The Impact of FDI through the Production Network

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 gains. In this project, researchers make 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 event study designs, where they define the event as the first time a local firm supplies to an MNC in the country. The baseline event study uses all such events in the economy and exploits the plausible exogeneity of the timing of the event to the local firm. Researchers address the concern of selection into supplying to MNCs based on time-varying unobservables by using a Government-led program that allows us to compare firms winning a deal with an MNC to their contenders to the same deal. They show that local firms expand and adjust their production process after joining their first MNC supply chain. More importantly, they provide evidence that they experience sizable and long-lasting productivity gains. Last, researchers survey new suppliers to MNCs to shed light on the mechanisms behind their productivity gains.