The Effects of Joining Multinational Supply Chains: New Evidence from Firm-to-Firm Linkages

Working Paper
Published on 24 April 2019

Abstract

This working paper, by Alfaro-Urena, Manelici and Vasquez (2019), investigates the effects of becoming a supplier to multinational corporations (MNCs) using administrative data tracking all firm-to-firm transactions in Costa Rica. Event-study estimates reveal that after starting to supply to MNCs, domestic firms experience strong and persistent improvements in performance, including the expansion of their workforce by 26% and gains in standard measures of total factor productivity (TFP) of 6-9% four years after. Moreover, the sales of domestic firms to buyers other than the first MNC buyer grow by 20%, both through a larger number of buyers and larger sales per buyer. The authors propose a simple model by which TFP and reputation affect the number of buyers, but TFP alone affects sales conditional on buying. They find a model-based increase in TFP of 3% four years after. Finally, the authors collect survey data from managers in both domestic firms and MNCs for further insights on mechanisms. Their surveys suggest that becoming suppliers to MNCs is transformative for domestic firms, with changes ranging from new managerial practices to better reputation.