FOREIGN DIRECT INVESTMENT (FDI) IN MEXICO

Foreign Direct Investment (FDI) in Mexico

Foreign Direct Investment (FDI) in Mexico

The description of the concept “Foreign Direct Investment”

FDI plays an extraordinary role as a major economic driver of globalization. For many developing countries, FDI is an important element in their strategy for economic development. The researcher known as Romer in 1993 noted that foreign investments help ease the transfer of technological and business know-how that are needed for growth in these countries. Moreover, FDI increases job opportunities, improves labor productivity, and provides developing countries access to foreign capital. To obtain the aforementioned FDI benefits, several developing countries implemented policies and strategies aimed at promoting and attracting FDI while other countries abolished trade and investment costs, improved human capital and infrastructure facilities. However, very little research has been done to control for the role of spatial interdependence in FDI and growth literatures (Ahmed & Malik, 2009, 40).

Recent years, however, have seen a growing interest in the spatial specification, estimation, and analysis of foreign direct investment and economic growth. There exist several reasons why spatial interdependence may occur. For instance, FDI complementarity in international economics implies that higher accumulation of FDI stock in a particular country induces FDI inflows in surrounding countries due to agglomeration economies or external economies of scale. Moreover, the researchers known as the researchers known as Franzese and Hays in 2008 argued that in a comparative political economic framework, globalization and rising capital mobility imply tax competition that suggests the fiscal policies of one country must depend crucially upon those of other countries with which it competes for capital. Additionally, security concerns and the global structure of military alliances are likely to make trade flows interdependent across country dyads. Second, countries in these regions compete with each other to attract FDI from developed countries. When decisions and policies are being made to promote and attract FDI in one country, such decision might affect inward FDI in surroundings countries. For instance, by lowering or eliminating investment costs such as corporate tax, a country can re-direct inward FDI from other host countries to itself. This implies that FDI to this host country substitutes for FDI to other destination markets in the same region. Finally, countries in these regions belong to regional organizations established to promote mutual economic development among its member states. It is possible that economic growth in one member country may depend on economic growth in another member country (Alfaro, Chanda, Kalemli-Ozcan & Sayek, 2004, 112).

Background of the Foreign Direct Investment in Mexico

Historically, despite the importance of FDI, only a few countries have been recipients of considerable absolute flows, particularly China, Brazil and Mexico. The United States is the world's largest recipient of FDI and it is also the largest foreign direct investor in Mexico. Several U.S. companies use parts assembled in Mexico in the final goods produced in the U.S. The abundance of labor and the opening of the Mexican economy during the 1990s were determinant factors in attracting foreign companies ...