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It is widely believed that restrictions against foreign direct investment (FDI) should be eliminated altogether. However, local equity requirements (LERs) that effectively mandate multinational enterprises (MNEs) to enter through international joint ventures (IJVs) are still common and are seemingly persistent. We seek to understand why and how governments are motivated to adopt LERs. We demonstrate that LERs can in fact be host governments' optimal choices when regulating the entry of MNEs into domestic markets formerly dominated by public firms. (JEL F13, F23, L32) * We wish to thank Tsung-Sheng Tsai, Povilas Lastauskas, session participants at the 94th Annual Conference of the Western Economic Association International and the 2019 Taiwan Economic Association Annual Conference, two anonymous reviewers, and Kwok Ping Tsang (Co-Editor), for their valuable comments. We acknowledge financial support from the JSPS KAKENHI (17K03731, 20K01644, 20K01666), Nanzan University for the Pache Research Subsidy I-A-2 for the 2020 academic year, and Daiko Foundation (No. 11075). An early version of this paper was circulated under a different title "FDI Policy and Mixed International Joint Ventures." The usual disclaimers apply. [Correction added on 4 August 2020 after first online publication: Changes have been made to the following: (1) the first sentence of the Acknowledgment section has been deleted; and (2) the last sentence of Acknowledgement section has been extracted and captured as footnote 12 which resulted to renumbering of footnote and its corresponding citations throughout the article.

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