Working Paper: NBER ID: w17204
Authors: Leonardo Iacovone; Beata Smarzynska Javorcik; Wolfgang Keller; James R. Tybout
Abstract: This paper examines the effect of Wal-Mart's entry into Mexico on Mexican manufacturers of consumer goods. Guided by firm interviews that suggested substantial heterogeneity across firms in how they responded to Wal-Mart's entry, we develop a dynamic industry model in which firms decide whether to sell their products through Walmex (short for Wal-Mart de Mexico), or use traditional retailers. Walmex provides access to a larger market, but it puts continuous pressure on its suppliers to improve their product's appeal, and it forces them to accept relatively low prices relative to product appeal. Simulations of the model show that the arrival of Walmex separates potential suppliers into two groups. Those with relatively high-appeal products choose Walmex as their retailer, whereas those with lower appeal products do not. For the industry as a whole, the model predicts that the associated market share reallocations, adjustments in innovative effort, and exit patterns increase productivity and the rate of innovation. These predictions accord well with the results from our firm interviews. The model's predictions are also supported by establishment-level panel data that characterize Mexican producers' domestic sales, investments, and productivity gains in regions with differing levels of Walmex presence during the years 1994 to 2002.
Keywords: Walmart; Mexico; manufacturers; consumer goods; foreign direct investment
JEL Codes: F23; L11; O33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Walmex's entry into the Mexican market (L81) | self-selection among suppliers (L15) |
| self-selection among suppliers (L15) | market share reallocation (D26) |
| market share reallocation (D26) | increased productivity and innovation among suppliers (O36) |
| Walmex's entry into the Mexican market (L81) | decline in prices and markups for moderate-appeal goods (D43) |
| Walmex's entry into the Mexican market (L81) | gain in market share for high-appeal firms (L21) |
| gain in market share for high-appeal firms (L21) | investment in product improvements (G31) |
| Walmex presence (L81) | observable changes in sales, investment patterns, and productivity gains (O49) |