08 December 2012


'Adoptive Expectations: Rising Sons in Japanese Family Firms' (NBER Working Paper No. 16874, 2011) by Vikas Mehrotra, Randall Morck, Jungwook Shim, Yupana Wiwattanakantang comments that
The practice of adopting adults, even if one has biological children, makes Japanese family firms unusually competitive. Our nearly population-wide panel of postwar listed nonfinancial firms shows inherited family firms more important in postwar Japan than generally realized, and also performing well – an unusual finding for a developed economy. Adopted heirs’ firms outperform blood heirs’ firms, and match or nearly match founder-run listed firms. Both adopted and blood heirs’ firms outperform non-family firms. Using family structure variables as instruments, we find adopted heirs “causing” elevated performance. These findings are consistent with adult adoptees displacing blood heirs in the left tail of the talent distribution, with the “adopted son” job motivating star managers, and with the threat of displacement inducing blood heirs to invest in human capital, mitigating the so-called “Carnegie conjecture” that inherited wealth deadens talent.
The authors note in a pre-print version that
adoption remains common in modern Japan. Paulson (1983) reports that 30% of her survey respondents respond affirmatively that “an adoptee was among their relatives”. Comparative statistics are difficult because many countries keep adoptions confidential, but Yamahata (1977) estimates adoption far more popular in modern Japan than in any other country, with the possible exception of the United States. 
However, most U.S. adoptees are children, while Japanese adoptees are overwhelmingly adults. Moriguchi (2007) reports that 2.5% of U.S. children are adopted, the highest rate per capita in the world: 31.4 per 1000 births, or 127,000 adoptions (Child Welfare Information Gateway, 2004) in 2000. This compares with only 1.6 child adoptions per 1000 births in Japan that year. Of the 80,790 adoptions reported in Japan in 2000, only 1,718 were of children; and all but 362 of these were by grandparents or step‐parents. The other 79,072 adoptions, 97.9% of the total, were of adults by adults. 
Since 1988, the law permits two forms of adoption (yôshi). One form, special adoption (tokubetsu yôshi), resembles Western practices, and permanently transfers a child younger than six (eight in certain foster care cases) to adoptive parents. A special adoption severs all legal links between the child and its biological parents, and is designed to advance the welfare of a needy child (Hayes and Habu, 2006). This is a new, imported, and rarely used procedure. The courts approve only a few hundred each year in Japan – 521, 362, and 350 in 1995, 2000, and 2002, respectively. The traditional form of adoption, now called ordinary adoption (yôshi engumi or fûtsu yôshi), remains far more common. The adoptee is usually an adult male who, in return for an inheritance, agrees to carry forward the adopting family’s name. Both parties to the adoption transaction must be above the age of consent (over 15) or court approval is required – except for adoptions of one’s grandchildren or step‐children (Civil Code §798). The adopted heir must also be at least a day younger than the adoptive parent. Adoptees’ average age at adoption is over twenty, and the vast majority of adoptions registered in Japan each year between consenting adults (Bryant, 1990, p. 300). Elsewhere, adult adoption is vanishingly rare (Kitsuse, 1964). O'Halloran (2009) notes that Japan’s “… continuing tradition of providing for the adoption of adults, is without any comparable precedent among developed nations.” 
… More recent statistics show much higher rates of adult adoption than earlier in the postwar period, averaging 97 to 98% from 1985 on. Thus, of the 83,505 adoptions registered by Koseki offices in 2004, only 1,330 (2%) were of children. The higher rates of child adoption in the years immediately following the war are perhaps due war orphans. 
Ordinary adoption sanctifies the voluntary severing of most, but not all, ties to one’s birth parents and their replacement with fealty to one’s new parents. The adoptee may often remain in contact with his birth parents, and may even inherit from them. If the adoptive relationship is disrupted, the adopted child may return to his biological parents. 
Calling ordinary adoption a transaction is appropriate, for Hayes and Habu (2006, pp. 2‐3) explain that “in Japanese society there continues to be a vein of unsentimental pragmatism towards adoption arrangements. There is a fairly widespread view that it is ethically acceptable for parents to become adopters for worldly objectives, even if they do not intend from the outset, to love the child as their own.” Lebra (1989, p. 203) clarifies that “nurturance and intimacy were secondary or irrelevant to the mandate of professional succession, and often were completely absent from the adoptive relationship – even where the adoptee was destined to become the new head of the household.” 
Most ordinary adoptees are of adult sons (Paulson, 1984, p.165, 289) because the practice is designed to rescue biologically ill‐fated families, not to provide for a needy child.  Hayes and Habu (2006, p. 1) elaborate: “Adoptions can be used to reconstruct patriarchal families. Families with superfluous sons would pair them off in a combined marriage and adoption to families with daughters.” Since the incest law only proscribes sex between biological siblings, a daughter and adopted son may marry. That a term, muko yôshi, exists to describe a husband‐who‐is‐also‐an‐adopted‐brother indicates this to be an accepted and relatively commonplace form of adoption; and Paulson (1983) reports 55% of adoptions in 1981 to be of sons‐in‐law. Of course, if a desirable potential son is already married, an adult married couple can also be adopted in a single transaction. Parents who adopt adult sons either lack biological sons or desire better quality sons than nature provided. Although Nakane (1967) argues that families seldom disinherit biological son in favor of an adopted son, subsequent ethnographic work convincingly refutes this. Beardsley et al. (1959) report at least one instance of adopted sons superseding biological sons in the histories of 25% to 33% of rural families; Pelzel (1970) estimates its frequency at 25%, and Bachnik (1983) puts its incidence at 34%. Pre‐modern records indicate even higher frequencies (Bachnik, 1983, p. 163). 
The patriarch of a family business can thus adopt a new son, say a star manager, should his biological sons prove uninterested or incapable of honoring the family name. This occurs with some regularity (Paulson, 1984, 165‐75; Kurosu, 1998; Hayes and Habu, 2006, p. 2). In this context, translating yôshi as adoption might be confusing. Terms like protégé or successor seem at least as appropriate as adopted son – the standard translation. Similar relationships, between family business patriarchs and favored junior associates who become “like sons”, may well occur less visibly in Western countries. 
This echoes a linguistic ambiguity as to what constitutes a family versus a firm. A Japanese family business is referred to as a house (ie ...), as in the House of Mitsui; but ie can also mean family or household. This conflation also occurs in West, as with the House of Windsor and J.P. Morgan’s 19th century investment bank, the House of Morgan (Goodman, 2000, p. 20). Repackaging a business as a family is readily dismissible as “an ideological obfuscation created by those at the top of the economic hierarchy.” But something more is clearly going on where a top manager subsequently becomes the head of an adopting family as well as that family’s businesses. 
It is tempting to see adoption as a liberal adaptation allowing “competent individuals to surmount rigid social barriers” in Japan’s hierarchical society (Burke, 1962, p. 108‐9). Haynes and Habu (2006, p. 12) more warily suggest that “the overlap between family and business concerns, potentially at least, forms an integrated social ethos in which the aspirations of a powerless child can find a place.” Although, they caution against pressing this too far, noting that many ordinary adoptions are within extended families, Macfarlane (2002) notes that “those who were adopted were not necessarily or even primarily blood relatives” and cites several studies that support the view that “adoption became a mechanism for social mobility” in pre‐modern Japan. 
The Japanese government restricts adult adoption for fiscal reasons. The 1988 revision to the tax law prevents testators evading inheritance taxes via multiple adoptions. Thenceforth an adopter with one or more biological children may bequeath to one adoptee only, and an adopter lacking any biological children may bequeath to two adoptees (Nakagawa, 1991, 89). A parent might still adopt many sons in order to have a broader choice of successors, but since only one may inherit, the supply of eager second, third, and forth adoptees is likely to be meager. 
Foreigners periodically sought to change Japanese adoption practices, which seemed immoral to Chinese and Western sensibilities alike. Chinese legal imports, beginning with the Taiho Code of 702 A.D., sought to impose Confucian morals restricting adoptions to blood relatives (Mass, 1989, 9‐11, 25, 72). In seeming deference to European sensibilities, Japan’s imported Civil Code (§792‐3) mandates that the adopted child be at least a day younger than the adopting parent (Takenoshita, 1997, p. 9). 
Both sought to fit Japanese pegs into foreign holes. The Taiho Code was soon “improved”, and modern registries sometimes let a younger parent adopt an older child “by mistake” (Nishioka, 1991, pp. 232‐4). 
Foreign criticisms of Japanese adult adoption practices are not entirely groundless. Before the Great War, families adopted children as de facto slaves, sold by their biological parents; and brothel owners adopted their prostitutes. Draft dodgers became “only sons” of childless families, and thus escaped conscription (Paulson, 1984, 278‐9). Adult adoptions are also used to hide affaires or to circumvent money lending laws (Bryant, 1990). 
But Japan’s adult adoptions doubtless primarily evoke condemnation because they challenge the conventions of other cultures. Elsewhere in East Asia, adoptions are a duty of blood relatives, but “the more rigid forms of Confucianism have not constrained non‐relative adoption in Japan to nearly the same degree as elsewhere” (Kaji, 1999; see also Bryant, 1990, n. 32). This shocked and appalled Confucian traditionalists, like Dazai Shundai (1680‐1747), who deplores Japan's “lawlessness”, and singles out its “barbarous” and “promiscuous” adoptions as “a major example of chaos” (Lebra, 1989, p. 185; quoting Kirby, 1908). In the same vein, the 19th century historian Shigeno Aneki (1887) compares the “evils” of adoption to those of imperial abdication (Lebra, 1989, p. 186). 
The above is a vast oversimplification, but conveys the gist of adoption practices as they affect Japanese family businesses. We distill two key economic implications. 
First, Japanese family businesses confronted with an heir who is incapable or ill‐disposed to take over the family business can readily adopt a more able son. Adoption lets family firms expand their successor searches beyond biological sons, and even beyond blood kin and in‐laws, to include virtually the same applicant pool a widely held professionally managed firm might tap. In theory at least, Japanese family firms ought to be able to meld such benefits as family ownership confers with the free‐ranging competition among potential successors that helps put the most able managers in charge of professionally‐run firms. 
Second, the threat of adoption may induce a greater work ethic in biological children, for “the eldest son too was sometimes forced out into the world, if a more competent younger or adopted son was appointed to succeed to the family property or rights” (Burke, 1962, p. 109). Adult adoptions may thus help counter the famous Carnegie Conjecture that inherited fortunes so deaden initiative and distort perspective as to virtually guarantee failure in running a great business.