Chile’s Supplier Development Program Irani Arráiz May 2015

What is the program’s objective? Promote commercial linkages between potential exporters and their SME suppliers to increase competitiveness The program recognized that linkages and spillovers depend on capabilities and absorptive capacity of local suppliers

What is the rationale of the program? Commercial relationships are perceived as short-term, unstable, and adversarial. Buyers have no incentives to invest in long-term supplier capabilities Suppliers have no guarantee that they can profit in the long term from these investments

How does the program work? Implementation of working plan (up to 3 years) Sponsor firm prepares proposal together with intermediary agent Sponsor presents proposal to CORFO regional office Diagnostic and design (up to 6 months) CORFO covers up to 50% of the diagnostic and design phase and up to 50% of annual implementation

What type of firms participate in the program? Suppliers Buyers (Sponsors) Size Sector

What are the impacts of the program? Increase in sales for sponsors and SME suppliers 18.5% and 25.5% at t+2 and t+3 for sponsors 16.0%, 11.2% and 8.5% at t+1, t+2 and t+3 for suppliers Increase in employment for SME suppliers 8.0%, 9.3% and 9.6% at t+1, t+2 and t+3 for suppliers Increase in salaries for SME suppliers 8.8%, 16.2% and 7.7% at t+1, t+2 and t+3 for suppliers Increase in firm sustainability for SME suppliers 2.6, 2.6 and 2.1 pp at t+1, t+2 and t+3 for suppliers Increase in ability of becoming an exporter for sponsors 4.6 and 3.7 pp at t+2 and t+3 for suppliers

What have we learned? Program benefits both suppliers and sponsor firms. Cooperation pays off Results suggest program achieved objective of improving and stabilizing commercial linkages Cost-effective Does the program have the potential to impact Chile’s product space via knowledge spillovers (to produce “complex” goods intensive in skill and technology)?

Impact on Sales Sponsor firmsSME suppliers Average increase in sales

Other impacts for suppliers Average increase in employment Average increase in salaries Increase in likelihood sales>0

Other impacts for sponsor firms Increase in likelihood of being an exporter

What was the identification strategy? Participation in the program is not random. Sponsors self- select themselves and then select their suppliers into the program Quasi-experimental design Constructed a control group using Propensity Score Matching. Participation model estimated with data from 2002 (before beneficiaries received treatment). It included trends of outcome variables between 1998 and 2002 Estimated effects of the program using fixed-effect estimation on the set of treated and control firms (controls for un- observable time-invariant characteristics)