Unintended consequences of industrial policy:

This paper examines the aircraft, petrochemical, and mainframe-computer industries to de-lineate the reasons why some of Japan’s industrial policies during the rapid-growth period succeeded and some failed. The Japanese government implemented policies to advance each of the three industries, but the measures had significantly different effects. While the government favored approaches that involved limiting the number of companies in the given industry and providing support for large-scale production to maximize efficiency, the companies in the industry tended to reinterpret the policies to the extent possible under the official constraints in ways that would minimize the resulting disadvantages to company operations. Out of that context, with the government’s policies on one side and the firms’ strategic responses on the other, emerged a wide variety of unintended consequences. The cases of the aircraft and petrochemicals illustrate how the government’s attempts to cultivate “national champion” companies by supporting the “visible hand” of management ended up stopping or twisting the “invisible hand,” thereby bringing the government’s policies to unforeseen failure. Meanwhile, the mainframe-computer industry sheds light on how the government can allow the visible hand and the invisible hand to coexist and function effectively.