aggregate level, the data seems to suggest that the presence of FDI ...rms helps to promote a vibrant local input industry in Bangladesh that is conducive for domestic ...rms to expand their product scope and productivity.

Another reason for FDI ...rms to cause SSS on domestic ...rms is by a¤ecting the quality and productivity of their local suppliers. The positive impacts of FDI ...rms on their local supplying industries have been identi...ed in Javorcik (2004), Blalock and Gertler (2008) and Javorcik and Spatareanu (2009), based on ...rm level data from Lithuania, Indonesia and Czech Republic.<sup>12;13</sup> These authors found that the overall presence of FDI in a downstream industry a¤ects the productivity of the domestic ...rms in the upstream industry, a ...nding that has been widely referred to as the “vertical spillovers”of FDI, or the spillovers of FDI due to backward linkages. I am taking the analysis one step forward by suggesting that these better local suppliers will further improve the productivity and product scope of those downstream domestic ...rms that also buy from them. Survey evidence, based on some follow up interviews with the local garment input suppliers in Bangladesh, also supports this point.<sup>14</sup> In these interviews, FDI garment ...rms are often described as being “pickier”as they demand higher quality inputs. Thus, in order to meet the higher standards of the FDI ...rms, these local intermediate input suppliers need to improve their quality and consistency, and to decrease the product reject rates which, inevitably, bene...t their other clients

> 12 These papers ...nd that the productivity of upstream domestic ...rms improves with the increased presence of downstream FDI ...rms, which suggests that downstream FDI ...rms transfer technology to their local suppliers. National industry input-output tables are used to relate upstream domestic ...rms to FDI ...rms in the downstream industry. Thus, all FDI ...rms in the downstream industry are considered as homogenous, regardless of whether or not these FDI ...rms indeed use local suppliers. Unlike these papers, the current paper has ...rm level information on each FDI ...rm, their speci...c local suppliers, and the domestic ...rms that are also using the same local suppliers. Thus, while some FDI ...rms that do not share local suppliers with domestic ...rms may not generate any spillovers to domestic ...rms, those FDI ...rms that share local suppliers are shown to improve productivity and product scope of domestic ...rms. Results of this paper could shed light as to why Javorcik (2004) ...nds strong evidence of vertical spillovers with low horizontal spillovers –it could be that these FDI ...rms do not share local suppliers with domestic ...rms in the same industry.

> 13 Note that, in addition to validating vertical spillovers, Blalock and Gertler (2008) also ...nd signi...cant pecuniary externalities, in terms of pro...tability of downstream domestic ...rms buying from an upstream industry that supply to FDI ...rms in Indonesia. In their paper, foreign ...rms transfer technology to their local suppliers, which, through entry of local suppliers, leads to more competition in the supplier industry and an overall reduction in the price of local intermediate inputs. As a result, domestic ...rms downstream of that supply market enjoy lower intermediate input prices which improve their pro...ts, but not necessarily their product scope and productivity. Such pecuniary externalities, while important, are not the focus of this paper and will not a¤ect the results, given that I use ...rm level price indices on output and input of each ...rm to de‡ate their sales and material costs. If prices of domestic inputs are lower, due to pecuniary externalities, material costs of ...rms will also be lower. De‡ating the low material costs with the low ...rm material price will not bias the quantity of intermediate inputs and, therefore, will not a¤ect ...rm productivity.

> 14 More detailed discussion on the follow up interviews with the suppliers can be found in the Appendix.

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