Foreign Investment, Vertical Integration and Local Equity Requirements

Avik Chakrabarti () and John S. Heywood ()

Economica, 2004, vol. 71, issue 284, pages 559-574

Abstract: The paper presents a spatial model in which a foreign firm and local government behave strategically in setting a local equity requirement (LER). Contrary to simple intuition, larger equity requirements may increase economic efficiency, but this conclusion is highly sensitive to the vertical structure of the foreign firm. When the foreign firm has monopoly power in both foreign (upstream) and domestic (downstream) markets, the optimal equity requirement is zero. Surprisingly, the introduction of domestic competition upstream causes the government to adopt a LER which lowers economic efficiency. Copyright (c) The London School of Economics and Political Science 2004.

Date: 2004

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