Local sourcing and the technology impact on suppliers: Comparing FDI and domestic producer firms

This study contributes to the literature on externality impacts that foreign direct investment (FDI) can generate among local suppliers in a host economy. Using unique data from several surveys among firms in the manufacturing sector of Nuevo Leon, Mexico, I present novel qualitative and quantitative evidence on the static and dynamic impact of FDI firms on their Mexican suppliers. Importantly, the data allows me to deal with certain issues and questions that previous research has failed to address satisfactory. In particular, the data makes it possible to compare statistically the operations and impacts of both foreign-owned and domestic producer firms, providing an answer to the question that underlies all research on FDI impacts whether foreign-owned firms actually differ in their impacts from domestic firms. I also use data from an objective sample of actual suppliers in the regional economy to identify the impact of producer firms and to assess whether type of ownership of producer firms matters for this impact. The main findings can be summarized as follows. First, there are only marginal differences between foreign-owned and Mexican producer firms regarding the level of use of local suppliers. As such, this indicates that type of ownership does not affect the static impact of producer firms. Second, I find several indications that the dynamic impact of foreign-owned firms is significantly larger than the impact of domestic producer firms. FDI firms offer several types of support to their suppliers significantly more frequently. This concerns in particular types of technological support, support that has a direct positive impact on production processes of suppliers. Findings from the survey among local suppliers also indicate that the dynamic impact of foreign-owned firms is larger, as there are significantly more firms among suppliers of FDI firms that indicate to have experienced a large positive impact from their business dealings with their client firms. Related to the finding that FDI firms offer more technological support, the suppliers indicate that it is in particular technological support that is important for generating this large impact. A vast majority of suppliers of FDI firms also indicate that they can use support received from a given client firm to improve their performance to other client firms, indicating the presence of wider positive economic effects from their business dealings with FDI firms. Third, I conduct a multivariate statistical analysis to identify supplier and business linkage characteristics that influence the likelihood that a supplier experiences a large positive impact. The findings indicate that the level of absorptive capacity of local suppliers facilitates this impact. A large technology gap between a supplier and its client firms, representing a large scope of the potential impact, also fosters the occurrence of a large positive impact of a technological nature. The levels of organizational and technological supportiveness of producer firms are also positively associated with the occurrence of large organizational and technological impacts. Overall, inter-firm linkages characterized by "at arms length" business transactions lower the likelihood that a large impact materializes, suggesting that close relationships between producer firms and suppliers facilitate positive externality effects. Finally, the positive effect of foreign-ownership of producer firms on the creation of large positive impacts among suppliers is maintained in the multivariate analysis. This confirms that the type of ownership of a producer firm clearly matters for the creation of positive dynamic impacts in the regional economy. As such, the findings contain robust indications that FDI firms are a particularly good source of knowledge and technology transfers to their local suppliers, supporting the notion that input-output linkages between FDI firms and domestic firms are a well-suited mechanism for the creation and transmission of positive spillover effects.