Foreign Direct Investment and Domestic Spillovers: Hi-tech Electronics in Guadalajara, Mexico Kevin P. Gallagher Department of International Relations, Boston University Global Development and Environment Institute, Tufts University Lyuba Zarsky Global Development and Environment Institute, Tufts University
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Foreign Direct Investment and Domestic Spillovers: Hi-tech Electronics in Guadalajara, Mexico Kevin P. Gallagher Department of International Relations,
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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
• 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