Retail Globalization and Household Welfare: Evidence From Mexico

A transformation in the way developing country households’ source consumption is occurring. A key driver has been the arrival of global retail chains and it has led to heated policy debates. Opponents against foreign retail­ers want to protect the large share of employment in the tradi­tional retail sector, suggesting these chains will drive down wages and employment domestically. Those in favor emphasize the potential benefits to households from lower con­sumer prices.

These debates have led to differences in policies toward retail Foreign Direct Investment (FDI) across developing countries.

– Ar­gentina, Brazil, Mexico, and most of Eastern Europe chose to liberalize retail FDI fully at the beginning of the 1990s.
– India continues to restrict foreign retail entry.
– Indonesia, Malaysia, and Thai­land re-imposed barriers on foreign retailers after initially allowing entry.

A study from the Cato Institute addresses the effect of retail FDI on average Mexican household welfare in the municipality of entry, the channels under­lying this effect, and to what extent gains from retail FDI differ across the income distribution.

Key findings:

– Foreign supermarket entry causes the average household to gain 6.2 percent of initial household income. This effect is driven by a significant reduc­tion in the cost of living.
– There is no effect on average municipality-level household incomes or employment rates — the main concern for localities facing foreign re­tailer entry.
– On average, all household in­come groups experienced significant gains from foreign entry; the richest income groups gained about 50 percent more than the poorest. The key driver is that richer households substitute more than 50 percent of their retail consumption to foreign stores, while the poor­est households substitute less than 15 percent.

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