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Local Content Requirement under Vertical Technology Diffusion

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  • Chul-Woo Kwon
  • Bong Geul Chun

Abstract

Many developing countries (LDCs) still impose a local content requirement (LCR) regulation on multinational enterprises (multinationals). The authors develop a simple model to investigate whether the introduction of an LCR affects a multinational's choice of technology transfer. The key assumption made in their analysis is that the multinational in an LDC prefers importing intermediate inputs from its home country, for the manufacture of final goods, to purchasing them from local suppliers equipped with outdated technology. However, the LCR of the LDC forces the multinational to purchase a fixed proportion of its intermediate inputs. The authors show that the magnitude of an LCR policy cannot affect the multinational's decision regarding technology transfer under technology diffusion. In addition, an increase in the LCR may foreclose technology diffusion because it could make the multinational establish its own intermediate input supplier(s) and become a vertically integrated multinational. Copyright © 2008 The Authors. Journal compilation © 2008 Blackwell Publishing Ltd.

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  • Chul-Woo Kwon & Bong Geul Chun, 2009. "Local Content Requirement under Vertical Technology Diffusion," Review of Development Economics, Wiley Blackwell, vol. 13(1), pages 111-124, February.
  • Handle: RePEc:bla:rdevec:v:13:y:2009:i:1:p:111-124
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    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1467-9361.2008.00462.x
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    References listed on IDEAS

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    1. S. Baranzoni & P. Bianchi & L. Lambertini, 2000. "Multiproduct Firms, Product Differentiation, and Market Structure," Working Papers 368, Dipartimento Scienze Economiche, Universita' di Bologna.
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    Cited by:

    1. Kwon, Chul-Woo & Chun, Bong Geul, 2015. "The effect of strategic technology adoptions by local firms on technology spillover," Economic Modelling, Elsevier, vol. 51(C), pages 13-20.
    2. Macatangay, Rafael Emmanuel “Manny”, 2016. "Optimal local content requirement policies for extractive industries," Resources Policy, Elsevier, pages 244-252.
    3. Sahoo, Anshuman & Shrimali, Gireesh, 2013. "The effectiveness of domestic content criteria in India's Solar Mission," Energy Policy, Elsevier, vol. 62(C), pages 1470-1480.

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