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Foreign Investment, Vertical Integration and Local Equity Requirements
Author(s) -
Chakrabarti Avik,
Heywood John S.
Publication year - 2004
Publication title -
economica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.532
H-Index - 65
eISSN - 1468-0335
pISSN - 0013-0427
DOI - 10.1111/j.0013-0427.2004.00388.x
Subject(s) - monopoly , equity (law) , vertical integration , foreign direct investment , economics , industrial organization , intuition , equity capital markets , business , upstream (networking) , market economy , microeconomics , monetary economics , international economics , finance , private equity , macroeconomics , political science , law , computer network , philosophy , epistemology , computer science
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.