Elsevier

World Development

Volume 39, Issue 4, April 2011, Pages 620-632
World Development

FDI, Local Sourcing, and Supportive Linkages with Domestic Suppliers: The Case of Monterrey, Mexico

https://doi.org/10.1016/j.worlddev.2010.08.012Get rights and content

Summary

In this paper, we use unique data from firm level surveys among foreign-owned and domestic producer firms as well as domestic suppliers to obtain novel direct empirical evidence on the level, supportive nature, and impact of input–output linkages in Monterrey, Mexico. Our main empirical findings are threefold. First, FDI firms and Mexican firms do not differ in their level of use of local suppliers of material inputs and production services. Second, we find evidence of a variety of types of support that producer firms transmit to their local suppliers. Importantly, FDI firms are significantly more supportive than Mexican firms. This applies in particular to types of support that are linked closely to improving the production processes of suppliers. We also find that several other producer firm characteristics are associated with the use of local suppliers or the provision of support. Third, we find significant differences between maquiladora firms of different generations regarding the scale and nature of their impact among local suppliers.

Introduction

The last two decades have witnessed a rapid growth of the research field engaged with the statistical identification and quantification of spillovers from foreign direct investment (FDI) in host economies (Blomström and Kokko, 1998, Crespo and Fontoura, 2007, Lipsey, 2004). Domestic firms may benefit from the presence and operations of FDI firms, as demonstration effects, labor turnover, and input–output linkages may facilitate flows of technology and skills to these domestic firms. Having said this, the empirical evidence is also characterized by a considerable degree of heterogeneity, reflecting the complexity that surrounds the satisfactory identification of FDI spillovers (Blomström and Kokko, 2003, Jordaan, 2009).

Furthermore, econometric studies on FDI externalities face limitations when it comes to addressing important questions on why and how FDI spillovers are generated and transmitted. The closest to identifying channels of FDI spillovers come studies that estimate the relation between the level of industry foreign participation and productivity of domestic firms in input-supplying industries (e.g., Blalock and Gertler, 2008, Kugler, 2006). However, findings of a positive association between industry foreign participation and productivity in related industries only constitute indirect evidence that input–output linkages are the main channel via which technologies are shared and transmitted. This indicates that there is a need to obtain further detailed evidence on the scale and nature of input–output linkages that FDI firms establish. This is especially the case for developing countries, for which evidence on the operations and effects of FDI firms tends to be far more limited. This lack of evidence, combined with the fact that many developing country governments see the attraction of FDI firms as a very important element of their economic development strategies, indicates the importance of obtaining more detailed evidence on the existence and effects of FDI backward linkages in developing country settings (Ivarsson and Alvstam, 2005a, Ivarsson and Alvstam, 2005b, Moran, 2005).

The purpose of this article is to conduct a detailed empirical study on the level and nature of input–output linkages between foreign-owned manufacturing firms and domestic suppliers in a developing host country setting. Using unique data from several firm level surveys that we applied in key manufacturing industries in the metropolitan area of Monterrey, Mexico, we analyze the scale and supportive nature of FDI backward linkages, in the context of these linkages potentially representing an important transmission channel of new knowledge and technologies. Furthermore, we conduct multivariate analysis to identify statistically firm level characteristics that affect both the level of use of local suppliers and the degree to which sourcing linkages are supportive in nature.

The main contribution of our analysis is threefold. First, the vast majority of previous research has focused exclusively on backward linkages between FDI firms and domestic suppliers. The common assumption is that FDI firms are less integrated locally than domestic producer firms, but this assumption is normally not tested. Our careful research design allows us to ascertain statistically whether and how FDI firms actually differ from comparable domestic producer firms regarding the level of use of local suppliers and the provision of support. Furthermore, our evidence is also novel as it contains representative information on the pool of local suppliers in the region that further clarifies whether there are differences in the dynamic impact between the two types of producer firm. Second, we conduct multivariate analysis to identify statistically the effects of a variety of firm level characteristics on the level of use of local suppliers and the provision of support. Next to obtaining important new evidence on which firm characteristics may influence the use of local suppliers and the nature of local linkages, this analysis also tests in a multivariate setting whether and how FDI and domestic producer firms differ in the impacts that they generate. Finally, we are able to link our analysis into the important debate on the role of younger generation maquiladora firms in future processes of economic development in the north of Mexico. Following the opening up of the Mexican economy in the late 1980s, there has been a large increase in the scale of economic activity in Mexico’s northern states. At the same time, recent research is suggesting that there is a growing presence of second and third generation maquiladora firms, which focus more on producing products compared to traditional assembly-style first generation maquiladoras. In combination, these processes may be creating a situation where younger generation maquiladora firms are starting to generate a larger positive impact on their local economy. Our analysis contributes to this debate by providing novel statistical evidence on whether maquiladora firms of different generations differ in the local impact that they generate.

The article is constructed as follows. In Section 2 we discuss in more detail the concept of FDI backward linkages and why these linkages are related to the occurrence of externalities. This section also looks at previous research on FDI linkages in Mexico. From this, we develop our research questions. Section 3 explains the research design of our fieldwork, presents findings from dichotomous comparisons between FDI and Mexican producer firms, and presents indications of the overall impact of the sourcing linkages of these two types of firm. Section 4 presents our multivariate analysis of the effects of firm level characteristics on the level of local sourcing and the provision of support. The main findings of this section can be summarized as follows. First, after controlling for a range of firm level characteristics, type of ownership is not significantly associated with the level of use of local suppliers. Second, type of ownership does matter when it concerns the provision of support: FDI firms are significantly more supportive compared to their Mexican owned counterparts, suggesting that FDI firms are a better source of positive externalities. Third, our findings indicate that younger generation maquiladora firms use more local suppliers and also offer more support compared to first generation maquiladora firms, suggesting that there are important differences in the economic impact between maquiladora firms of different generations. Finally, Section 5 summarizes and discusses policy implications.

Section snippets

Impacts of FDI via local sourcing

Applied economics research on FDI linkages usually distinguishes between direct and indirect effects (Dunning, 1993, Scott-Kennel and Enderwick, 2005) or static and dynamic impacts (Potter, Moore, & Spires, 2002). The static impact relates to the level of use of suppliers by an FDI firm, generating economic multiplier effects in the host economy. Dunning (1993) reviews several studies on the static impact of FDI in developing countries and concludes that the degree of use of local suppliers can

Research setting and design

We selected the metropolitan area of Monterrey, capital city of the state of Nuevo Leon, as research region. This city has received only limited attention in applied economics research on Mexico thus far, which is surprising given the fact that it constitutes the second or third largest agglomeration in Mexico (Behar, 1988, Gutierrez Garza, 1997, Vellinga, 2000). In fact, the importance of Nuevo Leon has only increased further during recent processes of locational readjustment of economic

Determinants of use of suppliers and provision of support

The findings in the previous section indicate two central issues. First, the evidence is mixed on the effect of type of ownership on the level of use of local suppliers. Second, type of ownership appears to have a distinct effect on the provision of support to local suppliers, as FDI firms are significantly more supportive to both suppliers of material inputs and production services. Of course, these findings need to be interpreted with some caution, as they are based on dichotomous comparisons

Summary and conclusions

The purpose of our study is to obtain novel detailed evidence on the level, supportive nature, and determinants of local sourcing by FDI firms in a developing host economy setting. Quantitative research provides important indications that input–output linkages between FDI firms and local suppliers may act as an important transfer mechanism of positive externalities. However, these indications constitute only indirect evidence of the functioning of these linkages as spillover channel and do not

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