurs, and increased information, explain why the norms of Japanese corporate governance are currently evolving.

Finally, extrapolating from Japan's experience, I suggest how norm analysis can contribute to the two most pressing questions in comparative corporate governance today: whether law matters to corporate governance, and whether diverse systems of corporate governance are converging toward the Anglo-American model. As to both questions, I suggest that closer attention to norms reveals shortcomings in the existing literature.

Abstract:
In this Article, we present data on legal elites in Japan - legally trained university graduates poised to pursue successful careers either as fast-track bureaucrats or lawyers handling sophisticated business transactions. The data show a marked shift in employment patterns over the past decade: increasingly, Japan's most elite university graduates are forsaking the bureaucracy for law.

We find that changes in Japan's underlying economic, political, and legal institutions are a primary cause of this shift. We argue that this trend is not a temporary phenomenon, but reflects a more fundamental transfer of authority in Japan from the bureaucracy to the legal system. The evidence sheds new light on two longstanding debates: the impact of law and lawyers on economic success, and the bureaucracy's role in the governance of the Japanese economy.

The data we examine are hard to square with the widespread view of Japan as "Exhibit A" for the proposition that societies encourage economic growth by steering their most talented youth away from "redistributive legal careers." Rather, the data indicate that in Japan (as elsewhere), talented college graduates pursue positions of power, prestige, and profit. While those positions were once located in the elite economic bureaucracy, they are now migrating to the legal system. Contrary to the evidence of stagnation in the economic and policy environments flowing out of Japan in recent years, close examination of the career choices of Japan's most highly regarded youth reveals a society in transition.

Abstract:
Enforcement problems plague shareholder activism and investor protection in many parts of the world. The importance of solving this problem has led scholars to consider a range of partial alternatives to weak domestic corporate law enforcement regimes, ranging from writing "self enforcing" corporate laws to using cross listings on foreign stock exchanges as a means of bonding firms to higher quality enforcement.

The recent experience of the three largest capitalist market economies of East Asia suggests that there is another partial solution to the problem of weak investor protection and corporate law enforcement, one that has received no theoretical or empirical attention - the nonprofit organization. This partial solution emerges from a puzzle at the center of contemporary East Asian corporate governance. With the possible exception of the government itself, nonprofit organizations (NPOs) have emerged as the most important corporate law enforcement agents in Korea, Japan and Taiwan. In each system, an NPO holding a portfolio of shares is engaged directly in the exercise of shareholders' rights to combat corporate fraud and mismanagement, and to improve the investor protection climate. In numerous instances, these organizations have won significant court victories or settlements against management. This development is puzzling because the defining characteristic of an NPO is the nondistribution constraint. That is, while nonprofits are not prohibited from making profits, they are prohibited from distributing them to their owners. Why are three organizations operating within the nondistribution constraint - rather than institutional investors or individual shareholders represented by plaintiffs' attorneys - the principal shareholder activists cum corporate law enforcement agents in this region?

This paper analyzes the role of NPOs in East Asian corporate governance, and applies economic theory on the existence of nonprofits as suppliers of public goods (along with several complementary theories) to explain the rise of NPOs as suppliers of investor protection in the region. The paper also examines the academic and policy implications of the East Asian experience. Academically, the NPO as a corporate law enforcement mechanism is a highly distinctive illustration of functional convergence in corporate governance: several societies have spontaneously generated substitutes for the attorney-oriented incentive mechanisms relied upon in the United States to enhance investor protection. Yet each NPO displays its own unique structure and strategy, differences that can be tied directly to the distinct domestic legal and political structures in which they operate. At the level of law reform, for transition economies the NPO has several advantages as a corporate law enforcement device, particularly in societies reluctant or unable to transplant the U.S. "attorney as bounty hunter" model of law enforcement. First, the nondistribution constraint inherent in the NPO form provides a built-in check on frivolous litigation. Second, shareholder activist NPOs seek to use and improve local law enforcement institutions, while most of the alternatives discussed in the literature involve abandoning weak local enforcement regimes.

Abstract:
Literature suggests two distinct paths to stock market development: an approach based on legal protections for investors, and an approach based on self-regulation of listed companies by stock exchanges. This paper traces China's attempts to pursue both approaches, while focusing on the role of the stock exchanges as regulators. Specifically, the paper examines a fascinating but unstudied aspect of Chinese securities regulation, namely, public criticism of listed companies by the Shanghai and Shenzhen exchanges. Based on both event study methodology and extensive interviews of market actors, we find that the criticisms have significant effects on listed companies and their executives. We evaluate the role of public criticisms in China's evolving scheme of securities regulation, contributing to several strands of research on the role of the media in corporate governance, the use of shaming sanctions in corporate governance, and the importance of informal mechanisms in supporting China's economic growth.

China, stock market, securities regulation

Abstract:
This paper examines three decades of Japanese experience with deposit insurance and failing banks, and analyzes the implications of that experience for bank safety net reform in other countries. To date, the literature and policy debate on deposit insurance have been heavily colored by U.S. banking history and focus almost exclusively on explicit deposit protection schemes. Analysis of Japan?s safety net experience suggests that (a) deposit insurance, for all its flaws, is superior to the real-world alternative -- implicit government protection of depositors and discretionary regulatory intervention in bank distress, (b) a well designed explicit deposit insurance system which includes a credible bank closure policy is the starting point for the design of effective private alternatives to a government-run safety net, and (c) the trend toward greater institutionalization of the Japanese safety net -- culminating in recent legislation to address the financial crisis -- reflects increased political competition and greater emphasis on legal as opposed to reputational systems of economic ordering in that country.

Abstract:
This paper examines three decades of Japanese experience with deposit insurance and failing banks, and analyzes the implications of that experience for bank safety net reform in other countries. To date, the literature and policy debate on deposit insurance have been heavily colored by U.S. banking history and focus almost exclusively on explicit deposit protection schemes. Analysis of Japan's safety net experience suggests that (a) deposit insurance, for all its flaws, is superior to the real-world alternative -- implicit government protection of depositors and discretionary regulatory intervention in bank distress, (b) a well designed explicit deposit insurance system which includes a credible bank closure policy is the starting point for the design of effective private alternatives to a government-run safety net, and (c) the trend toward greater institutionalization of the Japanese safety net -- culminating in recent legislation to address the financial crisis -- reflects increased political competition and greater emphasis on legal as opposed to reputational systems of economic ordering in that country.

Abstract:
This paper will be part of an interdisciplinary Handbook of Korean Unification designed to provide policy makers with a "blueprint" for a unified Korea. Drawing on lessons from privatization experiences in Germany and Central Europe, the paper outlines a step-by-step approach to the privatization of North Korean state-owned enterprises. The strategy is designed to obtain the corporate governance benefits of a sales-only approach to privatization and the social and political benefits of voucher-based mass privatization programs. A central lesson from past privatization experience is that law matters: simply moving ownership from state to private hands in an institutional vacuum does not ensure that adequate corporate governance and supervisory mechanisms will develop spontaneously. Thus, assuming South Korean economic institutions will serve as the template for a unified Korea, continued reform of South Korean corporate and securities laws is a crucial component of any well-devised privatization strategy.

Abstract:
In an accompanying essay to be published in the same journal, Professors Miwa and Ramseyer (M&R) argue that most of the comparative corporate governance academy interested in Japan has been chasing a myth. The myth, which M&R largely attribute to economist Masahiko Aoki's influential theories tying Japanese production to a system of delegated bank and governmental monitoring, is the existence of the "main bank system" and the related institutions of lifetime employment and keiretsu groups.

In this essay, I critique M&R's revisionist thesis. After a brief survey of formative events in the creation of the "conventional wisdom" about Japanese corporate governance, I present data and analysis that call into question the significance of the evidence relied upon by M&R to substantiate their claims. Next, I sketch a legal and norm-based analysis of postwar corporate governance that complements Aoki's economic perspective. I conclude that while M&R provocatively challenge several stylized facts, they do not ultimately cast great doubt on the power of Aoki's theoretical construct or the (past) existence of Japan's institutional setting for corporate governance. Interested observers can rest at ease: these economic institutions did exist. Attention can now turn to a more pressing issue: how best to replace them.

Main bank, keiretsu, Japanese corporate governance

Abstract:
The U.S. environment for inbound FDI from China today exhibits striking parallels with the environment for Japanese FDI in the 1980s. The motivations for Chinese FDI, such as building on extensive export activity by reaping advantages from location and ownership in the U.S., and internalizing processes that are currently external to Chinese firms targeting U.S. markets, are also likely to parallel those of Japanese firms during the boom in FDI from Japan in the 1980s. While the Japanese experience in the U.S. was initially rocky, many Japanese firms learned to adapt and thrive, particularly at the local level. Much can be learned from these parallels, particularly the sources of friction that Chinese firms are likely to encounter in Washington, and the means of dealing with these frictions both nationally and regionally.

Foremost among these lessons is the need to distinguish between the FDI environment at the federal and state levels. While the federal political and regulatory climate may be problematic for Chinese firms, state and local governments and communities are likely to be much more receptive to Chinese investment, particularly of the greenfield variety. Chinese firms will need to integrate fully into the community by forming dense networks of interaction with local suppliers, businesspeople and politicians, and by being good citizens in the realms of employment practices, philanthropy and community involvement. At the national level, Chinese firms probably can anticipate substantial wariness toward Chinese FDI by Congress and federal agencies. There is no magic formula for escaping political skepticism and even hostility at the national level. The Japanese case suggests that avoiding high profile acquisitions and overt lobbying efforts by individual Chinese firms (as opposed to working with organizations representing foreign investors generally) is a sound strategy for mitigating friction.

Foreign Direct Investment, China, Japan, International Trade

Abstract:
If recent history is any guide, the reunification of the Korean peninsula is a more realistic possibility today than at any time since armed conflict ended in 1953. This paper grew out of a three-year interdisciplinary project to provide policy makers with a "blueprint" for a unified Korea. Drawing on lessons from privatization experiences in Germany and Central Europe, as well as the Asian financial crisis, the paper outlines a step-by-step approach to the privatization of North Korean state-owned enterprises (SOEs). The strategy advocated is designed to obtain the corporate governance benefits of a sales-only approach to privatization and the social and political benefits of voucher-based mass privatization programs.

A two-phase privatization program is outlined: In Phase I, temporary, government-supervised intermediaries transfer significant stakes in viable SOEs to major investors in exchange for a variety of cash and noncash consideration. The process is designed to ensure effective corporate governance, maximize outside investment of capital and technology, and secure employment opportunities. In Phase II, the remaining interests in the SOEs are auctioned off to North Korean citizens in exchange for vouchers. This process returns significant ownership of firms to the North Korean people, disperses control over enterprises, and gives North Koreans an economic stake in unification.

A central lesson from past privatization experience is that institutions matter: simply moving ownership from the state to private hands in an institutional vacuum does not ensure that adequate corporate governance and supervisory mechanisms will develop spontaneously. Thus, assuming South Korean economic institutions will serve as the template for a unified Korea, the paper argues that continued reform of South Korean corporate and securities laws is a crucial component of any well-devised privatization strategy.

Abstract:
This Article provides theoretical and empirical support for the claim that organized crime competes with the state to provide property rights enforcement and protection services. Drawing on extensive data from Japan, this Article shows that, like firms in regulated environments everywhere, the structure and activities of organized criminal firms are significantly shaped by state-supplied institutions. Careful observation reveals that in Japan, the activities of organized criminal firms closely track inefficiencies in formal legal structures, including both inefficient substantive laws and a state-induced shortage of legal professionals and other rights-enforcement agents. Thus, organized crime in Japan--and, by extension, in other countries where significant gaps exist between formal property rights structures and state enforcement capacities--is the dark side of private ordering.

Regression analyses show negative correlations between membership in Japanese organized criminal firms and (a) civil cases, (b) bankruptcies, (c) reported crimes, and (d) loans outstanding. We interpret these data to support considerable anecdotal evidence that members of organized criminal firms in Japan play an active entrepreneurial role in substituting for state-supplied enforcement mechanisms and other public services in such areas as dispute mediation, bankruptcy and debt collection, (unorganized) crime control, and finance. We offer additional empirical evidence indicating that arrests of gang members do not curb the growth of organized criminal firms. These findings may have a significant normative implication for transition economies: efforts to eradicate organized crime should focus on the alteration of institutional incentive structures and the stimulation of competing rights-enforcement agents rather than on traditional crime-control activities.

Abstract:
This paper presents a property-rights-based approach to comparative corporate governance. Two central claims are advanced. The first is that property rights institutions are the principal source of diversity among national corporate governance systems. More specifically, firms in a given economy are shaped by (1) the extent to which control rights over assets are allocated to politicians and bureaucrats rather than private agents, and (2) the degree to which control rights over assets are legally as opposed to politically or socially enforced. To illustrate, the paper examines cross-country data on such factors as economic freedom, corruption, and political risk to create a property rights spectrum for the United States, Japan, and South Korea that explains observed corporate governance differences among the three countries.

The second claim is that convergence of corporate governance systems will be limited, despite the existence of powerful market forces operating at the global level. Property rights analysis is again used to frame the argument. While the efficiency concerns that drive the mechanisms of convergence operate powerfully on firm managers, they act only weakly on the political actors who hold significant control rights over firms in every economy. Thus, convergence will occur only where institutional inertia grounded in politics can be overcome. Even where formal rules converge, differences in enforcement practices linked to distinctive national structures are likely to persist.

Abstract:
This paper examines contemporary Japanese financial regulation through the prism of the catastrophic failure of Japan's home mortgage lending ("jusen") companies. The jusen problem is a matter of considerable practical importance and theoretical interest. Directly at stake is as much as $130 billion in unrecoverable loans held by virtually every sector of the Japanese financial industry. On a theoretical level, the creation and resolution of the jusen problem is one of the most striking examples of regulatory failure, intense political and bureaucratic activity, strategic interest group bargaining, and large-scale dispute resolution in Japanese history.We model Japanese regulatory interaction as a network of interrelated insitutions that facilitate coordinated public-private decisionmaking -- a system of financial governance we label a "regulatory cartel." As developed more fully in the paper, a regulatory cartel is an interlinked system for cooperative decisionmaking and enforcement among the public and private sectors, which operates according to reasonably well understood procedural and substantive rules, and which has as its purpose and effect the control of entry, production, and price, not only within specified industries but also across industrial sectors.The paper explains the jusen problem as an outgrowth of the incentives generated by this regulatory cartel, providing an account of the factors that led to this financial debacle and documenting the extraordinary steps taken to resolve the problem. The paper concludes that patterns of existing Japanese regulation are unsustainable, because the regulatory cartel does not function well in periods of low economic growth or where actors must divide up "bads" such as economic losses and political opprobrium. The jusen matter thus illustrates how longstanding patterns of regulatory interaction in Japan are changing in response to changes in the economic and political environments.

Abstract:
To date, the comparative corporate governance debate has focused on the reduction of agency costs rather than the ability of a given economic system to encourage the funding and monitoring of innovative new businesses. This paper explores the linkage between corporate governance and innovation by examining the different institutional environments for venture capital in the United States and Japan. The paper begins by outlining the practical and theoretical importance of venture capital, which has been largely overlooked in legal literature. It then profiles the venture capital markets of the United States and Japan, showing that U.S. venture capital funds are larger and more independent, hold larger equity stakes in and take a more active role in the management of portfolio companies, make more early-stage investments, and invest more heavily in new technologies than their Japanese counterparts. The paper traces the sources of these differences to prevailing traits of the corporate governance systems of the two countries, isolating five traits of the U.S. market-oriented governance system that increase the supply of and demand for risk capital, and showing why these traits are not found in Japan's bank-oriented system. The paper concludes that the venture capital market in Japan is constrained by the very institutional framework that is applauded by commentators working from an agency cost perspective, underscoring the need to include innovation in the comparative corporate governance debate.