Protectionism, Export Requirements, and Joint Ventures

Economic distortions often accompany the attempt by lower-income countries to develop. This paper examines the consequences of two such distortions: an export-share requirement whereby foreign capital producing in a local enclave is allowed to sell only a fraction of its output in the local protected market, and some local capital must be allowed into a joint venture in the enclave, even if it must be paid a higher return there than foreign capital earns in its country of origin. The welfare effect of such measures is investigated as well as the effect on local wages of measures that drive out some foreign investment. Such a loss of foreign capital may serve to raise the wage rate.