Global value chains and local content regulations: supplier selection and the development of national industries for the global offshore wind market

The energy transition is essential for climate change mitigation while fostering sustainable economic growth and job creation. As such, political bodies are often eager to either develop new industries indigenously through market formation policies or stimulate participation of domestic companies in the emerging global industry. However, developing markets and industries do not automatically go hand-in-hand. In order for countries to protect their industries, many countries encourage foreign developers to select domestic suppliers by applying pressure on local content.
The offshore wind sector is an exemplary case of a renewable energy industry that is composed of several global value chains (GVCs). An extensive value chain is required to build and operate offshore wind farms, with each project involving hundreds of companies originating from different countries under the guidance of a lead firm. This has implications for where and how a lead firm selects its supply-chain.
This research assesses the geographic properties of supplier sourcing in offshore wind that is performed by lead firms and the effectiveness of local content regulations, drawing insights from the GVC literature and the broader institutional context of global innovation systems. Specifically, we investigate supply-chain selection based upon the origin of the lead-firm and the location of the offshore wind farm, while understanding that different segments of the supply-chain behave in different ways. This leads to the following research question: Under what conditions do lead firms draw on suppliers from their home country (domestic sourcing), from the wind farm country (local sourcing) and the global market (global sourcing) for different parts of the value chain for offshore wind farms in Europe. We break down our supply-chain into three governance modes: market, modular and relational, depending on the degree of complexity and the ability to codify the segment. We exclude ‘hierarchical’ and ‘captive’ as these modes are integrated into – or directly controlled by – the lead firm, hence excluding the need for supplier selection.
This leads us to the following hypotheses: 1) Market and modular parts of the value chain are likely to rely on global sourcing; 2) Relational parts of the value chain are likely to rely on domestic sourcing; 3) Greater market diffusion (megawatts of installed capacity) positively influences local sourcing; 4) Local sourcing is more likely when local content is encouraged, but will be less effective for market-based parts of the supply chain than relational or modular modes.
Empirically, we employ a quantitative study based on the 4C Offshore Wind database, a dataset composed of all stakeholders for all offshore wind farms, including information such as supplier type, supplier headquarters, windfarm location, windfarm size, etc. We quantify ‘local content encouragement’ as a dummy variable based on explicit visions by policy makers in the country of the wind farm.
This research provides both a greater and more nuanced insight into the supply-chain composition of the offshore wind industry, and speaks to the effectiveness of local content regulations to help encourage industry development. Hence, it becomes strategically important to select which segments to invest in and which segments may be more challenging, a key element in promoting job creation and industrial development for new sectors. This study hence bridges the gap between transition studies and the GVC literature and the role of industrial policy research within regional and geographic economics. We are submitting an abstract for a full-paper to the track ‘Organizations and Industries in Sustainability Transitions’ as our research directly addresses the question of how organizations and industries can help foster sustainability transitions.