DP8540 Supplier Responses to Wal-Mart's Invasion in Mexico

Author(s): Leonardo Iacovone, Beata Javorcik, Wolfgang Keller, James R Tybout
Publication Date: August 2011
Keyword(s): distribution systems, firm heterogeneity, foreign direct investment, innovation, logistics, NAFTA, retailing
JEL(s): F23
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=8540

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 diĀ¤ering levels of Walmex presence during the years 1994 to 2002.