Effects of Change in Local Content Requirement and Exchange Rate Volatility in an International Oligopoly

This paper investigates the changes in local content requirement (LCR) and exchange rate volatility on an international oligopolistic market in a foreign country that accepts n affiliates firms through FDI from a home country. The subordinate firms are forced to procure a proportion of their intermediate products from the foreign firms under the LCR of the foreign government. We derive a Cournot equilibrium of the oligopolistic foreign market, in which affiliate firms compete with the foreign firms under foreign exchange rate uncertainty for when the number of affiliates, n, is either exogenous or endogenous. In the former case, we show the affiliates aggressively expand their outputs and the ex-post expected profits of the affiliates decrease but their ex-ante certainty equivalent of expected profits increases with the volatility of the exchange rate when the relative risk aversion coefficient is not high at equilibrium. In the latter case, we show LCR tightening from the foreign government always accelerates the exit of the affiliates from the foreign market and if the extent of the relative risk aversion of the international firms is not high, the entry of affiliates onto the foreign market can be urged as the risk of exchange rate increases.