Foreign Direct Investment and Domestic Spillovers:
Hi-tech Electronics in Guadalajara, Mexico
Kevin P. GallagherDepartment of International Relations, Boston UniversityGlobal Development and Environment Institute, Tufts University
Lyuba ZarskyGlobal Development and Environment Institute, Tufts University
The Promise of FDI• More stable form of foreign exchange
• Employment, tax revenue
• Productivity spillovers– Backward linkages– Human capital spillovers– Forward linkages
• Crowding in domestic investment
Environmental Spillovers
• Transfer of cleaner technology and better environmental management systems
• Requirements for better standards by local suppliers
• Exports must meet demands of green consumers and higher standards in EU, US, Japan
FDI Increases
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
1980 1985 1990 1995 2000
FDI/G
DP
CountryInflows ($US
billions)China 45.6Brazil 12.9Mexico 11.4Singapore 7.2Argentina 6.8Bermuda 4.5Malaysia 4.4Poland 4.1Chile 3.5South Korea 3.2
Top 10 total: 103.5Total For Developing Countries: 136.7Top 10 share: 76%
Largest Developing Country Recipients (average annual inflows, 1990 to 2001)
Border Zone:Mostly Audio / video
13 Computer monitor manufacturing.
13 TV manufacturing
Western Region:
Focus on IT industry, High tech electronics industry, Telecommunications & Electronic subassemblies.
10 Billion exported in 2002.
Center Zone:Home appliances and consumer electronics .
Electronics Clusters in Mexico
Electronics Clusters in MexicoElectronics Clusters in Mexico
QuerétaroQuerétaro
VISTAR VITROMATIC (2)
CuernavacaCuernavaca NEC
TorreónTorreón THOMSON
MonterreyMonterrey PIONNER DANFOSS COMPRESSORS VITROMATIC (3) MABE (2) KODAK NIPPON DENSO (Automotriz) AXA YAZAKI (Automotriz)
MexicaliMexicali
SONY
DAEWOO(SLRC)
MITSUBISHI GOLDSTAR
AUDIO & VIDEO ELECTRODOMESTIC COMPUTER EQUIPMENT TELECOM OTHER
AguascalientesAguascalientes TEXAS INSTR.
XEROX
SIEMENS
QuerétaroQuerétaro
CLARION DAEWOO BLACK & DECKER MABE (2) SINGER SIEMENS
State of MState of Meexicoxico MABE BRAUN ELECTROLUX SUNBEAM KOBLENZ ERICSSON ALCATEL/INDETEL AMP
PueblaPuebla
GESTAR SINGER VITROMATIC
SaltilloSaltillo MABE HAMILTON
BEACH*
ReynosaReynosa
VITROMATIC NOKIA
DELCO (Automotriz) PHILIPS SONY MATSUSHITA (Automotriz)
LUCENT TECHNOLOGIES FUJITSU (Automotriz) CONDURA (Automotriz) DELNOSA (Automotriz)
San Luis PotosiSan Luis Potosi
MABE GEMABE SANYO
ChihuahuaChihuahua
MOTOROLA ALTEL KIOCERA JABIL
JuárezJuárez
KENWOOD ELECTROLUX ACER
TOSHIBA PHILIPS THOMSON
ELAMEX PLEXUS
Tijuana SANYO SONY HITACHI MATSUSHITA JVC SAMSUNG PIONNER
SANYO ELECTRODOMÉSTICOS PHILIPS CASIO KODAK CANON KYOCERA INTERNACIONAL RECTIFIER
MITSUBISHI SHARP
Guadalajara
I.B.M
H.P.
TECHNICOLOR
TELECT TYCO
KODAK VOGT ELECTRONIC
SIEMENS VDO
SOLECTRON DE MEXICO
FLEXTRONICS
JABIL CIRCUIT
BENCHMARK
SANMINA-SCI
State of MState of Meexicoxico
ELECTROLUX FILTER QUEEN HOOVER IMAN KOBLENZ MABE PHILIPS SUNBEAM OLIVETTI
PANASONIC
OLIMPIA
Hi-Tech Exports and Foreign Investment in Jalisco
0
50
100
150
200
250
300
350
400
450
500
1995 1996 1997 1998 1999 2000 2001 2002
1994
=100 exports
Investment
Why firms came
• Proximity to U.S• Markets (hi-tech boom)• NAFTA (tariffs and rules of
origin)• PITEX and Maquila
Programs• Favorable Exchange rate• Guadalajara infrastructure
Backward Linkages• 95 percent of inputs are
imported• 80 percent decline in local
suppliers from 1985• 97 percent of all
investment between 1994 and 2002 was foreign
• Joint R&D projects limited• Success story:
– Electronica Pantera
Human Capital Spillovers
• Low end of production process– little training needed or
given
• Shift to contract employees
• Few domestic firms to spill over to
• Success story:– IBM training center and
spin-offs
Forward Linkages
• Hi-tech diffusion relatively low
• Limited success of “digital divide” projects
National Demand as a Share of Total Sales in Mexico's IT Sector
0%
5%
10%
15%
20%
25%
1994 1995 1996 1997 1998 1999 2000 2001 2002
Environmental Spillovers
• Technology Transfer:– Bringing EMS but not clear if in compliance– SCI-Sanmina and Industria Limpia program
• Greening the supply chain:– Little contact with local suppliers to begin with– No requirements for existing suppliers
• Exporting to higher standards:– Not in Guadalajara plants (but in plants closer to higher
regulation markets)
Why so few spillovers?
• Barriers to entry into global supplier networks
• Incentive to import inputs• Macroeconomic uncertainty• Weak local capacity • Lack of policy response• Lack of policy space
Why firms are leaving• Slowdown in
U.S. demand• China’s
accession to WTO
• Overvaluation of the peso (wages)
• Lack of local productive capacities
• Lack of domestic and regional markets
Hi-Tech Employment in Jalisco, 1995 to 2003
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
1995 1996 1997 1998 1999 2000 2001 2002 2003 2003
Preliminary Results
• Little evidence of domestic spillovers
• Spillovers that did occur were not allocated by the market
• Evidence of foreign investment crowding out domestic investment
• Role for public policy in steering FDI toward development goals
Total Investment Stagnates
0
5
10
15
20
25
30
1980 1985 1990 1995 2000
GFC
F/G
DP
Why Weak Development Impacts?
• Lack of domestic and regional markets
• Dynamic sectors are enclaves
• Scant governmental attention to learning
What to do?• Elements of a new strategy:
– Focus on domestic markets – Invest in building domestic capacities for production and innovation
(education, R&D, infrastructure)– Reduce domestic cost of capital and improve climate for domestic
investment without re-triggering inflation– Develop policies to maximize spillovers from FDI– What role for targeted industrial policy?
• What room to move? – Constraints of global and regional trade and investment regimes– Inflation
Export Goods Not People?
• Annual net job creation: 79,000 per year • New entrants into workforce: 730,000 per year• Real wages: down 12 percent (93-2002);reach 93
levels in 2003• Benefits: 45 percent of all new jobs are without
benefits• Informal sector: absorbs 30 to 60 percent of the
total Mexican workforce works • Migrants to United States: 4000,000 per year (up
from 200,000 pre-NAFTA)
Incomes Creep up but stay low
-10
-8
-6
-4
-2
0
2
4
6
8
1980 1985 1990 1995 2000
GD
P p
er c
apit
a g
row
th
Series1
Endogenous Productive Capacity?
Capacity for Innovation in Mexico and South Korea
Mexico S. Korea
Patent applications by National Firms/total patent applications 4.90% 51%R&D expenditure/GDP 0.36% 2.60%Scientists and Engineers per million persons 225 2152Science and Technological Journal Articles 2024 5219Technicians in R&D per million persons 172 576
(average, 1995 to 2000)