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

ABSTRACT 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 analysed the determinants of local sourcing; studies using panel data in a specific emerging country are particularly rare. Therefore, this study empirically analyses whether foreign affiliates' upstream positions in global value chains (GVCs) have positive effects on their local sourcing in Chile, which is well integrated into GVCs and its position in GVCs is relatively upstream. 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 industry‐level estimation including a more recent period.