Abstract
We examine the relative sensitivity of investment by Japanese and US multinational firms to host country policies that require manufacturing subsidiaries to switch to local component suppliers. We find that foreign direct investment by Japanese multinationals is much more sensitive to local content requirements and restrictions on component imports than that of US multinationals. While our empirical analysis cannot address supplier switching costs directly, our findings are consistent with the notion that the Japanese keiretsu system of industrial organization leads to stronger vertical relationships, and thus higher supplier switching costs, than those of firms from the US.
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