Unintended consequences of government policy

Introduction

This edition of JRBH centers its focus on the unintended consequences of government policy, a force that has a diverse mix of effects on corporate management. For example, the government provides financial assistance to certain companies for initiatives like technical research and development and infrastructure building. In cases where corporate activity leads to pollution or other harmful outcomes, the government steps in to regulate the activity via legislative measures. Through these types of policies, which seek to impact business directly, governments aim to achieve specific policy objectives by controlling corporate incentive. Correctly analyzing the direct impact of a policy has important value, of course. To recreate the successes of past policies, one needs to understand why certain policies succeeded and pinpoint the factors that prevented others from achieving their goals. Looking through a large set of samples, locating conditions common to the success stories therein, and then recreating those same conditions might make it possible to write another policy success story.

However, the feature papers in this edition of JRBH address a different type of impact: the secondary effects of government policy that arise in areas and ways that the policymakers did not originally foresee. Every social phenomenon is a complicated web of different elements; pulling one string can make something else in a completely different place move. The same principle applies to government policy, too. Policies where the government actively tries to influence a given industry not only have a direct impact on the target industry but also indirectly affect other industries. Bringing that dynamic to light requires a careful investigation into the indirect impacts of policy measures.

Imposing regulations on a given industry can lead companies in the industry to devise ways of circumventing the policy, which thereby renders the regulations meaningless. On the other hand, policies aiming to nurture one industry sometimes create opportunities for other industries and end up hurting the area they intended to help. In either case, the problems stem from the policies’ failure to take the actual industry actors into full consideration. We may not be able to predict ripple effects in advance, but what we can do is analyze historical fact to unravel complex webs of cause-and-effect relationships inside social phenomena—and that understanding helps us look at things from a broader, more informed perspective when we formulate policies or make business decisions.

The three papers in this edition delve into industrial policy, educational policy, and health-promotion efforts, respectively. In all three cases, the government and private organizations forged policies to serve public purposes—but also in all three cases, the effects of the policies triggered unintended phenomena that forestalled progress toward policy objectives or handed unexpected business opportunities to companies in industries with ostensibly tenuous connections to the target area. Below are basic summaries of the three feature papers.

The first is “Unintended consequences of industrial policy: Aircraft, petrochemicals, and computers,” in which Shimamoto Minoru looks at Japan’s industrial policy from the 1950s to the 1970s to examine the unintended consequences of policies implemented by the Ministry of International Trade and Industry (MITI, now the Ministry of Economy, Trade and Industry).

Coming out of World War II, Japan embarked on cultivating domestic industries in major fields where its foreign counterparts had already established foundations. Of particular importance were areas that posed technical challenges and required massive financial investments, such as aircraft, petrochemicals, and computers. MITI provided support to private firms to help nurture those new industries. In doing so, MITI sought to propel the industries forward by safeguarding against excessive competition. The ministry’s favored approaches included efforts to establish national policy companies, which would facilitate efficient use of budget resources and help avoid budgetary overlaps, and aiding a small handful of promising companies as a way of concentrating resources.

The aircraft industry saw the establishment of a national policy company, which policymakers hoped would unite Japan’s leading aircraft manufacturers to develop, produce, and market homemade civilian aircraft. While the effort did successfully develop an aircraft, the policy had a critical flaw: it allowed private companies to force their expenses on the government. With the cost issue making it unfeasible to turn the aircraft into a profitable product, the government’s policy ended short of its goals.

In the petrochemical industry, MITI gave a group of formidable players in the chemical industry ample resources to build a small number of massive-scale petrochemical plants on domestic soil. However, MITI and the chemical giants also decided to set a high minimum production level for market entry. The idea for the high standard was to fend off relatively small-scale firms angling for a piece of the action—but that move ended up being counterproductive. Smaller companies responded to the quota by expanding the production scales of their own plants in hopes of somehow sneaking over the policy’s entry barrier. MITI’s policy measures thus unintentionally welcomed in a flood of newcomers and drove production into excess territory, setting the Japanese petrochemical industry up for a structural recession when the oil crisis hit in the 1970s.

The final case study in the paper explores the mainframe-computer industry, where harsh opposition from the private sector sunk MITI’s proposal for a national policy company before it could make any progress. Ironically, the failure of MITI’s proposal ultimately allowed the industry to avoid the pitfalls that hampered development in the other two industries. In the end, MITI gave the private sector a considerable amount of freedom, which spurred activity and helped the industry make strides forward.

As these three industries show, the history of Japanese industrial policy is often more a litany of unintended ironies than it is a catalogue of expert planning by MITI.

The second paper, Sakai Ken’s “Chance favors the prepared mind: The confluence of BørneLund’s business strategy and unintended consequences of educational policies 1977-2020,” elucidates the connections between two seemingly unrelated elements: Japan’s yutori (pressure-free education) educational policy and the growth process of BørneLund, a company that markets wooden toys from Europe.

Founded in 1981, BørneLund focuses primarily on selling educational toys from Denmark and other European countries in the Japanese market. The company has also successfully branched out since 2000 by building play areas with larger equipment and holding events, which have been positive contributors to strong business performance. From the corporate standpoint, BørneLund has responded adeptly to the growth of the Japanese educational-toy segment by developing its market and diversifying its lines of business. When one situates the company’s history within the context of changing educational policies in Japan from the 1970s to the 2020s, however, interesting dynamics come into view.

The years after World War II witnessed numerous demographic changes in Japan, ranging from climbing birth rates and a growing overall population to booming economic conditions and increasing percentages of people electing to pursue university studies. In the 1970s, the conditions combined to create an “entrance-examination war” where large numbers of prospective university students had to compete for a relatively small number of admission slots. The university entrance examinations at the time put an emphasis on recalling answers from memory, which meant that knowledge-cramming was the only logical study method for most university hopefuls. Seeing the problems with the contemporary situation, the Ministry of Education, Culture, Sports, Science and Technology (MEXT, then the Ministry of Education, Science, Sports and Culture) decided in the 1980s to reform the entrance-examination system into one that valued individuality over academic performance around the concept of yutori (pressure-free) education. Subsequent MEXT educational policy began stressing the idea of ikiru chikara (the “power to live”), not scholastic ability, as the target quality for children to develop. With that shift, middle-class families hoping to achieve social advancement started to focus more and more on ensuring that their children received supplementary education from an early age.

In that context, parents began to opt for toys with educational effects that fostered their children’s development rather than character toys for simple amusement. Driving that change in preference were a variety of different mechanisms. MEXT took steps to move Japan away from the knowledge-cramming mode of education, but the ministry’s corresponding policy changes caused serious concern and confusion among middle-class families aspiring to social advancement. The style of education they had grown familiar with was quickly fading; following the traditional path of memorization-oriented study, long the norm, would no longer be enough to guarantee success on a university-entrance examination. Middle-class parents felt increasingly motivated to buy their children whatever items they could to foster that ikiru chikara and the ability to think for themselves. Before long, education-minded middle-class parents had taken a keen interest in what educational toys could offer.

The shift in educational policy was welcome news for BørneLund, which had been working to establish a solid market for European educational toys in Japan. With the company’s offerings forming a perfect match with the market’s needs, BørneLund was able to boost its sales. BørneLund’s experience, one example of an educational policy with unintended consequences, shows how the myriad social effects of government policy can create business opportunities in unexpected places—a difficult realization to come to when one looks exclusively at a single company.

The third paper is “The developmental history of the insole market in Japan: Rising health consciousness and an unintended shift toward fashion (1984–2010),” in which Sayako Miura identifies the factors that led to a boom in the transparent-insole market in the mid-2000s. One of the primary drivers was the “shoe-fitter” system. Playing active roles at shoe retailers, shoe fitters were instrumental in boosting consumer awareness of foot health. Despite that focus, the system ended up having unintended consequences: as shoe stores began to train more shoe fitters, who worked to emphasize the need for shoes that fit the individual wearer’s feet, the resulting awareness of proper fit did more to expand the market for functional, fashionable transparent insoles than it did for shoes.

Made with clear gel (elastomer), transparent insoles are partial pads that are usually inserted into the forefoot portions of women’s shoes. When they emerged onto the scene, transparent insoles won over young female consumers thanks to the dual benefits of alleviating the pain of wearing high heels and offering an appealing, fashionable design element. An assessment from the business perspective would likely attribute the spread of transparent insoles to the manufacturers’ ability to read and interpret the needs of young women. While that may be true, one also needs to acknowledge that the shoe fitter system in place at shoe retailers played a substantial role in making consumers conscious of and sensitive to those needs in the first place.

In the 1980s, problems arising from ill-fitting shoes, like bunions (hallux valgus) and other foot deformations, began to draw increasing attention. With the issues mounting, a private organization of shoe stores and other entities decided to respond by launching a new initiative in 1985. The organization’s members began training people to become shoe fitters, and the shoe-fitter system soon became a fixture in the market. As they gleaned insights from shoe fitters at stores, Japanese consumers paid increasing attention to foot health in the realm of women’s shoes. The goal of the whole system was simply to promote and market shoes that were better fits for consumers’ feet.

Insoles initially made their way into the market for different reasons that had little to do with foot health, however. In the 1970s, people generally used insoles to eliminate odors, and men were normally the primary targets for the products. At the outset, then, personal hygiene was the main motivator for purchasing and using insoles.

That began to change when the shoe-fitter system took shape in the 1980s. As shoe fitters enhanced women’s awareness of foot health, people began to look for as many ways as possible to make sure that their feet stayed healthy—not just choosing the right shoes, which was one valid approach, but also using insoles to mitigate shoe-induced pain. Sensing the rise in foot-health consciousness, insole manufacturers saw an opportunity and started developing functional insoles. The market for functional insoles proceeded to grow, and that success paved the way for the arrival of transparent insoles with a stronger emphasis on the fashion component—a new line of products that consumers gave a warm welcome.

To a shoe fitter, a person trained specifically to give consumers recommendations on optimal shoe choices, the best way for a consumer to look out for their foot health would obviously be to buy a good, properly fitting pair of shoes; insoles merely helped people cope with shoe pain rather than eliminating it at the source. Shoe fitters actively underscored the need for proper shoe fit, raising the public’s awareness of foot health along the way. At the same time, companies pounced on that heightened consciousness, turned it into a business opportunity, and released products that resonated with consumers thanks to their focus on fashion over functionality. In that sense, the growth of the insole market was an unintended consequence of the shoe-fitter system.

All three feature papers present examples of how attempts to achieve public goals, be they through government policy or the actions of private organizations, can have unintended consequences through both direct impact on the companies subject to the policies and indirect repercussions affecting other firms. The government generally draws up policies to accomplish a specific objective in a direct fashion. From a sociotechnological standpoint, sifting through large set of samples to identify direct cause-and-effect relationships is a meaningful, instructive process. From the perspective of social sciences and history, however, it is also crucial to recognize how a given policy produces outcomes that are not completely predictable as various actors interpret the policy differently and their corresponding actions mingle and combine.

Research on business history can delineate the processes by which actors have understood and interpreted government policy within the actorsʼ social contexts. By opening doors to those insights, business history provides a useful lens for examining how government policies—even the measures we formulate with the very best of intentions—might have unintended consequences, how we can stop those consequences from occurring, and how policies in one industry can actually create business opportunities in completely different fields.

Acknowledgements: I would like to express my sincere gratitude to Mr. Tom Kain, who translated this Introduction, the Shimamoto paper, and the Miura paper, and Dr. Kōichi Inaba, who translated the Sakai paper and Review of Selected Books on Japanese Business History Published in Japan in 2020.