From market leader to follower: Windows of opportunity and insular home market effect in Japan’s lithium-ion battery industry

Why do pioneering regions or countries lose their lead when industries experience rapid growth? Existing catch-up and home market theories explain latecomer advantages and domestic scale economies, but they overlook how incumbent demand structures can hasten decline. We propose the Insular Home Market Effect (Insular HME), a demand-driven lock-in which channels firms toward niche trajectories misaligned with world standards. Using evidence on Japan’s lithium-ion battery industry from the 1990s to 2025, we trace how high electricity prices, a hybrid vehicle bias and fragmented policy coordination depressed scale learning, encouraged talent outflows and weakened upstream resource security. Findings show that leadership erosion is contingent on state choices that fail to synchronize demand creation, geo-economic strategy and industrial support. The Insular HME converts a home advantage into a specialization trap; our findings advance debates on catch-up, global production networks and green technology transitions.