Host-Country Regulation and Other Determinants of Overseas Operations ofU.S. Motor Vehicle and Parts Companies

The likelihood that a U.S. auto company will carry out some manufacturing operations in a country is a function mainly of market characteristics such as aggregate and per capita income, but that likelihood is increased by the imposition of local content requirements. The entry of U.S. parts producers into manufacturing in a host country is determined mainly by market size and by the presence of U.S. auto producers and is therefore indirectly promoted by local content rules. The scale of production by individual auto producers does not appear to be increased by a country's imposition of local content requirements and may even be reduced, with the results that inefficiently small operations proliferate. The scale of U.S. parts company production depends on market size and the extent of U.S. auto company activity.The combination of induced entry of auto and parts producers with no effect or a negative effect on the scale of their individual operations suggests that countries imposing these restrictions do raise the aggregate level of local auto and parts production. However, they presumably pay some penalty in terms of sub-optimal scale and consequently high costs of production.