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)