Can Natural Resources Promote Industrialisation? Firms, Competition, and Spillovers from an Industrial Policy

Erik Katovich

This project has been retired

Small Research Grant (PhD)

A major goal for many low- and middle-income countries is diversification of economic production away from natural resources and towards industrial ventures. A local content requirement (LCR) is a type of industrial policy intended to foster domestic economic growth and industrialisation by necessitating multinational firms to buy a given percentage of their inputs from local suppliers. This can increase domestic supply but also decrease natural competition. This project analyses the firm-level impacts of a local content requirement imposed on the oil sector in Brazil from 2003 until about 2016. Introduced in 2003, this policy required oil companies to source a fixed percentage of inputs from Brazilian firms. The LCR may have stimulated firm growth and entry in targeted sectors, but may also have protected inefficient firms.

This project makes use of three existing administrative datasets which include information on Brazilian firms and employees including business size, location, and sector; firm profits, exports, and investments; and employee wage and education. By merging the three datasets, the research team can identify each firm that participated in the local content programme and construct a rich panel of outcomes for these firms, as well as their neighbours and matched counterfactuals, over an eighteen-year period that spans from three years prior to initial strengthening of the LCR policy in 2003, to two years after relaxation of the policy in 2016. Outcomes of interest include entry and exit, employment, wages, education levels, hires and layoffs, output, profits, labour productivity, TFP, export-orientation, and R&D intensity. Additionally, since only firms particularly related to oil were impacted by the LCR, the team evaluates the spillover effects of the policy on geographically nearby businesses.

Determining the effects of industrial policy is a prominent goal for nations currently reliant on natural resource production as the primary driver of the economy. These countries include most African nations. To encourage industrialisation, Angola, Cote d'Ivoire, Ghana, Nigeria, Tanzania, and Zambia have already implemented LCR policies. It is essential to study whether these policies are impactful to structural transformation and growth as they become wider spread. Outcomes could point policymakers towards further LCRs, or the results may show the policies to be ineffective and therefore prompt a move away from LCRs towards a more productive use of state funding for economic growth.

Research Team

Related content