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

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

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.

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