FOREIGN DIRECT-INVESTMENT, LOCAL CONTENT REQUIREMENT, AND PROFIT TAXATION

We develop a partial equilibrium model of foreign direct investment (F DI) in which identical foreign firms locate themselves in a host count ry to compete in an oligopolistic market for a non-tradeable commodity . The host country, assumed to be small in the market for FDI, makes u se of two instruments, viz., a profit tax and a local content requirem ent, to compete for FDI in the international market. We assume the exi stence of unemployment in the host country. The structure of optimal i nstruments and their relationship to the number, and the relative effi ciency levels, of the domestic firms, are established.