Multinational Firms, Exclusivity, and the Degree of Backward Linkages

This paper develops a two-tier oligopoly model in which the entry of a multinational firm results in technology transfer to its local sup-pliers and also impacts the degree of backward linkages in the local industry. The model endogenizes the multinational’s choice between anonymous market interaction with its suppliers and contractual re-lationships with them under which the multinational transfer tech-nology to its suppliers who in turn agree to serve the multinational exclusively. The multinational’s entry under an exclusive contract has a de-linking effect that can reduce the degree of competition among suppliers thereby leading to a decline in the level of backward link-ages and local welfare. With its emphasis on the supply-side effects of the multinational’s entry on local industry, this paper complements existing studies of backward linkages that focus more on demand-side effects