Foreign Affiliates' Position in Global Value Chains and Local Sourcing in Chile: Evidence from Plant-Level Panel Data

Local sourcing of intermediate inputs by foreign affiliates is a major source of the positive spillover effects of foreign direct investments (FDIs) in emerging countries. However, few studies have analyzed the determinants of local sourcing; studies using panel data in a specific emerging country are particularly rare. Considering that Chile is well-integrated into global value chains (GVCs) and that its position in GVCs is relatively upstream compared to that of other Latin American countries, this study empirically analyzes whether foreign affiliates' upstream positions have positive effects on their local sourcing, which is defined as the share of local material inputs to total costs. By matching industry-level panel data, including positions in GVCs, to plant-level panel data, this study constructs a unique dataset for the period from 1995 to 2006. We find that the upstream positions of foreign affiliates in GVCs are positively associated with the share of local material inputs to the total costs. We find that this positive effect is robust to the difference in entry modes between joint ventures and wholly owned subsidiaries, use of lagged affiliate-level variables, exclusion of affiliates with changes in industry affiliation, and different periods of analysis. Moreover, we find that the magnitude of the coefficient of the GVC position index is substantially larger than that of a previous study that analyzed other developing countries. Thus, the findings indicate that foreign affiliates operating in upstream industries have successfully developed backward linkages with local suppliers in Chile, contrary to the traditional view that FDI in natural-resource-related sectors has an enclave nature with very limited backward linkages. Therefore, this study provides new evidence on the role of FDI for productive linkages in resource-based economies.