Local Content Policies: What is the Impact on Construction Firms?

Local content requires companies to use local suppliers and employees – how does this affect a EPC firm, and what should they do about this issue?

What is local content?

Local content, as defined by the World Bank, is “the share of employment—or of sales to the sector—locally supplied at each stage of this chain”. [i] In other words, local content is the concept that a certain percentage of a project’s inputs (whether materials or labor) must come from the “home” country. This is especially relevant for large construction projects – these projects often represent capital expenditures in the $10B+ USD range – and have very strict local content requirements, especially when the majority investor is the government itself, or an entity controlled by the government (i.e. a National Oil Company). [ii] Ultimately, local content is an example of the isolationism megatrend, as it is a classic example of high tariffs or laws affecting the manner in which a firm’s supply chain functions.

The manner in which local content is implemented can be seen in Figure 1 created by the World Bank, which shows the different categories of local content, and how in particular Category 2 local content can affect the supply chains of a construction firm.


Figure 1 [iii]

Local content’s impact on industry players

“In many of the countries where we work, clients are requiring more local content in their projects by mandating use of in-country talent and procurement of in-country goods and services.” – Fluor 2016 Annual Report [iv]

An example of a company heavily affected by these local content laws is Fluor (NYSE:FLR). Fluor is a large multinational EPC (engineering, procurement, and construction) firm, headquartered in Texas, with revenues of ~$19B in 2016. [v] Fluor is exposed to a number of industries which have local content restrictions, including mining, energy, chemicals, and large infrastructure projects. [vi]

Local content restrictions greatly affects Fluor’s ability to do business. First off, it restricts the countries in which they can work, depending on their local presence. In addition, local content restrictions often require significant training of employees, as many of the countries with strong local content laws lack the “in-house” expertise to complete the project themselves. To address this concern, Fluor is focusing on developing office locations within many different countries, and building a supply chain organization that understands local content restrictions. Fluor is also focused on developing local training programs that help to educate the workers and manufactures within a certain country, as well as utilizing centers of excellence to provide supply chain consulting services when needed. [vii]

Next steps

Going forward, Fluor must focus its efforts on working with the sponsoring countries to better define the “rules of the game” for local content projects. In order to accomplish this, Fluor, as a well-respected player in this space, should include in its bids the option for no local content, and the savings that could be realized by implementing this change. Local content policies often result in schedule delays and higher cost, which are not always communicated well to the customer. [viii] By including this information in its bid packets, Fluor can help to steer the client to reduce their local content requirement where appropriate.

Despite this, it is unlikely that local content policies will decrease significantly, as many governments view them as being highly effective (whether they are or not is an entirely separate policy debate).  Flour thus should make a concerted effort to investigate core strategic decisions such as “where to play” and “how to win” in these markets that have high levels of local content requirements. In the author’s opinion, Fluor should focus on markets where their supply chain organization can help to improve the productivity of local manufacturers in a differentiated manner. Along that line, Fluor should focus on recruitment of experts in both the cultures of countries they expect to grow and in manufacturing of resources that are expected to be needed. In this manner, Fluor can leverage their existing supply chain competencies to create a competitive advantage, especially if stricter local content policies are enforced.

Questions that remain to be answered

  • Will modernization and free trade policies ultimately force countries to abandon enforcement of local content policies? Alternatively, will local content policies become more aggressive as income disparities amongst nations rises?
  • How should Fluor’s technical organization be structured in the future to enable deep expertise in all relevant fields as they expand to more nations with local content policies?

(718 words)


[i] Osmel E. Manzano et al., “Local Content in the Oil and Gas Sector” (The World Bank, January 1, 2013), http://documents.worldbank.org/curated/en/549241468326687019/Local-content-in-the-oil-and-gas-sector.

[ii] “Fluor 2016 Annual Report,” accessed November 15, 2017, http://investor.fluor.com/static-files/cbbc19b9-9dc0-4015-aa66-696767dfd1d8.

[iii] Manzano et al., “Local Content in the Oil and Gas Sector.”

[iv] “Fluor 2016 Annual Report.”

[v] “Fluor Reports Fourth Quarter and Full Year 2016 Results | Fluor Newsroom,” accessed November 15, 2017, http://newsroom.fluor.com/press-release/corporate/fluor-reports-fourth-quarter-and-full-year-2016-results.

[vi] “Fluor 2016 Annual Report.”

[vii] “Fluor 2016 Annual Report.”

[viii] Michael Warner, Local Content in Procurement: Creating Local Jobs and Competitive Domestic Industries in Supply Chains (Routledge, 2017).


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3 thoughts on “Local Content Policies: What is the Impact on Construction Firms?

  1. Great essay!

    Local content policies are obviously a hindrance to pure free trade. A company that, when differences in productivity and wages are taken into consideration, determines it would be better off exporting labor to another country cannot do so. That’s especially important for EPC companies that might not want to have to orchestrate the recruiting of a trained workforce in many different countries.

    The application of these policies, as you mention, might have a tendency to become stricter as isolationism grows and the “fear of the foreign” continues to be at the center of the public debate. It remains to be seen whether new free trade agreements will reduce the reliance on these measures to protect a country’s economy, especially since the immediate impact would typically benefit the richer, more productive country. I would argue, on the other hand, that protecting one’s country is certainly not the most efficient way of making it more productive and on par with its more developed counterparts.

    For companies like Fluor, I would think a dual approach would be beneficial. Continue to lobby the government to reduce the reliance on these policies, while investing in developing the workforce in those countries. This will arm them with strong arguments, and ultimately will give them access to a well-trained workforce in those countries.

  2. Thanks for the very interesting article! Local content policies appear to put a tremendous amount of financial strain on companies and inherently hinder free trade. I really liked your suggestion that Fleur include in its bids an option without local content sourcing, as that will increase transparency about how much money these policies cost companies.

    In response to your question about how Fleur can best structure themselves in the future to deal with local content policies, I wonder if it makes sense to split the company into regional or even country-level suborganizations within the larger company. It seems necessary to decentralize the company in order to serve disparate geographies with local content policies in place. If these policies persist, it will become necessary to have most areas of expertise available in all countries in which Fleur wishes to operate.

    One thing I found very interesting about local content policies is that while we would expect these policies to help the countries imposing them, paradoxically, the Organization for Economic Co-operation and Development (OECD) has found that these policies might actually hinder a country’s own prosperity [1]. Going forward, I wonder if countries will start realizing the negative effects of these policies and roll them back or if they will double down on the new trend of isolationism.

    [1] Stone, Susan, James Messent, and Dorothee Flaig. “Emerging Policy Issues: Localisation Barriers to Trade.” OECD Trade Policy Papers 180 (n.d.): n. pag. Papers – OECD ILibrary. OECD Publishing, 01 May 2015. Web. 01 Dec. 2017. .

  3. Great article. I agree with you that countries are unlikely to reduce local content requirements. In fact, I expect the opposite. For example, countries like Saudi Arabia (see link below) are working on increasing not just the percentage of Saudi nationals employed in foreign companies, but also the percentage of specific Saudi groups like women. Part of the reason for this is optics. Local residents aren’t generally aware of studies demonstrating the ineffectiveness of local content policies, but they most definitely are aware of policies require local hiring. Because of this, policy makers have every incentive to maintain the policies.


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