Emerging Policy Issues

Multinational enterprises in domestic value chains

“…policies imposed by governments that require firms to use domestically manufactured goods or domestically supplied services in order to operate in an economy. The motivation of such policies is often directly linked to the creation of domestic linkages by foreign affiliates with domestic suppliers and customers, but previous research has shown that LCRs also undermine long-term industrial competitiveness (Stone et al, 2015). Stronger domestic linkages are created when foreign firms find competitive partners in the domestic economy.…”

Executive summary

“…Final consumers and nontargeted domestic sectors will consequently reduce their consumption of these particular goods and, in turn, import more of the comparatively cheaper products. Stone et al (2015) also find that the industries under local content requirements tend to increase their share of imported inputs, which is counterproductive vis-à-vis their intended public policy objective.…”

“…In most cases, local content requirements will raise the targeted industry's production costs -assuming that without these requirements, each investor would be allowed to choose from the most cost-effective source, whether domestic or foreign. As such, a local content requirement is a regulatory intervention constraining firms to choose a less efficient supplier, which will lead to increase prices and thus reduce the competitiveness of the targeted industry across the economy (Stone et al, 2015). Final consumers and nontargeted domestic sectors will consequently reduce their consumption of these particular goods and, in turn, import more of the comparatively cheaper products.…”

An analysis of market-distorting factors in shipbuilding

“…Useful information sources to estimate those capital costs are financial statements to derive, for instance, the interest rates paid on other debt or the firm leverage (in order to assess the firm risk), or credit ratings to project loan cash flows and derive credit spreads for the estimation of discount rates (Lucas, 2018[23]). Alternatively, the risk premium can be derived on the basis of the Capital Asset Pricing Model (CAPM) introduced by Sharpe (1964 [27]), Lintner (1965 [28]) and Mossin (1966[29]). This model allows the determination of the firm specific beta-factor which represents the non-diversifiable (systematic) risk of the firm.…”

“…Firms can use various forms of financing instruments (Figure 17). The basic ones include debt (loans, credits or bonds) and equity (direct and quasi-direct 27 ). Beyond those, there exists also funds, such as debt or equity funds, and structured products that are customized, such as options or indices.…”