Regulation as Industrial Policy: A Case Study of the U.S. Auto Industry

Government regulation to protect health, safety, and the environment has for the past several years been indicted for the additional costs it has imposed on industry. Studies have documented that regulation can dramatically change the costs of production and alter the competitive structure within an industry. A close look at the U.S. automobile industry suggests that there may be other impacts of social regulation. In contrast to the conventional wisdom concerning the impact of regulation on the industry, this study finds that environmental regulation has had a distinctly positive impact on the auto industry. It has encouraged adaptation of existing strategies to the new reality of global competition. For a variety of reasons, it is not obvious that, without regulation, the industry would have adapted as quickly to its changing market. The article presents a theoretical framework to explain this impact and suggests how public policies intended to affect corporate strategy might be evaluated.