CONTENT PROTECTION WITH FOREIGN-CAPITAL

We consider local content requirements in a second-best environment, w ith foreign capital flows, and consider the consequences for domestic producers of final goods. We derive an expression for the welfare cons equences of content protection in a competitive general equilibrium mo del of two stages of production and show that content protection initi ally has no effect other than expanding foreign firms at the expense o f domestic ones. Once domestic producers exit, further tightening of t he content requirement decreases production of the final good and incr eases component production, stimulating an inflow of foreign capital. Conflicting effects on domestic welfare are discussed.