The Paradox of Growth Strategy through Increased Regulation

September 4, 2023
by Noriyuki Morimoto

Even if science and technology have the potential for unlimited progress, in some areas, the cost of adding a step of progress will gradually increase as the new value added through that progress will gradually decrease. Where the marginal cost and marginal value added coincide, technological innovation should lose its economic incentive and stop.

For example, in the area of safety in civil engineering, as technology is advanced to reduce the possibility of fatal accidents to as close to zero as possible, economic feasibility will be lost at some point. Based on the level of technology at that point, safety standards are set by regulation, and as long as they are adhered to, accidents are considered force majeure, thus ensuring the immunity requirements of the civil engineering company.

Such regulatory safety standards are deemed to be the best and most appropriate in terms of social consensus and current state of technology. However, these safety standards are not set and updated by the principle of competition under economic incentives, but by politics: more specifically, by the judgment of the regulatory authorities.

This is true not only for civil engineering, but for all industries that require safety regulation, such as food, transportation, nuclear power, etc. Furthermore, if safety standards are interpreted in a broad sense, including not only those to prevent fatalities but also to ensure health, comfort and convenience, other regulations such as environmental regulations and even financial regulations can be understood in a similar way.

Regulation can then play an entirely different role as a generator of new demand as it advances. While it is generally thought that deregulation is the strategy for growth, there can also be a paradoxical growth strategy of strengthening regulations. Electricity is a typical example of an industry that is unlikely to expand quantitatively, but strengthening nuclear power regulations and phasing out coal-fired power generation will accelerate a qualitative shift in the entire power supply mix, creating new growth opportunities such as the expansion of the renewable energy sector.

 

[Category /Growth Strategy]