Skip to main navigation menu Skip to main content Skip to site footer

Vol. 9 No. 2 (2023)
June 2023

Articles

The domestication of value chains through local content requirements: Can interconnected economies benefit from the Chinese experience?

https://doi.org/10.15678/IER.2023.0902.07

Published 2023-06-30

  • Tomasz Geodecki
    • ,
  • Marcin Zawicki

Tomasz Geodecki
Krakow University of Economics

Marcin Zawicki
Krakow University of Economics

Abstract

Objective: The objective of the article is to reflect on the effectiveness and conditions of economic policy based on local content requirements (LCRs) by testing the hypothesis that the application of LCRs in China between 2004 and 2014 was instrumental in increasing the volume of value added created in its economy.

Research Design & Methods: By using inter-country input-output tables, we attempt to assess the effectiveness of LCRs in increasing the volume of value added induced in a country where, as is the case in China, they are used to enhance domestic technological capabilities. Our analysis focused on high-tech and medium-high-tech (HT&MHT) sectors. In order to test the hypothesis, data from 2004 and 2014 were analysed for Austria, China, Germany, and the Visegrád countries (V4). This approach makes it possible to compare the effects of the domestication of value chains in China with the processes that accompanied the internationalisation of value chains in the group of four emerging economies.

Findings: The findings of our study justify the conclusion that the application of LCRs in China’s HT&MHT industries in 2004-2014 effectively increased the volume of value added created in its domestic economy. The negative consequences of LCRs predicted by the theory indeed occurred in China’s HT&MHT industries. The prices of intermediate inputs increased more than proportionally relative to the prices of outputs; likewise, the value added of suppliers to these industries increased more than proportionally. The gross value-added coefficient in HT&MHT industries decreased. Nevertheless, the induced value added by HT&MHT industries in the Chinese economy significantly outweighed the value-added loss resulting from the reduction in the direct gross value added coefficient in these industries. The reduction in margins resulted from the imposition of LCRs, which forced final producers to scale up sourcing from local suppliers. Local content requirements in China may have contributed to a rapid increase in technological capabilities. Technological catching up by Chinese HT&MHT producers and their suppliers accelerated in the context of increasing scale of production achieved by intensifying participation in world trade and by increasing the purchasing power of local consumers.

Implications & Recommendations: Although some elements of technological self-reliance present in the Chinese model may serve as an inspiration for the Visegrád countries to reflect on the international division of labour that emerged in the 1990s in Europe, the space for its renegotiation seems to be constrained not only by their population size but also by their limited ability to mobilise innovative inputs.

Contribution & Value Added: The novelty of our approach consists in estimating the positive and negative effects of LCRs as predicted by theory, expressing them in monetary terms, and comparing them with the effects achieved by economies where value chains are internationalized.

Keywords

economic policy, global value chains, industrial upgrading, interconnected economies, local content requirements

(PDF) Save

Author Biography

Tomasz Geodecki

PhD in Economics, an Assistant Professor at the Department of Public Policy, Krakow University of Economics. His research interests include economic policy, innovation policy, and policy analysis.

Marcin Zawicki

Habilitation in policy sciences, PhD in Economics, an Associate Professor at the Department of Public Policy, Krakow University of Economics. His research interests include policy analysis, public management and governance.

References

  1. Abraham, F., Konings, J., & Slootmaekers, V. (2010). FDI spillovers in the Chinese manufacturing sector: Evidence of firm heterogeneity 1. Economics of Transition, 18(1), 143-182. https://doi.org/10.1111/j.1468-0351.2009.00370.x
  2. Ali, S., Na, H., Law, D., & Buszard, P. (2004). World Trade Organisation (WTO) and the response of vehicle manufacturers in China: A comparative study. International Journal of Management Practice, 1(1), 57-73. https://doi.org/10.1504/IJMP.2004.004870
  3. Amable, B. (1992). Effets d’apprentissage, compétitivité hors-prix et croissance cumulative. Economie Appliqué, (45 (3)), 5-31.
  4. Amsden, A. H. (2001). The rise of “the rest”: Challenges to the west from late-industrializing economies. Oxford University Press, USA.
  5. Auerbach, P., & Sotiropoulos, D.P. (2012). Revisiting the socialist calculation debate: The role of markets and finance in Hayek’s response to Lange’s challenge. Kingston University London, Economics Discussion Paper, 2-3. https://doi.org/10.1057/9781137335753_15
  6. Augustyniak, B., Ebeke, C., Klein, N., & Zhao, H. (2013). German-Central European Supply Chain—Cluster Report—First Background Note—Trade Linkages. IMF Multi-Country Report, 13, 263.
  7. Baldwin, R.E. (2006). Globalisation: The great unbundling (s). Economic council of Finland.
  8. Baldwin, R.E. (2012). Global supply chains: Why they emerged, why they matter, and where they are going. CEPR Discussion Papers 9103. https://doi.org/10.1111/twec.12189
  9. Belderbos, R., & Sleuwaegen, L. (1997). Local content requirements and vertical market structure. European Journal of Political Economy, 13(1), 101-119. https://doi.org/10.1016/s0176-2680(96)00036-5
  10. Blanchette, J., & Polk, A. (2020). Dual Circulation and China’s New Hedged Integration Strategy. Center for Strategic & International Studies.
  11. Bruszt, L., & Greskovits, B. (2009). Transnationalization, social integration, and capitalist diversity in the East and the South. Studies in Comparative International Development, 44(4), 411-434. https://doi.org/10.1007/s12116-009-9045-0
  12. Cabrero Bravo, A., & Tiana Álvarez, M.A. (2012). The import content of the industrial sectors in Spain. Economic Bulletin/Banco de España, April 2012, p. 81-92.
  13. Chang, H.-J. (2002). Kicking away the ladder: Development strategy in historical perspective. Anthem Press.
  14. Chang, H.-J. (2003). Globalisation, Economic Development & the Role of the State. Zed Books.
  15. Chang, H.-J. (2007). Bad samaritans: Rich nations, poor policies, and the threat to the developing world. Random House Business New York.
  16. Davidson, C., Matusz, S.J., & Kreinin, M.E. (1985). Analysis of performance standards for direct foreign investments. Canadian Journal of Economics, 876-890.
  17. Ezell, S.J., Atkinson, R., & Wein, M. (2013). Localization barriers to trade: Threat to the global innovation economy. The Information Technology & Innovation Foundation. https://doi.org/10.2139/ssrn.2370612
  18. Fagerberg, J. (1996). Technology and competitiveness. Oxford Review of Economic Policy, 12(3), 39-51. https://doi.org/10.1093/oxrep/12.3.39
  19. Fagerberg, J., & Godinho, M.M. (2004). Innovation and catching-up. Georgia Institute of Technology.
  20. Fu, X., & Gong, Y. (2011). Indigenous and foreign innovation efforts and drivers of technological upgrading: Evidence from China. World Development, 39(7), 1213-1225. https://doi.org/10.1016/j.worlddev.2010.05.010
  21. Gallagher, K.S. (2003). Foreign technology in China’s automobile industry: Implications for energy, economic development, and environment. China Environment Series, 6, 1-18.
  22. Geodecki, T., & Grodzicki, M.J. (2015). How to climb up the World Economic League Table? Central and Eastern Europe in global value chains/Jak awansować w światowej lidze gospodarczej? Kraje Europy Środkowo-Wschodniej w globalnych łańcuchach wartości. Zarządzanie Publiczne, 33(3), 16. https://doi.org/10.15678/zp.2015.33.3.02
  23. Gill, I.S., & Kharas, H. (2007). An East Asian renaissance: Ideas for economic growth. The World Bank. Retrieved from https://doi.org/10.1596/978-0-8213-6747-6
  24. Grodzicki, M.J. (2018). Konwergencja w warunkach integracji gospodarczej: Grupa Wyszehradzka w globalnych łańcuchach wartości. Kraków: Wydawnictwo Uniwersytetu Jagiellońskiego.
  25. Grodzicki, M.J., & Geodecki, T. (2016). New dimensions of core-periphery relations in an economically integrated Europe: The role of global value chains. Eastern European Economics, 54(5), 377-404. https://doi.org/10.1080/00128775.2016.1201426
  26. Grodzicki, M.J., & Skrzypek, J. (2020). Cost-competitiveness and structural change in value chains–vertically-integrated analysis of the European automotive sector. Structural Change and Economic Dynamics, 55, 276-287. https://doi.org/10.1016/j.strueco.2020.08.009
  27. Grossman, G.M. (1981). The theory of domestic content protection and content preference. The Quarterly Journal of Economics, 96(4), 583-603. https://doi.org/10.2307/1880742
  28. Hale, G., & Long, C. (2011). Are there productivity spillovers from foreign direct investment in China? Pacific Economic Review, 16(2), 135-153. https://doi.org/10.1111/j.1468-0106.2011.00539.x
  29. Hobday, M. (1995). East Asian latecomer firms: Learning the technology of electronics. World Development, 23(7), 1171-1193. https://doi.org/10.1016/0305-750x(95)00035-b
  30. Huimin, M., Wu, X., Yan, L., Huang, H., Wu, H., Xiong, J., & Zhang, J. (2018). Strategic Plan of “Made in China 2025” and Its Implementation. In Analyzing the Impacts of Industry 4.0 in Modern Business Environments (pp. 1-23). IGI Global.
  31. Kaldor, N. (1966). Causes of the slow rate of economic growth of the United Kingdom: An inaugural lecture. London: Cambridge UP.
  32. Kaldor, N. (1978). The effect of devaluation on trade in manufacturers. Future Essays in Applied Economics, 99-116.
  33. Keller, W., & Yeaple, S.R. (2013). The gravity of knowledge. American Economic Review, 103(4), 1414-1444. https://doi.org/10.3386/w15509
  34. Kenderdine, T. (2017). China’s industrial policy, strategic emerging industries and space law. Asia & the Pacific Policy Studies, 4(2), 325–342. https://doi.org/10.1002/app5.177
  35. Lee, K., Szapiro, M., & Mao, Z. (2018). From global value chains (GVC) to innovation systems for local value chains and knowledge creation. The European Journal of Development Research, 30(3), 424-441. https://doi.org/10.1057/s41287-017-0111-6
  36. Liefner, I., Hennemann, S., & Xin, L. (2006). Cooperation in the innovation process in developing countries: Empirical evidence from Zhongguancun, Beijing. Environment and Planning A, 38(1), 111-130. https://doi.org/10.1068/a37343
  37. Linden, G., Kraemer, K.L., & Dedrick, J. (2009). Who captures value in a global innovation network? The case of Apple’s iPod. Communications of the ACM, 52(3), 140–144. https://doi.org/10.1145/1467247.1467280
  38. Liu, K. (2018). Chinese manufacturing in the shadow of the China–US trade war. Economic Affairs, 38(3), 307-324. https://doi.org/10.1111/ecaf.12308
  39. Liu, Z., Zhang, W., Zhao, C., & Yuan, J. (2015). The economics of wind power in China and policy implications. Energies, 8(2), 1529-1546. https://doi.org/10.3390/en8021529
  40. Lu, Y., Tao, Z., & Zhu, L. (2017). Identifying FDI spillovers. Journal of International Economics, 107, 75-90.
  41. Milberg, W., & Winkler, D. (2013). Outsourcing economics: Global value chains in capitalist development. Cambridge University Press.
  42. Ministry. (2016). 2011 Input-Output Tables for Japan: Joint Compilation. Ministry of Internal Affairs and Communications, Japan. Retrieved from https://www.soumu.go.jp/main_content/000443188.pdf
  43. Moran, T.H. (1992). The impact of TRIMs on trade and development. Transnational Corporations, 1(1), 55-65.
  44. Nölke, A., & Vliegenthart, A. (2009). Enlarging the varieties of capitalism: The emergence of dependent market economies in East Central Europe. World Pol., 61, 670.
  45. OECD. (2015). Entrepreneurship at a Glance 2015. OECD.
  46. OECD. (2016). The economic impact of local content requirements; Trade policy note. OECD.
  47. OECD, I. (2013). Benefiting from Global Value Chains. Synthesis Report, OECD.
  48. Qui, Y., & Anadon, L.D. (2012). The price of wind in China during its expansion: Technology adoption, learning-by-doing, economies of scale, and manufacturing localization. Energy Economics, 34. https://doi.org/10.1016/j.eneco.2011.06.008
  49. Richardson, M. (1991). The effects of a content requirement on a foreign duopsonist. Journal of International Economics, 31(1-2), 143-155. https://doi.org/10.1016/0022-1996(91)90060-j
  50. Romer, P.M. (1990). Endogenous technological change. Journal of Political Economy, 98(5, Part 2), S71-S102. https://doi.org/10.1086/261725
  51. Simonazzi, A., Ginzburg, A., & Nocella, G. (2013). Economic relations between Germany and southern Europe. Cambridge Journal of Economics, 37(3), 653-675. https://doi.org/10.1093/cje/bet010
  52. Stehrer, R., & Wörz, J. (2001). Technological Convergence and Trade Patterns’, The Vienna Institute for International Economic Studies (WIIW). WIIW Working Papers.
  53. Stehrer, Rober, & Stöllinger, R. (2015). The Central European Manufacturin Core: What is Driving Regional Production Sharing? FIW Research Reports.
  54. Stone, S., Messent, J., & Flaig, D. (2015). Emerging policy issues: Localisation barriers to trade.
  55. Tabata, S. (2014). Eurasia’s Regional Powers Compared-China, India, Russia. Routledge.
  56. Thun, E. (2004). Industrial policy, Chinese-style: FDI, regulation, and dreams of national champions in the auto sector. Journal of East Asian Studies, 4(3), 453-489. https://doi.org/10.1017/s1598240800006044
  57. Timmer, M.P., Dietzenbacher, E., Los, B., Stehrer, R., & De Vries, G.J. (2015). An illustrated user guide to the world input-output database: The case of global automotive production. Review of International Economics, 23(3), 575-605. https://doi.org/10.1111/roie.12178
  58. Tomsik, V., & Kubicek, J. (2006). Can local content requirements in international investment agreements be justified? https://doi.org/10.2139/ssrn.1092840
  59. U.S. Chamber of Commerce. (2017). Made in China 2025: Global Ambitions Build on Local Protections.
  60. Valverde, Isabel. (2020). China’s pivot towards domestic-driven growth: Not as easy as Xi hopes. Global Risk Insights, (December 1).
  61. Veloso, F. (2001). Local content requirements and industrial development: Economic analysis and cost modelling of the automotive supply chain. Massachusetts Institute of Technology.
  62. Veloso, F.M. (2006). Understanding local content decisions: Economic analysis and an application to the automotive industry. Journal of Regional Science, 46(4), 747-772. https://doi.org/10.1111/j.1467-9787.2006.00476.x
  63. Verdoorn, P.J. (translated by G. and A.P. Thirlwall). (1949). Fattori che regolano lo sviluppo della produttivita del lavoro. L’Industria, 1949.
  64. Wallerstein, I. (2004). World-systems analysis. Duke University Press.
  65. Wang, C.C., Lin, G.C., & Li, G. (2010). Industrial clustering and technological innovation in China: New evidence from the ICT industry in Shenzhen. Environment and Planning A, 42(8), 1987-2010. https://doi.org/10.1068/a4356
  66. Wei, S.-J., Xie, Z., & Zhang, X. (2017). From “Made in China” to “Innovated in China”: Necessity, prospect, and challenges. Journal of Economic Perspectives, 31(1), 49-70. https://doi.org/10.1257/jep.31.1.49
  67. Wübbeke, J., Meissner, M., Zenglein, M.J., Ives, J., & Conrad, B. (2016). Made in China 2025. Mercator Institute for China Studies. Papers on China, 2, 74.

Downloads

Download data is not yet available.

Similar Articles

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 > >> 

You may also start an advanced similarity search for this article.