The effects of joining Multinational Supply Chains: New Evidence from Firm-to-Firm Linkages

by Isabela Manelici and Jose-P. Vasquez (UC Berkeley), with Alonso Alfaro-Urena (Banco Central de Costa Rica)

See here for a draft of the paper.

Using administrative data tracking all firm-to-firm transactions in Costa Rica, we investigate the effects of becoming a supplier to multinational corporations (MNCs). Event-study estimates reveal that after starting to supply MNCs domestic firms experience strong and persistent improvements in firm performance, including gains of 6-9% in revenue-based measures of total factor productivity (TFPR) four years after. Moreover, their business with buyers other than the first MNC buyer grows by 20%. This growth is due to both higher average sales and having more buyers. To interpret these changes in business with others, we propose a simple theoretical framework. When we do not account for the extensive margin of new buyers, we estimate gains in the productivity residual similar to TFPR estimates. Around half of these gains are due to an improved ability to match with new buyers. Finally, we survey domestic firms and MNCs for additional insight. We learn that becoming suppliers to MNCs is transformative for domestic firms, with changes ranging from new managerial practices to better reputation. These changes arise from interactions during which MNCs communicate their expectations and advice on how to meet them, and from the efforts of new suppliers to rise up to the challenge.