Does FDI in Upstream and Downstream Sectors Facilitate Quality Upgrading? Evidence from Russian Exporters*
| Published date | 01 April 2022 |
| Author | Stavros Poupakis |
| Date | 01 April 2022 |
| DOI | http://doi.org/10.1111/obes.12427 |
Does FDI in Upstream and Downstream Sectors
Facilitate Quality Upgrading? Evidence from
Russian Exporters*
STAVROS POUPAKIS†
†
Institute for Global Health, University College London, 30 Guilford Street, London WC1N
1EH, UK (e-mail: s.poupakis@ucl.ac.uk)
Abstract
This study examines whether foreign direct investment inflows facilitate upgrading of
export quality in host countries. The analysis focuses on the Russian Federation and
uses customs data merged with firm-level information from ORBIS. The results show a
positive relationship between the quality of products exported by domestic firms and
the presence of foreign affiliates in the upstream (input-supplying) industries. This
relationship is present irrespective of export destination or FDI origin. The results are
robust to using different proxies to measure product quality.
I. Introduction
The past decade has witnessed a slowdown in global flows of foreign direct investment
(FDI). This slowdown has had and will continue to have profound implications for global
value chains, international trade centred around multinationals and technology transfer across
international borders. However, there are also less visible implications, such as the impact of
FDI inflows on domestic exporters in host countries, which is the topic of this study.
Foreign affiliates affect the performance of local firms in host countries in a variety
of ways. For instance, their presence in the upstream (input-supplying) industries may
have a direct effect on domestic firms by providing them with higher quality
intermediates and capital goods, which results in increased productivity and higher
product quality.
1
The presence of FDI may also have an indirect effect: by increasing
the level of competition in the input-supplying sector it may induce local input
JEL Classification numbers:F14, F23, O24.
*I am grateful to Beata S. Javorcikfor her support and helpful guidance throughout thisproject. I am also thankful to
Maurizio Bussolo, Arti Grover, and Denis Medvedev who helped atvarious stages of this project, to Guillermo
Arenas for sharingthe customs data, and to the World Bank for its financial support. The findings,interpretations, and
conclusions expressed in this paper do not necessarily represent the opinions of the World Bank Group, its
management or its Executive Directors. I would alsolike to thank Ana P. Fernandes, Alvaro Gonzalez, Christopher D.
Miller and FarshadR. Ravasan for helpful comments on thedraft. All errors are my own.
1
For instance, Javorcik, Keller and Tybout (2008) report that small Mexican producers meet with their input
suppliers (usually foreign affiliates) every 6 months to learn about the possibilities of upgrading their products.
Suppliers provide the necessary inputs and often prepare a new formula for the product based on these inputs.
451
©2021 The Department of Economics, University of Oxford and John Wiley & Sons Ltd
OXFORD BULLETIN OF ECONOMICS AND STATISTICS, 84, 2 (2022) 0305-9049
doi: 10.1111/obes.12427
producers to become more efficient or upgrade their production processes and thus
offer more technologically advanced inputs.
2
Moreover, the presence of foreign affiliates in the downstream (input-sourcing)
industries may boost production quality among their local suppliers. This improvement
might be achieved, for example, by knowledge transfer from foreign affiliates to their
local suppliers to facilitate the production of cheaper or higher quality inputs.
3
Finally,
domestic firms may learn from foreign affiliates that operate in the same industry by
observing the practices of foreign affiliates or hiring workers trained by them.
4
In this
way, local firms may learn how to improve their product quality, use standardization,
improve marketing skills and enhance the reliability of their shipments (see, for
instance, Haskel, Pereira and Slaughter, 2007; Keller and Yeaple, 2009; Balsvik, 2011;
Poole, 2013). FDI inflows also increase competition in the domestic market, which
may force local firms to either improve or to exit.
Domestic firms may learn about the profitability of various export opportunities by
observing their foreign peers’exports, and this could make them invest in quality
upgrading or developing new products. Thus, the presence of foreign affiliates may lead to
a reduction of export costs (Aitken, Hanson and Harrison, 1997), an increase in the amount
and unit value of trade transactions (Chen and Swenson, 2007), help develop new export
connections (Swenson, 2008), and expand export varieties (Sheng and Yang, 2016).
Indeed, anecdotal and survey evidence, discussed in the Mechanisms section, suggest that
managers of domestic firms, and especially suppliers, learn from their multinational peers,
and this knowledge transfer oftentranslates into quality upgrading of exports.
In this study, I examine the impact of FDI on the quality of products exported by local
firms in Russia. I use detailed customs data recording Russia’s exports at the level of the
firm, 10-digit HS (Harmonized System) product classification, destination country and
year. Due to the data I have at hand, the time period I examine is 2012–16. The export data
are combined with firm-level balance sheets and ownership information. Although the
balance sheet information covers 2007–16, the ownership information is available only for
2012 and 2015 in the data extract I use. Thus, I focus my analysis on a long difference. I
measure quality upgrading, defined as within-product improvements in export quality, in
two ways. First, I focus on unit values of exports.
5
Second, I use the approach in
Khandelwal, Schott and Wei (2013) which builds on the work of Khandelwal (2010).
6
2
Several studies show that when firms have access to imports of high-quality and diverse inputs, there are
significant gains in productivity (Amiti and Konings, 2007), export quality (Bas and Strauss-Kahn, 2015) and
product scope (Goldberg et al., 2010).
3
See a survey by Javorcik (2008) on Czech manufacturing firms showing that about 40% of domestic
suppliers receive some assistance from their multinational customers. Interestingly, becoming a supplier was the
incentive to improve product quality for nearly half of these domestic firms. Javorcik (2004) also shows
spillovers from FDI to the supplying industries. Also, Javorcik, Lo Turco and Maggioni (2018) use the Hidalgo
and Hausmann (2009) product complexity indicator to show that domestic firms are more likely to produce more
complex products as a result of the increased FDI presence in the supplying sectors.
4
Recent evidence from Russia show that firms with foreign affiliates have better management and better
performance (Grover and Torre, 2019).
5
Despite their shortcomings, export unit values have been extensively used as a proxy for quality, see, for
example, Schott (2004), Hallak (2006), Bas and Strauss-Kahn (2015).
6
The basic insight of this method is that, controlling for price, products that enjoy a higher market share are
of higher quality.
©2021 The Department of Economics, University of Oxford and John Wiley & Sons Ltd
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