DEG study: Local sourcing increases development impact

Local procurement is an important factor driving a country’s development: by sourcing products and services locally, companies help to safeguard income and jobs among local suppliers. This in turn also benefit the companies themselves, for example through shorter delivery times, lower currency risks, better planning security and greater control over the supply chain.

In developing countries in particular, it is frequently the case that goods required by companies are not available in sufficient quantities and/or at the required level of quality. The study “Unlocking the benefits of local sourcing for companies and societies” – which has just been published by DEG – Deutsche Investitions- und Entwicklungsgesellschaft mbH focuses on how companies can actively optimise their local procurement.

Added value for companies and society

As Christiane Laibach, Chairwoman of DEG’s Management Board, explains: “Well-planned measures that increase the proportion of locally sourced products and services create added value for companies and for society as a whole. The companies can reduce costs, plan more effectively and develop stronger local roots. As well as increasing their sales, suppliers can see their products integrated in global value chains. And, of course, rising local income leads to growing tax revenues and increased purchasing power.”

Company-specific and country-specific analysis possible

The research work undertaken together with consultancy firm Steward Redqueen presents two approaches for companies to analyse and increase their local sourcing: one country-specific and one company-specific.

For the country-specific approach, data from the Global Trade Analysis Project (GTAP) were used. GTAP is a global network of researchers conducting quantitative analyses of international economic policy issues. Companies can compare their sourcing activities with those of other companies in the same sector and learn from best practice examples. There is particularly high potential for improvement in countries that have a low level of local procurement in certain sectors compared with other countries. These include Vietnam for automotive supplies and animal feed production, Uzbekistan for non-metallic minerals such as gypsum, and Turkey for rubber products for example for tires. Development financiers such as DEG can use this approach to provide targeted support to companies whose local procurement is below the global average in this sector.

DEG provides assistance in the form of Business Support Services

The company-specific approach is a hands-on instrument that companies can use to identify and overcome specific obstacles associated with local sourcing. DEG has already integrated this approach in its “Business Support Services” with a view to analysing and improving its customers’ value chains. Here, among other things, DEG determines whether companies have the potential to optimise their sourcing of local preliminary products and services.