New research has found while a large home market base was beneficial in selling a product it could became a trap if companies focused too much on the domestic market and failed to respond to global opportunities and technological advancements.
Professor Kirsten Martinus, Director of the Future Regions Lab, School of Social Sciences at The University of Western Australia, and Associate Professor Natsuki Kamakura, from the University of Tokyo, were co-authors of the study published in Progress in Economic Geography, which looked at Japan's lithium-ion battery industry.
"We were interested in understanding how pioneering regions or countries can lose their lead when industries experience rapid growth," Professor Martinus said.
"Existing catch-up and home market theories explain latecomer advantages and domestic scale economies, but they overlook how incumbent demand structures can hasten decline."
Researchers examined Japan's lithium-ion battery industry from the 1990s to 2025 and traced how conditions, including high electricity costs, post-Fukushima supply insecurity and cautious demand for battery electric vehicles, influenced corporate investment decisions.
They then examined what organisational and policy channels constraints translated into industrial decline or strategic repositioning.
"We found Japan's experience illustrated a general mechanism by which specialised domestic demand can trap early leaders," Professor Martinus said.
The study proposed the Insular Home Market Effect, a demand-driven lock-in that channels firms toward niche trajectories, was misaligned with world standards.
"If a competitor is proficient at scaling up production and organising global supply chains then the firm that over-focuses on the niche home market will lose its trajectory," Professor Martinus said.
"Japan lost leadership in the industry over time as China took a much more globally oriented and directed trade approach to become the dominant supplier."
The results suggest industry needs to align demand creation, supply-chain positioning and industrial policy in strategic technologies such as the Asian electronic sector.
