Foreign direct investment, vertical integration, and local suppliers: Evidence from the Polish dairy sector

Studies argue that foreign investment has negative implications for small local suppliers, as they cannot comply with higher standards or they are laid off to reduce transaction costs. We analyze the impact of FDI in the Polish dairy sector, a sector dominated by small suppliers and of crucial importance for poor rural households. The analysis shows that FDI does not cause a rapid consolidation of the supply base. Instead, foreign companies introduce farm assistance programs to overcome market imperfections. Through vertical and horizontal spillover effects, this leads to improved access to finance, increased investments, product quality improvements, and growth of small local suppliers. (C) 2004 Elsevier Ltd. All rights reserved.