No. 3/2008: Multinational supermarket chains in developing countries: Does local agriculture benefit? Hildegunn Stokke Ekroll

There is no consensus in the empirical literature on how entry of multinational supermarket chains affects farmers in developing countries. We quantify the dynamic effects of supermarket expansion on agriculture within a structural framework that clarifies the adjustment mechanisms involved. The model specification takes the potential productivity linkage between supermarkets and local suppliers into account. While econometric analyses struggle with causality issues, we analyze the endogenous interaction between supermarketsí choice of suppliers and agricultural productivity. Based on numerical simulations, two results emerge. First, we offer a possible understanding of the conflicting evidence in the empirical literature. Whether farmers benefit from supermarkets or get stuck in a low productivity trap depends on the extent of local constraints related to production capacity and market access. Second, supply chain development initiated by supermarkets can help farmers escape the low productivity trap. While supermarkets face a short run cost, they gradually gain from more productive local suppliers.