Production Subsidies, Local Content Requirements and Foreign Direct Investment:A Theoretical Analysis

Roger N. Strange
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Roger N. Strange: Kobe University

Kobe Economic & Business Review, 1995, vol. 40, 130-144

Abstract: This paper provides a partial equilibrium analysis of the welfare effects of inward direct investment for the host economy in the presence of domestic production subsidies and local content requirements. The main conclusion is that if a production subsidy is to be used to increase domestic output and employment, then the reduction in national welfare is less if the subsidy is made available to both domestic and foreign firms. Furthermore a production subsidy is a more efficient way of protecting a component industry than a local content requirement on the final-goods industry.

Date: 1995
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