Policy Recommendations to Build Sustainable Development Through Fdi Spillovers in Mexico

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Policy Recommendations to Build Sustainable Development through FDI Spillovers in Mexico

Abstract

FDI and trade liberalization have impacted Mexico positively and negatively. Mexico’s economic productivity growth has been steady since Mexico opened the country to trade liberalization which in turn attracted TNCs. However, knowledge spillover effects from trade and FDI have been extremely low; Mexico failed to grow its own production through backward linkages. The Maquiladora system remains a low skill production system which FDI spillovers can hardly change to bring about sustainable development. This article draws attention to pro-active government policies that can be implemented in order to solve problems Mexico faces in the age of globalization. Government needs to attract FDI, invest in R&D and upgrade skills of the workers to promote knowledge spillovers to support successful development of the indigenous firms.

Since Mexico joined the North America Free Trade Agreement (NAFTA) in 1994, real GDP grew by an average of 3.7% from 1995 to 2004 (OECD 2005). Mexico has the 14th largest nominal Gross Domestic Product (GDP), and the 11th largest by purchasing power parity. Tariffs for high-tech imports that were over 20% in the 1980s were lowered to zero under the NAFTA (Dedrick et al., 2001). Mexico is making an export-led growth, benefiting from its geographic proximity to the United States. A recent study of NAFTA’s impact on Mexico found that on average a 10% reduction in tariffs led to productivity growth of 4% to 8% (Iacovone 2009). Overall, the evidence from Mexico indicates that an increase of 10% in trade exposure was associated with a 4% increase in output per working-age person (OECD, 2003). According to Paus and Gallagher, Mexico was successful in attracting high-tech FDI due to TNCs’ efficient seeking interest in its region that had location-specific advantages (Paus and Gallagher 2006). Despite all these positive prospects and growth, the Mexican government failed to develop linkages between national and foreign firms in the Mexican economy and was unable to allocate the benefits evenly. According to Gallagher, Mexico had a significant number of indigenous high-tech firms when the influx of foreign firms occurred in the 1990s. However, the global high-tech commodity chain began to shift in the mid-1990s so that major foreign contract manufacturers (CM) began to crowd out many of the local suppliers. The inability to compete with foreign CMs made many indigenous firms go bankrupt in Guadalajara. Local firms lacked the technical capabilities and the scale necessary to potentially grow into contract manufacturers (Paus and Gallagher 2006). Moreover, the maquiladora that is built around the border of Mexico and the US remains a low skilled operation that failed to establish backward linkages. The maquiladora system is nowhere close to the strategy of development, namely of attracting foreign corporations to close industrial parks, in which there are vocational training institutions and host country supplier firms (Moran 2006). To realistically cope with such problems Mexico is facing in the globalized world, the Mexican government needs to engage in proactive policies. Under market failures without proper government action, it is unlikely that Mexico will create the indigenous capabilities necessary to benefit from potential FDI spillovers. Therefore, government needs to adopt policies to invest in R&D. This is evident in other nations. “In Taiwan, a nation that was able to become a true latecomer in the high tech sector, the government helped conducting R&D with government labs and provided access to capital that indigenous firms were able to upscale to meet global demands.” (Amsden and Chu, 2003) In Guadalajara where foreign firms conduct a limited amount of R&D with local suppliers, government needs to build up an indigenous knowledge base by investing in R&D government labs, as...
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