Driving Innovation Through Regulatory Design and Corporate Behaviour: A Case Study of Functional Food Industry in Japan.

This study addresses the critical need for innovation in the healthcare sector, particularly in Japan's functional food industry, amid rising chronic diseases and healthcare costs. It explores the complex relationship between regulatory design and corporate behaviour, focusing on how companies' compliance strategies influence their research and development (R&D) investments. A mixed-method approach was used, analysing data from 15 major dietary supplement companies and 74 products under Japan's Foods with Function Claims (FFCs) regulation. The study reveals a correlation between companies' engagement in the FFCs system and their preference for conducting in-house clinical trials, indicative of higher R&D investments ( = 0.66, = 0.007), and that between the latter variable and average product sales, which is a measure of returns on regulatory compliance ( = 0.66, = 0.008). Companies actively complying with FFCs regulations tend to conduct R&D and accumulate knowledge in-house, to innovate and differentiate their products, gaining competitive advantages. The study also highlights the role of a company's size, market presence, and industry origins in shaping regulatory strategies, with firms from other industries using FFCs regulations to explore new business opportunities. The research underscores the importance of flexible regulatory frameworks that encourage R&D investment, leading to innovation and competitive advantages in the healthcare sector.