Local content requirements, vertical cooperation, and foreign direct investment
Belderbos, Rene Sleuwaegen, Leo Jie A Joen, Clive
Belderbos, Rene
Sleuwaegen, Leo
Jie A Joen, Clive
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Publication Type
Journal article
Editor
Supervisor
Publication Year
2002
Journal
De Economist
Book
Publication Volume
150
Publication Issue
2
Publication Begin page
155
Publication End page
180
Publication Number of pages
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Abstract
Local content requirements have been observed empirically to protect vertically integrated domestic industries and induce inward foreign direct investment in intermediate goods production. The effects of a local content requirement is examined in the context of potential foreign direct investment and upstream manufacturing by a foreign multinational and potential vertical cooperation between the host country's upstream and downstream producers. In case of vertical cooperation domestic producers have an incentive to set the price of the intermediate strategically to discourage foreign direct investment. Vertical cooperation is found to enhance the rent-shifting effect of the local content requirement, whereas the foreign direct investment response increases price competition and reduces domestic profits. In both cases, manufacturing efficiency and foreign welfare decrease.
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Keywords
Strategic Context & International Business