ABSTRACT
We quantify the impacts of a local content requirement (LCR) policy that promotes the use of domestic content in the upstream oil and gas sector on the Indonesian economy. We develop a model of foreign sourcing with an LCR compliance decision. An LCR-bound firm chooses to comply with the LCR or not by weighing the cost penalty of compliance and the non-compliance cost. We find that the LCR leads to reallocation of sales to the upstream oil and gas sector between compliers and non-compliers but generates small effects on aggregate sales, value added, and employment. The LCR not only increases local content of compliers but also raises domestic input costs and reduces the local content of non-binding firms and non-compliers, causing the aggregate local content to decline. Therefore, an attempt to increase aggregate local content using LCR may generate an unintended effect.
