Optimal local content requirement policies for extractive industries

Research output: Contribution to journalArticle

6 Citations (Scopus)
222 Downloads (Pure)

Abstract

Local content requirement policies typically call for a foreign investor to source a portion of its procurements from local suppliers in the domestic economy. Local content requirement policies have long been studied for various industries, and there is currently a vibrant debate on their design or implementation in extractive industries, such as minerals, oil, or gas, especially in resource-rich low-income countries. Our objective in this paper is to characterise optimal local content requirement policies in the context of extractive industries. If an optimal local content requirement policy serves to monetise the positive externalities from foreign investment, then it is, in essence, a Pigouvian subsidy, which is a first-best policy, but the incremental volume of business which it may induce is a function not only of the size of the positive externalities but also of the response of local suppliers to new business opportunities. We discuss four implications: providing high-powered incentives for investor compliance, harvesting the investor’s superior information, managing the host government’s administrative burden, and mitigating the risk of infantilising local suppliers.
Original languageEnglish
Pages (from-to)244-252
Number of pages9
JournalResources Policy
Volume50
Early online date24 Oct 2016
DOIs
Publication statusPublished - Dec 2016

Keywords

  • Local content requirement
  • extractive industries
  • Pigouvian subsidy
  • positive externalities

Fingerprint Dive into the research topics of 'Optimal local content requirement policies for extractive industries'. Together they form a unique fingerprint.

  • Profiles

    No photo of Rafael Macatangay

    Macatangay, Rafael

    • CEPMLP - Lecturer (Teaching and Research)

    Person: Academic

    Cite this