Multinational suppliers: Are they different from exporters?

This paper focuses on an unexamined area of trade, the behaviour of heterogeneous intermediate suppliers facing final producers of different ability and pursuing different strategies. We develop a theoretical model to analyse the choice of an intermediate supplier between selling to domestic producers, selling to multinational producers and/or exporting to foreign producers. The model’s predictions are: (i) sufficiently productive firms self-select into supplying to multinationals or exporting, while the most productive firms pursue both strategies, and (ii) the order of preferred strategies between supplying to multinationals and exporting depends on foreign direct investment inflows and export set-up costs. The paper tests these theoretical predictions using firm-level data from 29 European and Central Asian countries in 2002 and 2005. The empirical analysis confirms our model’s predictions. Moreover, it suggests that multinational suppliers are more likely to have higher required levels of ex-ante labour productivity than exporters, implying that exporting is easier and a more popular choice for firms.