Paper short abstract:

This study will examine Michael Porter's hypothesis in which properly designed environmental reforms trigger innovation that even lead to absolute advantages over firms in foreign countries, using the case of Japanese automakers in the U.S. market during the 1970s and 1980s.

Paper long abstract:

The purpose of this study is to historically examine the impact of environmental structural reforms on the international competitiveness of Japanese automobile industry in the 1970s and 1980s. In particular, this presentation will examine the hypothesis in which Japanese automakers that followed the environmental reforms acquired its competitive advantage over American counterparts that avoided complying with the reform. Michael Porter (1995) hypothesizes that "properly designed environmental standards can trigger innovation that may partially or more than fully offset the costs of complying with them. Such "innovation offsets"… can not only lower the net cost of meeting environmental regulations, but can even lead to absolute advantages over firms in foreign countries not subject to similar regulations." In 1972, the Central Council for Environmental Pollution Control in Japan reported on the regulation target on emission gas similar to the 'Muskie Act' of 1970 in the U.S. As the U.S. government decided to postpone the enactment of this Act, Japan's emission regulation became the world toughest. Japanese automakers had begun developing their technology to counter the emission gas problem prior to this governmental regulation, but they were urged to further develop the technology to meet the environmental reform requirement. Between 1973 and 1978, Japanese government gradually strengthened the emission gas target and automakers made strenuous efforts to meet the target. Major automakers such as Toyota claimed in their corporate history that these efforts became useful for gaining know-hows of overall product performance and quality improvement. Meanwhile, in the U.S., the Energy Tax Act of 1978 imposed a tax on the sale of automobile that failed to meet the fuel economy standard. Coupled with increasing social pressures on emission gas problems, U.S. automakers suffered to meet the new guideline set by the environmental reformists whereas Japanese automakers enjoyed the fruit of meeting tough conditions set by the reforms of their home country. Using the above historical cases, this study will discuss the impact of conforming to and going against the reforms and finally examine Porter's hypothesis in the case of Japanese and American automobile business.