ABSTRACT
The conditions under which lead firms will invest in upgrading suppliers occupy center stage in the debates about how global value chains (GVCs) affect development and what room is left for governments to adopt industrial policies. In a key industry for developing economies, oil and gas (O&G), the maps of oil production and value chain have been redrawn by the growth of production from high-cost resources, which means that an increasing share of the value of oil production is to be found in the supply of capital goods and services rather than in the ownership of the land. This has opened up new possibilities for industrial policy in the form of local-content requirements, regulations through which governments influence how lead firms (oil companies) structure their supply chain. This chapter analyzes the conditions under which local-content regulations can lead to domestic supplier upgrading and characterizes the value chain of O&G. Empirical support is provided by a deep case study of Brazil, a country that is rich in technically complex and costly deep-offshore oil and that has adopted policies to promote its supply industry. Based on analyses of an industry where local firms were pushed towards diversification in a new chain (shipbuilding), data from more than 23,000 contracts of Petrobras, and audit reports of local-content compliance, this chapter shows that, consistent with theoretical expectations, new local suppliers required high monitoring costs and struggled to reach international productivity levels, partly because Brazil’s policy requirements have been set too far beyond the capacity of the domestic industry. Together, the findings also highlight the sustainability challenges of pursuing an industrial policy dependent on a single lead firm (Petrobras), with captive governance of the supply chain, and in a context of political rent seeking.
