sample period, a result that is signi...cant both statistically and economically. I further derive and estimate a simple multiproduct ...rm model which shows that, through the use of IV regressions, (i) the increase in FDI presence causes the number of local input suppliers to increase which leads to greater variety of local inputs; and (ii) a larger variety of local inputs promotes product scope and productivity of domestic ...rms.

Firm level data of the Bangladeshi garment sector is speci...cally collected to study this issue.<sup>3;4</sup> The data set consists of a strati...ed random sample of 10 percent of the domestic ...rms and 100 percent of the FDI ...rms in the apparel sector of Bangladesh.<sup>5</sup> Each of these ...rms is asked to identify its top three local input suppliers. Given that I have all the FDI ...rms in the sample, I have the complete list of the top three local suppliers that work with FDI ...rms in Bangladesh. For each domestic ...rm it is, therefore, possible to construct the market share of their FDI siblings. The data set also has information on the product scope of each ...rm. To measure the unobservable ...rm productivity, this paper considers multiple ...rm productivity measures, which include sales per worker, output per worker, and estimated TFP (OLS and augmented Olley-Pakes due to Ackerberg, Benkard, Berry and Pakes (2007), which takes into account the FDI status of the ...rms). Furthermore, ...rm speci...c prices on output and materials are used to de‡ate sales and material costs of ...rms for the productivity estimations to avoid bias due to the use of industry price de‡ators. By looking at a wide range of performance indicators, the results of the paper are not speci...c to the way ...rm productivity is measured. Nevertheless, these di¤erent performance indicators yield very similar and consistent results. Several robustness checks of the paper further con...rm that these results are not driven by selection bias, omitted variable bias, endogeneity bias, reversed causality, and the alternative spillovers from FDI ...rms to domestic ...rms when they have

> 3 In 2004, this data set was jointly collected by Ana Fernandes and me, as part of a World Bank project requested by the government of Bangladesh. I focused on the garment sector while Ana studied the rest of the manufacturing sector. The ultimate purpose of my project is to inform the Government on whether or not it is worthwhile to liberalize the garment sector for more FDI, in anticipation of the end of the Multi-Fiber Agreement in 2005. Many FDI restrictions have been removed since then, given the ...ndings of positive spillovers in the previous draft of this paper in the Bank’s report.

> 4 Demidova, Kee and Krishna (2012) and Cherkashin, Demidova, Kee and Krishna (2010) also use the same data set to study the sorting behavior of ...rms when they face very di¤erent demand shocks and trade policy regimes in di¤erent markets. Both these papers do not look at local intermediate inputs and other factors that would a¤ect product scope and productivity of ...rms.

> 5 There were only about 49 FDI garment ...rms in Bangladesh at the time the survey was collected and I made sure that we visited all of them. However, not all ...rms provided all the information necessary for the regression analysis. After dropping ...rms that have incomplete data, I am left with 41 FDI ...rms.

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