In 2008, as the escalating financial crisis called into question continued global economic growth and innovation, the leaders of the world’s leading economies pledged in the G-20 forum to combat the forces of protectionism by maintaining an open trade and investment environment. Unfortunately, many of these same governments have since found creative ways to protect domestic companies at the expense of foreign competitors. One of the means they have employed is forced localization.
So what is forced localization? Forced localization refers to a broad set of policies that are designed to compel companies to relocate all or part of their global business operations within a country’s borders. For example: foreign firms could be required to process data at a national datacenter, purchase or manufacture locally, or transfer intellectual property to a domestic competitor as a precondition for market access.
This is not a new story. In the 1970s and 80s, with energy markets in flux and developing countries plagued by economic instability, industry analysts expressed grave concerns about the proliferation of import substitution policies. Today, forced localization measures have become more complex, but they are designed to achieve the same goal: impede the ability of foreign companies to compete with local firms in providing goods, services, and technologies in global business transactions. While many governments see these policies as simple solutions to the challenges of a complex global economy, the truth is the drawbacks for a country and its citizens far outweigh the benefits. Instead, localization efforts work to reduce that country’s competitiveness across all economic sectors and undermine the health of the global economy by raising the cost of doing business internationally.
To better inform global policymakers about the pitfalls of pursuing these strategies, ITI is launching a series of blogs where our policy experts will do a deep dive on the many forms of forced localization being imposed on technology companies, including:
- Data Localization: Requirements that companies store, process, or otherwise handle data within a country’s borders. This includes restrictions on the free flow of information across borders that underpins an open internet.
- Local Content Requirements: Mandates that a certain amount of the final value of a good or service be sourced domestically, either by purchasing it from local companies or by manufacturing or otherwise producing or providing it locally.
- Technology Transfer Requirements: Measures requiring businesses to transfer proprietary intellectual property directly to local competitors or through government agencies.
- Local Presence Requirements: Requiring a company to establish a local office in-country or provide goods or services using local facilities, infrastructure, or agents, etc.
- Standards and Conformity Assessment: Requirements to comply with unique, non-global technical standards, or to conduct duplicative or overly restrictive conformity assessment procedures without recognition of international norms that make current technology and new innovations possible.
- Indigenous Innovation Requirements: Requirements to use or impose a preference to domestically developed technology.
- Domestic Employment Requirements: Requirements to achieve a certain level of domestic employment.
The proliferation of forced localization measures is a trend that the world’s leading economies must combat if policymakers want to spur innovation, job creation, and economic growth. It is out of step with the international norms and policy frameworks that have guided innovation in technologies and the rapid rise of technology-enabled industries.
Forced localization efforts are ultimately self-defeating and there are better policy options for countries to pursue their legitimate policy objectives to promote economic growth locally and their competitiveness globally. In addition to offering concrete examples of forced localization, in the weeks ahead our blog series will provide policy alternatives and conclude with a discussion of how to combat these harmful measures.
–ITI graduate fellow Evangelos Razis contributed to this article.
Forced Localization Blog Series Table of Contents:
- What is Forced Localization?
- Local Content Requirements
- Local Presence Requirements
- Local Standards and Conformity Assessment
- Data Localization Explained
- The Costs of Data Localization
- Development and Data Localization
- Privacy Protection and Data Localization
- Cybersecurity and Data Localization
- Law Enforcement Access to Information and Data Localization
- Using Trade Agreements and other Multilateral Approaches to Address Forced Localization