All posts tagged 'Industrialization - Localization'

Import substitution and the importance of localization

This is a post in English of a post written in Russian: http://www.sovecomo.ru/2021/01/25/Импортозамещение-И-Важность-Локализации.aspx

Import substitution is a pillar of a sovereign economy: it is important for industrialization, developing skills and new technologies, generate direct and indirect jobs and profits for the local communities, and add money to state budgets through taxes.
Ideally, in such a business cycle the money is kept inside the country, if the production is fully localized.

Total or very high localization means that components, ingredients, materials, tools and related services are also produced inside the country. Which unfortunately is often not true.

I will try to layout an approximate schema:

There are different types of suppliers:
Foreign companies which sell items produced abroad: almost 0% of money stays inside the country
Foreign companies which sell items assembled inside the country but with components produced abroad: up to 25% of money stays inside the country
Foreign companies which sell items assembled inside the country and with localized components: up to 50% of money stays inside the country
Local companies which sell items produced abroad: up to 25% of money stays inside the country (mainly profits)
Local companies which sell items assembled inside the country but with components produced abroad: up to 50% of money stays inside the country
Local companies which sell items assembled inside the country and with localized components: up to 100% of money stays inside the country

As we see there are 3/4 main factors, which determine on how much money stays inside the country:
-Localization of labour(jobs)
-Localization of supply chain
-Taxes
-Profits

Summing them up even more, we can say that both the Tax residency of company(and main investors) and localization determine how much money stays inside the country. Especially the localization will keep the money inside the country, if the business is labour and manufacturing intensive e.g. industrial goods like car, ships, airplanes.

That why the Sovereign Economic Model whitepaper advocates the de-taxation of small-medium manufacturing businesses, in order to manufacture locally as much as possible, and therefore retaining the money inside a country.