The Japanese subcontracting system (shitauke) developed among upstream SMEs and downstream large firms as a sort of intermediate form between complete vertical integration by a single firm and spot market bidding among unrelated firms. Such interfirm relationships worked well when technological and managerial gaps between large firms and SMEs were neither too large nor too small, and contributed to the upgrading of SMEs in terms of technological improvement and access to foreign markets in the 1950s and 1960s.2 The government implemented various policies to protect SMEs with respect to social policy as well as competition policy