Trade Adjustment Costs in Developing Countries: - World Bank ...

New Kids on the Block 233spondents who were asked about telecommunications. The corresponding figuresfor the effect on service availability ranged from 47 percent in accounting andauditing to 80 percent in telecommunications (Arnold et al. 2007).Arnold et al. (2007) formally examined the link between FDI in services and theperformance of domestic firms in downstream manufacturing. Using firm-leveldata from the Czech Republic for 1998–2003, they measure the presence of FDIin services by the share of services output provided by foreign affiliates. Themanufacturing–services linkage is captured using information on the degree towhich manufacturing firms rely on intermediate inputs from service industries.The econometric results indicate that opening services to foreign providers leadsto improved performance of downstream manufacturing sectors. This finding isrobust to several econometric specifications, including controlling for unobservablefirm heterogeneity and other aspects of openness, and instrumenting for theextent of foreign presence in service industries. The magnitude of the effect iseconomically meaningful: a one standard deviation increase in foreign presencein service industries is associated with a 3.8 percent increase in the productivityof manufacturing firms relying on service inputs.FDI inflows into services, and more specifically into the wholesale and retailsector, may also lead to increased competition in the manufacturing industries ofa host country. Global retail chains with their extensive supplier networks spanningmultiple countries, if not continents, are much better positioned than smallernational chains to put pressure on indigenous suppliers. This view is supportedby the results of a case study of the soap, detergent, and surfactant (SDS) producersin Mexico. According to Javorcik et al. (2008), entry of Wal-Mart intoMexico changed the way that SDS producers and other suppliers of consumergoods interacted with retailers. By exercising its bargaining power, Wal-Martsqueezed profit margins among the major brands, offering them higher volumesin return. It also engaged the most efficient small-scale local producers as suppliersof store brands, thereby creating for itself a residual source of SDS productsthat could be used in bargaining with the major (multinational) brandedsuppliers. Those local firms that were not efficient enough to meet Wal-Mart’sterms lost market share, and many failed. At the same time, the limited set of producersthat survived grew, and with prodding from Wal-Mart they became moreefficient and innovative, adopting innovations first introduced to the market bytheir multinational competitors.This view finds further support in the results of Javorcik and Li (2009) who examinehow the presence of global retail chains affects firms in the supplying industriesin Romania. Applying a difference-in-differences method and theinstrumental variable approach, the authors conclude that expansion of global retailchains leads to a significant increase in the TFP in the supplying industries.Presence of global retail chains in a Romanian region increases the TFP of firmsin the supplying industries by 3.8 to 4.7 percent and doubling the number ofchains leads to a 3.3 to 3.7 percent increase in total factor productivity. However,the expansion benefits larger firms the most and has a much smaller impact onsmall enterprises.