Understanding local content descisions: economic analysis and an application to the automotive industry

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.