The Local Content Requirement under the Vertical Technology Diffusion
Many developing countries (LDCs) still impose a local content requirement (LCR) regulation on multinational enterprises (multinationals). This paper develops a simple model to investigate whether the introduction of a LCR affects a multinational’s choice of technology transfer. The key assumption made in our analysis is that the multinational in the LDC prefers importing intermediate inputs from its home country to make final goods to purchasing from local suppliers equipped with old technology. However, the LCR of the LDC makes the multinational purchase a fixed fraction of intermediate inputs. We show that the magnitude of a LCR policy can not 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.