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

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

Border Zone: Mostly Audio / video 13 Computer monitor manufacturing. 13 TV manufacturing Western Region: Focus on IT industry, High tech electronics industry, Telecommunications & Electronic subassemblies. 10 Billion exported in Center Zone: Home appliances and consumer electronics. Electronics Clusters in Mexico

Querétaro  VISTAR  VITROMATIC (2) Cuernavaca  NEC Torreón  THOMSON Monterrey  PIONNER  DANFOSS COMPRESSORS  VITROMATIC (3)  MABE (2)  KODAK  NIPPON DENSO (Automotriz)  AXA YAZAKI (Automotriz) Mexicali  SONY  DAEWOO (SLRC)  MITSUBISHI  GOLDSTAR  AUDIO & VIDEO  ELECTRODOMESTIC  COMPUTER EQUIPMENT  TELECOM  OTHER Aguascalientes  TEXAS INSTR.  XEROX SIEMENS Querétaro  CLARION  DAEWOO  BLACK & DECKER  MABE (2)  SINGER  SIEMENS State of Mexico  MABE  BRAUN  ELECTROLUX  SUNBEAM  KOBLENZ  ERICSSON  ALCATEL/INDETEL  AMP Puebla  GESTAR  SINGER  VITROMATIC Saltillo  MABE  HAMILTON BEACH* Reynosa  VITROMATIC  NOKIA  DELCO (Automotriz)  PHILIPS  SONY  MATSUSHITA (Automotriz)  LUCENT TECHNOLOGIES  FUJITSU (Automotriz)  CONDURA (Automotriz)  DELNOSA (Automotriz) San Luis Potosi MABE GE  MABE SANYO  Chihuahua  MOTOROLA  ALTEL  KIOCERA  JABIL Juárez  KENWOOD  ELECTROLUX  ACER  TOSHIBA  PHILIPS  THOMSON  ELAMEX  PLEXUS Tijuana  SANYO  SONY  HITACHI  MATSUSHITA  JVC  SAMSUNG  PIONNER  SANYO ELECTRODOMÉSTICOS  PHILIPS  CASIO  KODAK  CANON  KYOCERA  INTERNACIONAL RECTIFIER  MITSUBISHI  SHARP Guadalajara  I.B.M  H.P.  TECHNICOLOR TELECT   TYCO  KODAK  VOGT ELECTRONIC  SIEMENS VDO  SOLECTRON DE MEXICO  FLEXTRONICS  JABIL CIRCUIT  BENCHMARK  SANMINA-SCI State of Mexico  ELECTROLUX  FILTER QUEEN  HOOVER  IMAN  KOBLENZ  MABE  PHILIPS  SUNBEAM  OLIVETTI  PANASONIC  OLIMPIA 

Why firms came Proximity to U.S Markets (hi-tech boom) NAFTA (tariffs and rules of origin) PITEX and Maquila Programs Favorable Exchange rate Guadalajara infrastructure

Backward Linkages 95 percent of inputs are imported 80 percent decline in local suppliers from percent of all investment between 1994 and 2002 was foreign Joint R&D projects limited Success story: –Electronica Pantera

Human Capital Spillovers 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

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

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

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 ( );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)

Endogenous Productive Capacity?