Abstract: The arrival of global retail chains in developing countries is causing a radical transformation in the way that households source their consumption. This paper draws on a new and unique collection of Mexican microdata to estimate the effect of foreign supermarket entry on household welfare and its underlying channels. The richness of the data allow us to estimate a general expression for the welfare gains from retail FDI, and to decompose the total effect into several distinct components. To base our estimates on plausibly exogenous variation in foreign retail entry we propose an event study design that exploits data on the universe of foreign store locations and opening dates in combination with high frequency data on barcode-level store prices, consumption quantities, and household incomes in those same locations over the period 2002-2014. We find that foreign retail entry causes large and significant welfare gains for the average household that are mainly driven by a reduction in the cost of living. A substantial share of this price index effect is due to pro-competitive effects on consumer prices charged by domestic stores. We find little evidence of significant changes in average municipality level incomes, wages or employment. We do, however, find evidence of store exit and adverse effects on domestic store profits and the incomes of traditional retail sector workers. Finally, we present evidence that the gains from retail FDI are on average positive for all income groups but strongly regressive, and quantify the opposing forces that underlie this finding.

Development Impact Evaluation (DIME) is a global program hosted in the World Bank's Development Research Group. Its purpose is to increase the use of impact evaluation in the design and implementation of public policy and increase institutional capacity and motivation for evidence-based policy. 

Last Updated: Apr 27, 2015