UNDERSTANDING LOCAL CONTENT DECISIONS: ECONOMIC ANALYSIS AND AN APPLICATION TO THE AUTOMOTIVE INDUSTRY*

Authors

  • Francisco M. Veloso

    1. Department of Engineering and Public Policy, Carnegie Mellon University, Pittsburgh, PA 15213. E-mail: fveloso@cmu.edu; and Faculdade de Ciências Económicas e Empresariais, Universidade Católica Portuguesa, Palma de Cima, 1649-023 Lisboa, Portugal
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  • *

    I would like to thank Richard de Neufville, Joel Clark, Alice Amsden, Richard Roth as well as the Editor and two anonymous referees for their extensive comments and suggestions. The comments of participants from the seminars at Carnegie Mellon University and the Academy of Management are also appreciated. I would also like to acknowledge a post-doctoral fellowship from Fundação para a Ciência e Tecnologia in Portugal. The usual disclaimer applies.

Abstract

ABSTRACT In industrializing regions, foreign investments often generate spillovers through regional backward links. This situation may create a gap between private and social valuations of resources, resulting in a level of local content below what would be optimal for the economy. This situation creates an opportunity for the enactment of domestic content regulations. This paper presents a model to understand how these policies condition the decisions of the economic agents and affect economic welfare. Then, it simulates the model using a case study of the automotive sector. Results suggest that, in certain conditions, this local content regulation can be welfare enhancing.

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