Supplier Responses to Wal-Mart's Invasion of Mexico

50 Pages Posted: 11 Jul 2011 Last revised: 3 Jan 2022

See all articles by Leo Iacovone

Leo Iacovone

World Bank; University of Sussex

Beata Smarzynska Javorcik

University of Oxford - Department of Economics

Wolfgang Keller

University of Colorado; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

James Tybout

Pennsylvania State University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: July 2011

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.

Suggested Citation

Iacovone, Leonardo and Smarzynska Javorcik, Beata and Keller, Wolfgang and Tybout, James R., Supplier Responses to Wal-Mart's Invasion of Mexico (July 2011). NBER Working Paper No. w17204, Available at SSRN: https://ssrn.com/abstract=1882172

Leonardo Iacovone (Contact Author)

World Bank ( email )

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Beata Smarzynska Javorcik

University of Oxford - Department of Economics ( email )

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Wolfgang Keller

University of Colorado ( email )

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Centre for Economic Policy Research (CEPR)

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James R. Tybout

Pennsylvania State University - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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