Local content in extractive industries: Evidence and lessons from Chile’s copper sector and Malaysia’s petroleum sector

Abstract

This paper examines the role of industrial policy in providing incentives for resource-based industrialization and overcoming market obstacles in the development of local suppliers in extractive sectors. More particularly, this study examines and compares local content outcomes and strategies in Malaysia’s petroleum sector and in Chile’s copper sectorThe Malaysian experience shows that several market barriers can be overcome by targeted policies and infant industry protection to increase R&D, accumulate skills and capabilities. In contrast, in Chile, the development of internationally competitive local suppliers has been slowed down by market bottlenecks and the lack of public incentives for innovation, skilled human capital accumulation, and learning by doingBeyond unsustainable protectionist approaches focused on short-term goals such as local content quotas, this study reveals that sustainable local content policies require capacity building programme (through intra-industry dialogue to share key information on quality requirements, R&D and specialized human capital accumulation) in order to gradually build long-term competitiveness. The gradual accumulation of technology and skills through learning by doing enables to develop the scale and capacity of local firms to meet the demand for increasingly sophisticated inputs and services in extractive activities, as well as develop transversal capabilities that can serve other sectors.