Why Industrial Relocation Does Not Necessarily Upgrade Capabilities in Receiving Regions
A Regional Economic Analysis of Value Chain Governance Local Learning and Value Capture
Keywords:
regional economics, industrial relocation, value chain governance, absorptive capacity, local embeddedness, industrial upgradingAbstract
Industrial relocation can expand production and employment in receiving regions, but project establishment, capacity expansion, technological upgrading, and local value capture do not necessarily advance together. This article combines theoretical analysis with a comparison of representative studies on value chain governance, absorptive capacity, and regional production networks to explain when incoming investment can support local upgrading. It distinguishes four evaluation outcomes: project establishment, output growth, capability accumulation, and the local retention of benefits. The central argument is that opportunities for knowledge transfer, local firms' learning capabilities, and arrangements for distributing returns jointly shape upgrading. Procurement linkages may support learning or create dependence, while geographical clustering requires organizational and cognitive connections to sustain knowledge diffusion. The article develops testable propositions on supplier entry, functional upgrading, and the persistence of capabilities after an external investor or customer exits. It also discusses identification problems arising from nonrandom investment promotion, selective procurement, and changes in firm composition. The analysis draws on international investment research without treating its estimates as direct evidence of domestic interregional relocation in China. It contributes a framework for separating production expansion from transferable local capabilities and durable regional benefits. Policy evaluation should examine independent operating capabilities and sustainable local returns rather than rely exclusively on investment, output, or local procurement shares. The propositions require further testing with linked project, supplier, worker, and firm data.
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