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Export, foreign direct investment and local content requirement

Authors Qiu, Larry Dongxiao
Tao, Zhigang
Issue Date 1999-06
Summary Local content requirement (LCR) is a popular government regulation on foreign direct investment (FDI). This paper investigates the design of optimal LCR policy. LCR affects multinationals' international strategies, namely FDI and export. We find that a less efficient or more vertically integrated firm is more likely to adopt the FDI strategy over the export strategy. By taking the endogeneity of a firm's international strategy into account, we characterize conditions under which the host government's optimal LCR policy results in one of the following equilibria: (i) all firms make FDI, (ii) all firms choose export, and (iii) some make FDI and others choose export.
Language English
Format Working paper
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