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Dr. Alejandro Diaz Bautista Conference FDI Mexico United States September 2009
 

Dr. Alejandro Diaz Bautista Conference FDI Mexico United States September 2009

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“Foreign Direct Investment (FDI) and Economic Growth. The Case of Mexico and the United States". ...

“Foreign Direct Investment (FDI) and Economic Growth. The Case of Mexico and the United States".
Dr. Alejandro Díaz-Bautista
Investigador Nacional y Miembro del Sistema Nacional de Investigadores, CONACYT, Nivel II.
adiazbau@hotmail.com
http://www.linkedin.com/pub/alejandro-diaz-bautista/6/619/691
Profesor-Investigador de Economía,
Departamento de Estudios Económicos,
El Colegio de la Frontera Norte.
Preparado para la 1er. Seminario internacional Evaluación del efecto de la Inversión Extranjera Directa (IED) en las economías en desarrollo. El evento se realizara en la Casa COLEF Ciudad de México, con dirección en la Calle Francisco Sosa No. 254, Col. Barrio de Santa Catarina en Coyoacán, México D.F. el 18 de septiembre de 2009.

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  • League of California Cities Los Angeles County Division April 5, 2007 LAEDC: Jack Kyser Global FDI inflows reached a new record level of $1,833 billion Inflows to developed countries rose by 33% ($1,248 billion). Developing economies recorded a 21% growth rate ($500 billion). Inflows to South-East Europe and CIS countries increased by 50% ($86 billion).

Dr. Alejandro Diaz Bautista Conference FDI Mexico United States September 2009 Dr. Alejandro Diaz Bautista Conference FDI Mexico United States September 2009 Presentation Transcript

  • “ Foreign Direct Investment (FDI) and Economic Growth. The Case of Mexico and the United States “ Dr. Alejandro Díaz-Bautista Investigador Nacional y Miembro del Sistema Nacional de Investigadores, CONACYT, Nivel II. [email_address] http://www.linkedin.com/pub/alejandro-diaz-bautista/6/619/691 Profesor-Investigador de Economía, Departamento de Estudios Económicos, El Colegio de la Frontera Norte. Preparado para la 1er. Seminario internacional Evaluación del efecto de la Inversión Extranjera Directa (IED) en las economías en desarrollo. El evento se realizara en la Casa COLEF Ciudad de México, con dirección en la Calle Francisco Sosa No. 254, Col. Barrio de Santa Catarina en Coyoacán, México D.F. el 18 de septiembre de 2009 a las 11 a.m.
  • History of Foreign Direct Investment (FDI)
    • After the Second World War, global FDI was dominated by the United States.
    • The US accounted for around 75% of new FDI between 1945 and 1960.
    • FDI has grown in importance in the global economy with FDI stocks now constituting 28 percent of global GDP.
    *Source: Bureau of Economic Analysis, U.S. International Transactions Accounts Data (2008)
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  • Global FDI flows surpassed the peak of 2000 by 2006 ($ billion) FDI inflows, global and by group of economies, 1980-2007
  • FDI in Mexico
    • NAFTA, proximity to the United States, and continued political and economic stability make Mexico an attractive location for foreign direct investment (FDI).
    • In recent years, Mexico has passed tax, pension and energy reforms.
    • Additional reforms to improve competition, education and labor conditions within Mexico are needed to increase competitiveness and encourage more FDI.
    • Overall FDI in Mexico is expected to fall in 2009 as a consequence of the globaleconomic downturn.
  • FDI in Mexico
    • Mexico received 21 billion US dollars in foreign direct investment (FDI) in 2008, down 16 percent from 2007, accordin to the UN report published by UNCTAD.
    • In its annual report, the United Nations Conference on Trade and Development (UNCTAD) ranked Mexico 18th on its list of 20 major FDI destinations. This was far behind Brazil, Russia, India and China, generally considered to be Mexico's close competitors for such investment.
    • Mexico is falling down places in the ranking in the past few years.
  • FDI in Latin America
    • FDI inflows to Brazil, Latin America's largest economy, rose by nearly 29 percent to 45 billion US dollars in 2008.
    • UNCTAD expects FDI to fall by as much as 45 percent in Latin America this year as a result of the financial crisis.
    • This economic crisis has hit private equity firms hard and caused big companies to cut their spending.
    • Mexico is expecting a decrease of around 23 percent in FDI inflows in 2009.
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  • Economic Integration in North America
    • The economic relationship between Mexico and the U.S. is evident in the evolution of some of their economic indicators since 1993. For example, it is apparent that, since 1993, Mexico's GDP shares its trend behavior with the U.S. GDP.
    • Nevertheless, during the 1980s and the beginning of the 1990s the synchronization of the real sectors of both economies was unclear.
  • Economic Synchronization Between Mexico and the U.S.
    • Castillo, Fragoso Pastrana and Diaz-Bautista (2004) studied the synchronization between the economies of Mexico and the United States with special reference to the manufacturing sector. The authors examined the dependency between the assembly plant industry for export in Mexico and the performance of the economy of the United States.
    • Herrera (2004) found also synchronization of GDPs in Mexico and the U.S. became evident with the implementation of the NAFTA.
  • United States FDI in Mexico
    • Overall US FDI flows into Mexico for 2008 were $8.9 billion coming from U.S. sources. The U.S. currently provides 41% of all FDI in Mexico, benefiting more than 21,139 companies. The U.S. provides up to 68% of the total investment in manufacturing and assembly plants, and 51% of the total investment in the financial and banking sector.
    • In 2008, FDI was the third largest provider of foreign currency income to the Mexican economy, behind petroleum and remittances.
    • In 2008, approximately 40% ($3.5 billion) of U.S. investment in Mexico was directed to the six Mexican border states. These states, the location of the majority of maquiladora firms, receive 58% of all U.S. manufacturing investment in Mexico.
  • Literature Review
    • Foreign direct investment ( FDI ) is usually viewed as a channel through which for technology
    • is able to spread from developed countries to developing countries.
    • Does foreign direct investment ( FDI ) contribute to economic growth?
    • The answer to this is uncertain.
  • Literature Review
    • Although the evidence on the relationship between FDI and economic growth is ambiguous, several studies argue that the host country’s absorptive capacity plays an important
    • role in explaining FDI .
    • Blomström et al. (1994) state that FDI is positive and significant only for higher income countries and that is has no impact in lower income countries.
    • Borensztein et al. (1998) point out that the contribution of FDI to economic growth is enhanced by its interaction with the level of human capital in the host country.
    • Balasubramanyam et al. (1996) argue that FDI plays different role in the growth process due to the differing trade policy regimes.
  • Literature Review
    • In the theoretical literature, the role of FDI is that of a carrier of foreign technology that can boost economic growth like Findlay (1978) and Romer (1993).
    • In the empirical studies on FDI , however, the evidence is still divided. Aitken and Harrison (1999), for instance, find that the net effect of FDI on productivity is quite small. Borensztein et al. (1998) and Carkovic and Levine (2005) also arrive at similar results by finding FDI does not have an unmitigated and positive effect on economic growth. On the other hand, Haddad and Harrsion (1993), Kokko et al. (1996), and Alfaro et al. (2004) point out that FDI can increase the rate of growth in the host economy through technology transfer.
  • Literature Review
    • Zhang (2001) and Choe (2003) analyses the causality between FDI and economic growth. Zhang uses data for 11 developing countries in East Asia and Latin America. Using co-integration and Granger causality tests, Zhang (2001) finds that in five cases economic growth is enhanced by FDI but that host country conditions such as trade regime and macroeconomic stability are important.
    • Choe (2003) mentions that causality between economic growth and FDI runs in either direction but with a tendency towards growth causing FDI ; there is little evidence that FDI causes host country growth. Rapid economic growth could result in an increase in FDI inflows.
    • Carkovic and Levine (2002) use a panel dataset covering 72 developed and developing countries in order to analyse the relationship between FDI inflows and economic growth. The study performs both a cross-sectional OLS analysis as well as a dynamic panel data analysis. The paper concludes that there is no robust link running from inward FDI to host country economic growth.
  • Literature Review
    • Most FDI occurs between developed economies, and the country receiving the greatest inflow of FDI is the United States.
    • Attraye and Hendrick (2006) examined whether such FDI inflows have stimulated growth of the U.S. economy. They applied time-series data to a simultaneous-equation model that explicitly captures the bi-directional relationship between FDI and U.S. economic growth. FDI is found to have a significant, positive, and economically important impact on U.S. growth. The results imply that even a technologically advanced country such as the U.S. benefits from FDI, the gains from FDI are very substantial in the long run, and the sustainability of the U.S. current account deficit is enhanced by FDI's positive effect on productivity but undermined by the income inelasticity of FDI.
    • The results suggest that U.S. policies should focus on keeping the country attractive to foreign direct investors.
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  • Literature Review
    • As a major recipient of FDI among developing countries (alongside with China, India and Brasil), Mexico has been the subject of numerous studies that explored both the causes and implications of FDI flows that have increased in the wake of economic reforms it implemented beginning in the mid-1980’s, and more intensely, after the signing of the NAFTA Agreement.
  • Literature Review
    • Numerous studies have explored the implications of foreign investment flows for growth, productivity, income inequality in Mexico.
    • Lopez-Cordova (2002) finds that increased competition
    • and foreign capital penetration had a positive impact on the Mexican productivity at the firm
    • Mollick, Ramos and Silva (2005) find that regional infrastructure (e.g. the network of paved roads and the number of telephone lines) is important in attracting foreign investments to a region. Chiquiar (2004) shows that FDI flows and international exposure have benefited northern states of Mexico to a larger extent than the central and southern ones and that the impact on
    • wages and returns to schooling is therefore different across the Mexican states.
  • Literature Review
    • Waldkirch (2003) studies the impact of NAFTA formation on the distribution of investment flows into Mexico across the origin countries. Using aggregate data from 1980 to 1998 for FDI flows originating in 9 OECD countries, he finds that the case of Mexico supports the hypothesis that a developing country benefits from a FTA with a more developed country, since it becomes more attractive for international capital. The results show that FDI flows from Canada and the US have increased more than flows from non-NAFTA countries and estimates that the FDI coming from the US and Canada would have been 42% lower in the absence of NAFTA.
  • Literature Review
    • Cuevas, Messmacher and Werner (2005) use Cross-country panel data are used to assess the effect of free-trade agreements on flows of foreign direct investment (FDI). Free-trade agreements are found to have a significant positive effect on FDI flows, and free-trade agreements are found to matter more for the smaller members of the agreement. For example, the North American Free-Trade Agreement’s (NAFTA) effect on FDI flows into Mexico is much larger than its effect on flows into the United States. These cross-country results are used to assess NAFTA’s effect on FDI flows into Mexico. After controlling for a set of other factors—such as an increase in worldwide FDI flows—the trade agreement is found to generate FDI flows nearly 60 percent higher than they would have been without the agreement.
  • Mexico’s FDI in the NAFTA Era
    • Díaz-Bautista (2006) claims that the FDI-induced export expansion accounts for more than half of the 3.5 million jobs created in Mexico during the first decade of NAFTA, specially in the Northern Border.
    • FDI may also have contributed to increasing economic and social disparities and North-South polarization in Mexico, like in Dussel (2003) and Hanson (2003).
  • FDI and Economic Growth
    • Despite the straightforwardness of the argument, empirical evidence on a positive relationship between FDI inflows and host country economic growth has been elusive. When a relationship between FDI and economic growth is established empirically it tends to be conditional on host country characteristics such as the level of human capital, for example De Mello (1999) and Borensztein et al (1998).
    • The difficulty in proving a positive effect from FDI on economic growth provides a strong incentive for further empirical studies.
    • Neoclassical models of economic growth only allow FDI to have a level effect on growth due to diminishing returns to capital. However, the endogenous growth theory and NEG models provides a framework for studying the link between FDI and economic growth that makes it possible to take the characteristics of FDI into account and should improve the chances of confirming the theoretical relationship by empirical evidence.
  • FDI and Regional Economic Growth considering the Distance to the Northern Border of Mexico
    • Diaz-Bautista (2006) reviewed different studies to explain the effects of the NAFTA agreement in regional FDI and regional economic growth. An empirical econometric model was used to analyze the relation between the FDI and economic growth at the regional level in Mexico, with an approach of the new economic geography and endogenous economic growth.
  • FDI and Regional Economic Growth
    • The impulse caused by the opening of the economy and the signing of NAFTA in 1994 had a positive effect in the growth of regional northern border economies of Mexico and FDI in the northern border, where the maquiladora sector is one of the main motors of economic growth on the Northern Mexican Border.
    • In almost all the regions of the Northern Border, a process of economic growth is observed, and the impulse due to the commercial opening is apparent. The exporting sector being one of the most dynamic sectors of the Mexican economy.
  • FDI and Economic Growth
    • By the year 2000, the companies that exported more than 80% of their production, paid 62% higher wages than other types of companies. In that same year, the maquiladora sector had wages 5 times greater than the average national minimum wage. Similarly, Mexico has diversified its export base.
    • By the year 2000, companies producing manufactured goods accounted for 87 % of Mexico’s export sales.
    • In one decade, the liberalization of trade and the macroeconomic policies in Mexico have increased exports from 41 trillion USD, in 1990, to 166 trillion USD in 2000. Similarly, Mexico increased its imports by 310% between 1990 and 2000.
  • NAFTA increased Trade in North America
    • Since 1994, commercial trade between the member countries of NAFTA increased at an annual average rate of 11.8%, whereas the worldwide annual average rate of growth in trade was around 7%. The opportunities of trade for both Mexico and Canada within NAFTA have increased in the last few years. Mexico became the fourth most important commercial partner for Canada, whereas the bilateral commerce between Mexico and Canada tripled, reaching 12 trillions USD in 2000.
    • The integration of the intra industry trade is extremely high within NAFTA and shows how the region integrated not only in commercial terms but also in terms of the region’s productive systems.
  • FDI in the NAFTA Region
    • The NAFTA region has created new opportunities of investment and trade for the companies of all 3 countries, and 50 % of FDI in NAFTA is between trade partners. For Mexico, the United States is the main source of FDI.
    • FDI is of great importance the Northern Border Mexican Region, and by the year 2004, FDI in the Northern Border States of Mexico represented 18.7% of total FDI at the national level. The Northern Border States that are considered in this study are Baja California, Sonora, Chihuahua, Coahuila, Nuevo Leon and Tamaulipas.
  • In 2006, approximately 38% ($3.9 billion) of U.S. investment in Mexico was directed to the 6 Mexican border states.
  • Foreign Direct Investment in Mexico
    • 3 billions annual USD 10.731 annual billions USD
    • Before NAFTA (1993) After NAFTA (2003)
    • FDI Growth of 266% in 10 years
    • FIRST FDI RECEPTORS
    • DEVELOPING COUNTRIES 2003
    • 1ST CHINA 57 BILLION USD
    • 2ND HONG KONG 14.3 BILLION USD
    • 3ER MEXICO 10.731 BILLION USD
    • SOURCE : World Economic Situation and Prospects 2004 and Ministry of Economy Mexico.
  • FDI in Baja California
    • Baja California has had a foreign direct investment (FDI) accumulated from 1999 to 2009 equivalent to 4.6% share nationally. The accumulated FDI in a decade was 10 thousand U.S. $ 428.3 million.
    • Within the current situation in the economy of 2009, we note that the path is marked by the globalization of world economy, which stands out as one of the most salient features in regional economies such as Baja California.
    • Foreign direct investment (FDI) in the Northern Border of Mexico constitutes 24% of the total received from 1999 to 2009, states such as Baja California, Coahuila, Chihuahua, Nuevo Leon, Sonora and Tamaulipas.
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  • Economic Growth
    • The economics of growth in Mexico has come a long way since it regained center stage for economists in the last few years. The early focus of economic growth in Mexico was based upon theoretical models that generated self-sustaining growth, but newer models of economic growth have been applied to Mexico, which have increasingly replaced older models, with an attempt to shed light on the factors affecting economic growth in Mexico. On the empirical front, the search for determinants of growth has gone from basic economic growth variables (such as physical and human capital) to newer determinants of economic performance such as trade and institutions.
  • Economic Growth Models
    • A Major weakness of the neoclassical growth model has been detected by economists around the world and has not been overlooked in Mexico. Long-run growth in that model is exogenous.
    • Recent empirical studies have found a correlation between the rate of growth of FDI and economic growth. The direction of causality between the rate of growth of investment and the rate of economic growth has been analyzed by Carrol and Weil (1994), Blomström, Lipsey and Zedjan (1996) and Barro (1997), and found that the causality was from FDI to economic growth.
  • New Growth Theory
    • In the endogenous growth models the increases in investment during a period of time, increases the rate of economic growth in the long run. In the endogenous growth models, FDI can affect growth endogenously if it generates increasing returns in production via externalities and productivity spillovers. Moreover, policy changes might induce permanent increases in output growth by providing incentives to host FDI. Specifically, FDI is thought to be an important source of human capital accumulation and technological change.
    • Helpman (1984) and Helpman and Krugman (1985) are also an important part of the analysis of FDI in the new growth theory. In those models, distance to the export market is an important determinant of economic growth and FDI.
  • Center Periphery and distance
    • Krugman (1997) uses the model developed by Dixit and Stiglitz (1977) to have a unified spatial economic structure which is described by the new economic geography.
    • Fujita, Krugman and Venables (1999) assume that factors of production are less mobile between countries than between different regions of the same country,and analyzed the spatial order resulting from differing transport costs.
  • Derivation of the Model with FDI and Regional Economic Growth
    • We assume a regional production function in the following form:Y = F(K, L, F, X) (1) where Y is the product, K is capital, L is human capital, F is FDI and X denotes the vector of observable variables that can affect the regional economic growth and the FDI.
    • A Cobb Douglas function is used to obtain the logarithms in time that gives us the following expression:
    • gy= ζgk+ ψgf+ γgL+ θgx (2)
    • The relation shows the empirical relationship between regional economic growth (gy) and the presence of FDI (gf), with other explicative factors (gx). From the conventional model of growth, the empirical model is developed using the economic growth ∆yjt in region j for time t, with the FDI represented by F, human capital represented by L, and other variables (X) like distance and urban agglomerations.
    • The empirical model has the following form:
    • ∆ Yjt = β0+ β1Ljt+ β2Fjt+ β3Xjt+ ujt (3)
  • Sources of Information
    • The sources of information for the study are varied.
    • Distance is measured by the number of kilometers on the road from the capital of a state to the nearest border crossing with the United States. Another distance variable is included and constructed by the number of kilometers on the road from the capital of a state to Mexico City.
    • The density per kilometer squared in each state of Mexico measures the level of cluster agglomeration in the economy.
    • Another variable is constructed by the number of businesses in the commercial, services or manufacturing sector per state.
    • The migration variable is measured by the net balance migration per state in Mexico provided by INEGI. The human capital variable is an indicator of the educational characteristics of the population in each state. It includes the percentage of the population 15 years of age or older that have more than elementary studies in each state of Mexico.
    • The regional economic growth is measured by the percentage annual increase in income per capita in the period 1994-2000. The initial level of income used in the study is the one provided by INEGI in 1994. Foreign direct investment is constructed from the data provided by the Ministry of Economy in Mexico from1994 to 2000. The econometric technique must take into account the endogeneity argument.
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  • Conclusions
    • The results of the econometric analysis of the regional economic growth with the new economic geography perspective shows that the agglomeration variables are non significant, while the distance from the border is statistically significant, which is evidence in favor of the agglomeration models and the NEG models.
    • The distance from the border shows the importance of transport costs and trade to the United States in explaining regional economic growth in Mexico.
    • The migration variable is also important, showing the importance of migration in determining regional economic growth, due to repulsion and attraction forces that affect regions and agglomerations in Mexico.
    • On the other hand, the human capital variable, which is one of the most important variables is the endogenous growth models is non significant in the regression.
  • Conclusions
    • In the empirical study, the importance of the distance to the Northern Border of Mexico as a determinant of regional economic growth in Mexico is shown. The commercial trends in the agglomeration of industry in the Mexican Northern Border and the transportation technology costs to the border region (which are proxied by the distance to the border) are an important factor driving Mexico first to regional concentration and then to regional dispersion of economic activity. The production of manufactures is subject to increasing returns to scale if the production activities take place in a single site close to the border and the selling market.
    • The recent advances in the field of NEG have increased our understanding of spreading and agglomerating forces in the Mexican economy.
  • Conclusions
    • Some other important conclusions emerge. Regional integration has had a positive and significant effect on FDI, which shows a combination of investment creation and diversion.
    • FDI complements trade in the NAFTA region in the first 14 years of the agreement.
  • “ Foreign Direct Investment (FDI) and Economic Growth. The Case of Mexico and the United States “ Dr. Alejandro Díaz-Bautista Investigador Nacional y Miembro del Sistema Nacional de Investigadores, CONACYT, Nivel II. [email_address] http://www.linkedin.com/pub/alejandro-diaz-bautista/6/619/691 Profesor-Investigador de Economía, Departamento de Estudios Económicos, El Colegio de la Frontera Norte. Preparado para la 1er. Seminario internacional Evaluación del efecto de la Inversión Extranjera Directa (IED) en las economías en desarrollo. El evento se realizara en la Casa COLEF Ciudad de México, con dirección en la Calle Francisco Sosa No. 254, Col. Barrio de Santa Catarina en Coyoacán, México D.F. el 18 de septiembre de 2009 a las 11 a.m.
  • References
    • Díaz Bautista, Alejandro (2006), “An economic growth model of institutions, economic integration and foreign direct investment of Mexico with the United States”, Un modelo de crecimiento económico considerando a las instituciones, integración económica e inversión extranjera directa de México con los Estados Unidos”, Revista Convergencia, Revista de Ciencias Sociales, num. 41, ISSN 1405-1435, Nº. 41, pags. 117-139, mayo – agosto de 2006.
    • Díaz Bautista, Alejandro (2006), “Foreign Direct Investment and Regional Economic Growth considering the Distance to the Northern Border of Mexico” in Analisis Economico, UAM, Number 46, Vol. XXI, 2006.FDI and Regional Economic Growth.
    • Díaz Bautista, Alejandro (2005), “Regional Growth and Development, Clusters and FDI in Mexico”, prepared for the conference “ Desarrollo Regional y Competitividad”, organized by the Presidency of Mexico with Centro de Investigación y Docencia Económicas, A.C. (CIDE), September, 2005.
    • Díaz Bautista, Alejandro (2005), “The Impact of Economies of Agglomeration, Clusters and networking in medium-sized Mexican Telecommunication firms”, Chapter in the Book “Industrial Development and Labor Markets in the United States–Mexico Border”, UCLA Latin American Center Publications (2005), University of California, Los Angeles (UCLA).