Abstract: This paper studies the short- and long-run effects of large firms on economic development. We use evidence from one of the largest multinationals of the 20th Century: The United Fruit Company (UFC). The firm was given a large land concession in Costa Rica — one of the so-called “Banana Republics”— from 1889 to 1984. Using administrative census data with census-block geo-references from 1973 to 2011, we implement a geographic regression discontinuity (RD) design that exploits a quasi-random assignment of land. We find that the firm had a positive and persistent effect on living standards. Regions within the UFC were 26% less likely to be poor in 1973 than nearby counterfactual locations, with only 63% of the gap closing over the following 3 decades.Company documents explain that a key concern at the time was to attract and maintain a sizable workforce, which induced the firm to invest heavily in local amenities that likely account for our result. We then build a dynamic spatial model in which a firm’s labor market power within a region depends on how mobile workers are across locations and run counterfactual exercises. The model is consistent with observable spatial frictions and the RD estimates, and shows that the firm increases aggregate welfare by 2.9%. This effect is increasing in worker mobility: If workers were half as mobile,the firm would have decreased aggregate welfare by 6%. The model also shows that a local monopsonist compensates workers mostly through local amenities keeping wages low, and leads to higher welfare levels than a counterfactual with perfectly competitive labor markets in all regions, if we assume amenities have productivity spillovers.
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We find that households living within the former UFC regions have had better economic outcomes (housing, sanitation, education, and consumption capacity), and were 26% lesslikely to be poor than households living outside. This effect is persistent over time: Since the UFC closed, the treated and untreated regions have converged slowly, with only 63% of the income gap closing over the following 3 decades.3 Historical data collected from primary sources suggests that investments in local amenities carried out by the UFC — hospitals, schools, roads — are the main drivers of our results. For instance, we document that investments per student and per patient in UFC-operated schools and hospitals were significantly larger than in local schools and hospitals run by the government, and sometimes even twice as large. Access to these investments was restricted, for the most part, to UFC workers who were required to live within the plantation. This might explain the sharp discontinuity in outcomes right at the boundary.4 We do not find evidence of other channels, such as selective migration or negative spillovers on the control group, being the main mechanisms behind our results. Why were these investments in local amenities higher than in the rest of the country? While the company might have invested in hospitals to have healthier workers, it is lessclear why it would benefit from more schooling. Evidence form archival company annual reports suggests that these investments were induced by the need to attract and maintain a sizable workforce, given the initially high levels of worker turnover.5 For instance, after describing annual turnovers of up to 100% per year, the 1922 report states
“These migratory habits do not permit them to remain in the plantation from one year to the next, and as soon as they become physically efficient in our methods and acquire money they either return to their homes or migrate elsewhere and must be replaced.”
Later, the 1925 report states
“We recommend a greater investment in corporate welfare beyond medical measures. An endeavor should be made to stabilize the population...we must provide measures for taking care of families of married men, by furnishing them with garden facilities, schools, and some forms of entertainment. In other words, we must take an interest in our people if we might hope to retain their services indefinitely.”
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Infrastructure investments included pipes, drinking water systems, sewage system, street lighting, macadamized roads, a dike (Sanou and Quesada, 1998), and by 1942 the company operated three hospitals in the country17 [...] and although a higher level of spending does not necessarily imply a higher quality of health care, UFC’s medical services were known of being among the best in the country (Casey, 1979).
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