THE IMPACT OF LOCAL CONTENT RULES ON GLOBAL SOURCING DECISIONS

Many governments have established, for various reasons, local confent purchasing rules for companies that wish to operate in their country. These requirements force firms to purchase a certain amount of components from suppliers located in that country. This paper describes local content rules and develops models to select suppliers while satisfying local content provisions. The single plant model can be transformed into a knapsack problem that is solved by a ranking procedure, and the solution provides insight as to the manner in which local content rules impact more generalized models. Furthermore, we illustrate possible negative effects to local industry that may result when governments set the local content percentage too high, and we discuss methods for companies to circumvent local content rules. Finally, we address the issue of local content rules in the context of multi‐plant global sourcing decisions, and we provide an efficient solution procedure for the classical plant location model extended to include local content rules at each site