MNEs and business linkages: exploring the role played by risk, ethno-linguistic fractionalization and colonial legacy

This paper empirically studies the effect of foreign direct investment (FDI) on the creation of local linkages between foreign firms and domestic suppliers within the context of Sub-Saharan African (SSA) countries. More specifically, we investigate the role played by colonial tradition, overall risk and ethno-linguistic fractionalization as moderators of the relationship between multinational enterprises (MNEs) and local suppliers. Our cross-country analysis includes 18 SSA countries and employs a rich dataset with 1,350 original firm-level data collected through the United Nations Industrial Development Organization Africa Investor Survey 2010 (UNIDO AIS 2010). Our results confirm previous studies and go one-step further by showing that: (1) foreign firms with a local partner in their ownership structure are more likely to create linkages with local suppliers; (2) that experience in the host country is necessary to identify suppliers who meet the quality and cost standards expected by international customers; (3) that the presence of a local partner and the experience in the host country are even more important when the investment is made in countries characterized by political and economic instability and ethno-linguistic fractionalization.