The industrial composition of countries explains the spatial pattern and growth of the global car industry

Abstract

During the last decades, the change of the automotive industry's geography has been explained mainly by outsourcing strategies of lead firms and global suppliers driven by aggregate factors like convenient labor costs and tax benefits. But are these factors sufficient to explain the successful establishment of the car industry and related activities in a country? This thesis applies methods from econometrics, economic complexity and network science to explore the effect of the industrial composition of economic systems on the emergence and growth of the car industry. Here a new tool, which combines the previously mentioned methods, is developed to predict the number of the most significant related industries in different industrial sectors. Moreover, the results obtained using this tool are confirmed by a qualitative analysis concerning the evolution of the Turkish and South Korean car industry. More specifically, I make use of the product space (Hidalgo et al., 2007), a network on the probability of co-exporting products like cars, to develop the Related Capability Index (RCI) that measures the number of related industries necessary to explain the emergence of the car industry. Performing regression analysis, it is proved that the 11 industries with the highest proximity value in the product space are the most significant predictor of the car industry's emergence and growth. Further analysis shows that, in order to determine the development of a competitive car sector, these 11 industries should be not only active but they should have intermediate or developed strengths. These findings are consistent with the idea that the related variety of the knowledge base and the development of systemic skills and underlying capabilities are essential for the development of a complex industry. Moreover, I analyze how, in the last decades, the most correlated industries have not only increased their heterogeneity but also their level of complexity. Finally this thesis assesses how the underlying capabilities connected to the car industry are likely to change in the future. According to the findings of this thesis, policy makers aiming to foster the development of a complex industry should focus not only on tax and production costs' benefits for potential investors, but rather focus also on the diversification and sophistication of the productive structure of their country.