How can policy design increase the effectiveness of local content requirements? A qualitative comparative analysis of renewable energy value chains
Based on:
Journal Article (2025)
Investigates how policy design can increase the effectiveness of local content requirements (LCR) in renewable energy value chains, using a qualitative comparative analysis approach.
Brief by:
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Local content requirements (LCR) are policy tools used to promote domestic industries by mandating a certain percentage of local production in renewable energy (RE) projects. However, the effectiveness of LCR varies significantly across different sectors, countries and contexts. Empirical studies have shown that overly stringent LCR can deter investment or lead to regulatory circumvention, particularly when local industries cannot produce goods at competitive prices or quality levels. For instance, in Argentina, stringent LCR have been linked to reduced investment. Conversely, a non-restrictive policy design, with gradual increases in local content requirements as local production capacity grows, has been effective in countries like China. The study examines 27 cases of LCR introduction in the wind or solar sector across 124 countries from 1995 to 2017, highlighting the role of policy design and political economy context in determining LCR effectiveness. The research addresses gaps in understanding the conditions under which LCR are effective or ineffective, emphasizing the need for nuanced policy design tailored to specific political and economic contexts.
Key findings
A non-restrictive LCR policy design or high economic complexity is necessary for LCR effectiveness.
Evidence
The analysis shows that either a non-restrictive LCR policy design or high economic complexity is necessary for LCR effectiveness, with no cases achieving effectiveness without one of these conditions.
What it means
This finding underscores the importance of adapting LCR policy designs to the technological capabilities of the local workforce, allowing for gradual increases in local content requirements as economic complexity grows.
Policy mixes with financial incentives or renewable energy targets enhance LCR effectiveness in less favorable political economy contexts.
Evidence
In countries like Uruguay and South Africa, policy mixes including financial incentives and targets facilitated LCR effectiveness despite challenging political economy contexts. These mixes attracted international investments, enabling the gradual build-up of domestic production capacities.
What it means
The study highlights the critical role of complementary policy tools in enhancing LCR effectiveness, particularly in contexts lacking favorable market conditions or high economic complexity.
Restrictive LCR designs are central to policy ineffectiveness, even with supportive policies.
Evidence
All cases of policy ineffectiveness involved restrictive LCR designs, such as Malaysia's 100% local content requirement. This restrictiveness hindered effectiveness despite additional supportive policies like financial incentives in Brazil and India.
What it means
The findings suggest that overly restrictive LCR designs can negate the benefits of supportive policies, emphasizing the need for balanced policy design.
Favorable market and investment conditions can enable LCR effectiveness without policy mixes.
Evidence
In countries like Canada, China, and Spain, favorable market and investment conditions, coupled with high economic complexity, supported LCR effectiveness without the need for policy mixes. These conditions allowed even restrictive LCR to be fulfilled.
What it means
This insight illustrates that in supportive political economy contexts, simple policy designs can suffice for LCR effectiveness, reducing the need for complex policy mixes.
Proposed action
Local content policy design
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How can policy design increase the effectiveness of local content requirements? A qualitative comparative analysis of renewable energy value chains
Cite this brief: Eicke, Laima. 'How can policy design increase the effectiveness of local content requirements? A qualitative comparative analysis of renewable energy value chains'. Acume. https://www.acume.org/r/how-can-policy-design-increase-the-effectiveness-of-local-content-requirements-a-qualitative-comparative-analysis-of-renewable-energy-value-chains/
Brief created by: Dr Laima Eicke | Year brief made: 2026
Original research:
- Eicke, L., (2025) ‘Does policy design matter for the effectiveness of local content requirements? A qualitative comparative analysis of renewable energy value chains’ 154(3), pp. 607–614 https://doi.org/10.1111/psj.12590. – https://onlinelibrary.wiley.com/doi/10.1111/psj.12590
Research brief:
Investigates how policy design can increase the effectiveness of local content requirements (LCR) in renewable energy value chains, using a qualitative comparative analysis approach.
Local content requirements (LCR) are policy tools used to promote domestic industries by mandating a certain percentage of local production in renewable energy (RE) projects. However, the effectiveness of LCR varies significantly across different sectors, countries and contexts. Empirical studies have shown that overly stringent LCR can deter investment or lead to regulatory circumvention, particularly when local industries cannot produce goods at competitive prices or quality levels. For instance, in Argentina, stringent LCR have been linked to reduced investment. Conversely, a non-restrictive policy design, with gradual increases in local content requirements as local production capacity grows, has been effective in countries like China. The study examines 27 cases of LCR introduction in the wind or solar sector across 124 countries from 1995 to 2017, highlighting the role of policy design and political economy context in determining LCR effectiveness. The research addresses gaps in understanding the conditions under which LCR are effective or ineffective, emphasizing the need for nuanced policy design tailored to specific political and economic contexts.
Findings:
A non-restrictive LCR policy design or high economic complexity is necessary for LCR effectiveness.
The analysis shows that either a non-restrictive LCR policy design or high economic complexity is necessary for LCR effectiveness, with no cases achieving effectiveness without one of these conditions.
This finding underscores the importance of adapting LCR policy designs to the technological capabilities of the local workforce, allowing for gradual increases in local content requirements as economic complexity grows.
Policy mixes with financial incentives or renewable energy targets enhance LCR effectiveness in less favorable political economy contexts.
In countries like Uruguay and South Africa, policy mixes including financial incentives and targets facilitated LCR effectiveness despite challenging political economy contexts. These mixes attracted international investments, enabling the gradual build-up of domestic production capacities.
The study highlights the critical role of complementary policy tools in enhancing LCR effectiveness, particularly in contexts lacking favorable market conditions or high economic complexity.
Restrictive LCR designs are central to policy ineffectiveness, even with supportive policies.
All cases of policy ineffectiveness involved restrictive LCR designs, such as Malaysia’s 100% local content requirement. This restrictiveness hindered effectiveness despite additional supportive policies like financial incentives in Brazil and India.
The findings suggest that overly restrictive LCR designs can negate the benefits of supportive policies, emphasizing the need for balanced policy design.
Favorable market and investment conditions can enable LCR effectiveness without policy mixes.
In countries like Canada, China, and Spain, favorable market and investment conditions, coupled with high economic complexity, supported LCR effectiveness without the need for policy mixes. These conditions allowed even restrictive LCR to be fulfilled.
This insight illustrates that in supportive political economy contexts, simple policy designs can suffice for LCR effectiveness, reducing the need for complex policy mixes.
Advice:
Local content policy design
- Industry performance indicators, country statistics, focus group discussions with stakeholders, …
- consider policy mixes to enhance effectiveness