Multinational and Economic Development

Can local firms boost their productivity by supplying to multinational firms? This project tries to answer this question using a novel, administrative dataset from Costa Rica.

Can local firms boost their productivity by supplying to multinational firms (MNCs)? The answer to this question has, so far, proven elusive, as it requires data on actual firm-to-firm linkages, an empirical strategy that delivers causal estimates, and evidence on productivity (as opposed to performance) gains. This project makes direct progress on the first two fronts by using an administrative dataset that records all firm-to-firm transactions within Costa Rica and two complementary even study designs, where the event is defined as the first time a local firm supplies to an MNC in the country.

To identify the causal effects of joining the supply chain of a MNC, the authors exploit the plausible exogeneity of the timing of the event to both firms involved. Taking advantage of the richness of the data, they construct two samples of domestic firms: a full sample, and a restricted one containing only firms that eventually supply to an MNC. This allow them to confirm that the findings are actually driven by the timing, and not by unobserved differences with "never-suppliers". Further tests are performed to defend the causal nature of the results.

Policymakers around the world continuously present the attraction of MNCs as an important development strategy. This project provides valuable insights on the merits and perils of such a strategy. The resulting findings are likely to benefit all countries who may be already offering generous incentives to attract MNCs, or contemplating to do so in the future.