With their recent calls for the NSW government to prioritise local wines, the NSW wine industry association joins a long history of calls for priority to buy local.
And that is a good call, right? When people spend money at local businesses, more of that money tends to stay within the community. Local businesses are more likely to use local suppliers, banks, and services, which helps circulate money within the local economy. A strong local business will hire local people.
UniSA Credit Union Chair of Economics Dr Susan Stone with co-author Dr Dorothee Flaig (University of Hohenheim), this Economic Research Institute for ASEAN and East Asia-funded study reveals more to this story …
What we are talking about is a form of economic stimulus called ‘local content requirements’, or an ‘LCR’. Tied to locally manufactured goods or locally supplied services, these LCRs can look like:
- A requirement to purchase
- Tax breaks tied to their use
- The need to use local facilities or infrastructure.
Often there is pressure applied from local businesses to maintain their market share (and jobs) over interstate or overseas options. It is commonly thought that this is good for the local economy, however, that is not always the case. Providing support to local business in the face of interstate, or overseas, competition, usually means higher prices for consumers, and tax dollars going to business instead of other potential uses. The issue is complex, and outcomes unclear so that despite the large number of studies examining LCRs, there is not yet a clear consensus on the merits of these policies.
The use of LCRs has been accelerating in recent years. Countries have put in place more than 500 individual local content measures from 2014 to 2020 compared with less than 200 measures from 2008 to 2013 – a 155% increase (Global Trade Alert).
So, should we be looking inwards to support what is right next door? Some of the advantages identified by Drs Stone and Flaig include:
- First and foremost, employment creation is often high on the agenda, this is particularly powerful during economic downturns.
- LCRs can be used to stimulate the domestic economy by increasing investment, training, employment, and tax revenue.
- Build up a competitive industry with new suppliers.
And what are the disadvantages?
- Firms tend to incorporate government incentives into their long-term costing structures rather than reaching a self-sufficiency stage.
- LCRs limit competition and can stymy innovation.
- A small or unstable domestic market may not be able to buy enough from the local suppliers, who may then exit the market.
- Additional (tax funded) resources are needed to design, implement, monitor, and enforce LCR policies.
Four factors have been identified that impact on the success of LCRs:
- market size and stability,
- policy design and coherence,
- the restrictiveness of the LCRs, and
- a sufficient domestic industrial base.
However, even knowing the advantages, disadvantages and the success factors, the ability compare LCRs against each other is difficult due to the variance in sector coverage, the type of policy employed and jurisdictional level.
Flaig and Stone’s findings suggest that LCRs, while intended to boost specific sectors, often result in limited and negative economic impacts, including unintended consequences for business operating outside the targeted sector. These policies can undermine long-term competitiveness and create dependencies on government intervention. A more effective approach involves allowing overseas firms to establish competitive partnerships within the domestic economy. This strategy promotes innovation, efficiency, and sustainable economic growth, providing stronger domestic linkages and broader economic benefits.
What do you think?
