Could spillovers from multinationals affect the trade activities of local firms?

Abstract

This paper examines spillovers from foreign affiliates of multinationals on various margins of trade of local firms. We find that a larger foreign presence in the same region crowds out the trade activity of local firms, resulting in a reduction of the number of products imported and exported, as well as of the number of origins where imports are sourced from. Supply chain linkages with foreign affiliates are instead found to help local firms to diversify their exports and imports. Engagement in R&D activity allows local firms to mitigate some of the negative effects of the presence of foreign-owned firms in the same region, and enhances the local firms’ gains arising through forward linkages. • Local firms in the same region as MNEs concentrate trade on fewer products and markets. • Local firms in the same sector as MNEs expand the range of export destinations. • Supplying MNEs results in local firms exporting a larger number of products. • Buying from MNEs enables local firms to enter new markets as exporters and importers. • R&D is a conduit for absorbing knowledge when buying inputs from MNEs.