Policy Recommendations to Build Sustainable Development Through Fdi Spillovers in Mexico
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,
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,
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