The type-4 engine is strong by design. My issue with the type-4 is cost compared to the type-1. Parts quality has improved over the years and it has also declined on certain things. The job of an engine builder is to know what's good and what to stay away from.
If you plan on racing a type-1 engine, heat is your biggest enemy. Heat destroys these engines and everything possible needs to be done to combat the heat that 170-180 horsepower creates.
I am building a 2332cc engine for my dear friend Anand Rajani. We are using Nicasil cylinders along with a head casting that has very good cooling properties. Anand is going with the 4 cam shroud but I do not believe this is needed, he wants the shroud for it's looks. Compression and camshaft choice is critical also. Moderate compression, 9-1 to 9.5-1 with a low duration cam builds allot of cylinder pressure and detonation will be an issue.
If you are leaning towards a type-1 engine, you should consider a modern programmable ignition. I am using a programmable crank trigger ignition with coil on plug on Anand's 2332cc. This allows me to design a spark table around Anand's driving style, eliminating detonation while still allowing him to have a cam in the 250 degree @.050 lift range.
So, My answer to you is yes, a type-1 engine can be built to hold up to 170 HP, driven on the street and raced occasionally. It just needs to be designed differently than your average engine.