Do the biggest aisles serve a brighter future? Global retail chains and their implications for Romania

During the past two decades many countries have opened their retail sector to foreign direct investment (FDI), yet little is known about the implications of such liberalization for their economies. Using a unique dataset combining outlet-specific information on global retail chains with a panel of Romanian manufacturing firms, this study sheds some light on this question. The results suggest that the expansion of global retail chains leads to a significant increase in the total factor productivity (TFP) in the supplying manufacturing industries: a 10% increase in the number of foreign chains' outlets is associated with a 2.4% to 2.6% boost to the TFP in the supplying industries. The decomposition of the aggregate productivity in the supplying industries suggests that the boost to performance is driven by both within-firm improvements and between-firm reallocation. Both changes are found to be associated with the expansion of foreign chains. These conclusions are robust to a variety of specifications and supported by evidence from a firm-level survey. They suggest that the opening of the retail sector to FDI may stimulate productivity growth and improve allocation efficiency in manufacturing industries and thus provide another piece of evidence in favor of services liberalization.