Under which conditions does building up a local automotive industry contribute to economic development?

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Résumé:

Many developing and emerging economies have sought to establish a domestic automotive industry as part of their industrialization and economic development strategies. This paper reviews the literature on the experiences of several of these countries and develops a success-failure spectrum of participating in the automotive global value chain (GVC).

It argues that for countries to benefit from establishing a national automotive industry with respect to their overall industrialization and economic development ambitions, they need to aim at nurturing a large number of indigenous component manufacturing firms with substantial technological capabilities, as well as focus on establishing vertical and horizontal linkages from the automotive industry to other domestic industries.

This, however, can only be done when FDI into the automotive industry has been attracted and substantiated. Without attracting FDI and linking up to the automotive GVC, the build-up of a competitive automotive manufacturing base will not be possible. Nevertheless, this paper shows that the successful countries have not stopped there. They have succeeded in localizing significant parts of the automotive value chain and positioning indigenous firms in high value-added activities, while linking up to automotive GVCs.

Applying a set of quantitative indicators, this paper compares different countries’ automotive GVC achievements. These indicators include automotive components exports, domestic vehicles sales, domestic vehicle production, vehicle exports, the automotive trade balance, as well as three GVC indicators, i.e. foreign value added in domestic automotive exports, domestic value added in foreign automotive exports, and the share of re-exported intermediate imports.

What these quantitative indicators do not capture is the degree of domestic ownership of locally operating component manufacturing firms, local content and domestic value-added broken down by type of component, or backward and forward linkage effects of the automotive industry. Hence, the quantitative indicators are supplemented by qualitative elaborations on the automotive industries in several developing economies, sourced from the secondary literature. The countries covered in the secondary literature that are brought in at this stage include China, India, Brazil, South Korea, Thailand, Malaysia, Philippines, Argentina, Turkey, South Africa and several Eastern European countries.

Having developed this indicative success-failure spectrum of automotive GVC participation, the second part of the paper focuses on two core independent variables that impact how countries perform on the spectrum: 1) automotive GVC factors that impact localization; and 2) the country’s use of industrial policy to influence localization. The former captures aspects such as market size and economies of scale, location, OEM strategies, type of component and labour costs, while the latter captures aspects like government bargaining with multinational OEMs, helping indigenous component manufacturers with firm-level upgrading and establishing a local inter-firm collaborative ecosystem.

Interacting these two sets of factors, namely GVC governance-based factors and government industrial policy decisions, can help explain differential performance across countries. The developmental contribution of the local automotive industry will be greater the further the country has moved along the following ladder of industry-level upgrading: 1) the establishment or revival of a national or regional automotive assembly industry, 2) the move from majority imports of components to local production and sourcing of components, 3) the move from follow sourcing to sourcing from indigenous suppliers to 4) aggressive localization which means that automotive design is localized.

The overall contribution of this paper is to suggest an analytical framework for assessing whether a developing country’s automotive industry is making a positive contribution to the country’s industrialization and economic transformation. This framework is by no means trying to be exhaustive, but it aims to provide some useful insights on how to derive relevant research questions when trying to assess the developmental contribution of a developing country’s automotive industry, as well as on the design of automotive industrial policy in developing countries.