Export, foreign direct investment, and local content requirement

Local content requirement (LCR) is a popular government policy in developin g countries to regulate foreign direct investment. We establish a model wit h heterogeneous multinational firms and show that (a) the LCR policy affect s the firms' modes of entry to a new market, with FDI being more likely to be adopted when there are lower LCRs, and (b) when facing the same LCR, a l ess efficient firm is more likely than a more efficient firm to adopt the F DI mode. Furthermore, we investigate the design of an optimal LCR policy. T wo types of FDI benefits are considered, and two types of LCR policy are,co mpared. (C) 2001 Elsevier Science B.V. All rights reserved.