The Effects of Foreign Direct Investment in Mexico since NAFTA

Authors


  • I thank seminar participants at the 4th Minnesota International Economic Development Conference, the Western Economic Association Conference in Seattle, the European Trade Study Group Conference in Athens/Greece and the North American Economics and Finance Association Winter Meetings in New Orleans and especially Sven Arndt, Galina Hale and an anonymous referee for helpful comments. Thanks also to Ivan Balbuzanov for excellent research assistance.

Abstract

Foreign direct investment (FDI) into Mexico has increased dramatically since the inception of the North American Free Trade Agreement (NAFTA), raising questions about its effect on the Mexican economy. This paper studies the impact of FDI on industry productivity and wages over the first 10 years of NAFTA, paying particular attention to the source country and destination industry of investments. It also offers a detailed description of the evolution of FDI, its components, sectoral composition and sources from 1994–2005. There is evidence of a positive effect of FDI on productivity, particularly total factor productivity (TFP). The effect on wages is negative or zero at best, suggesting a divergence from productivity over this time period. The positive productivity effect stems largely from US FDI into non-maquiladora industries, which receive over two-thirds of manufacturing FDI. There is no evidence that more distant source countries have a differential effect. Consistent with theoretical expectations, FDI into maquiladoras benefits unskilled workers at the expense of skilled workers.

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