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Spatial linkages and third-region effects: evidence from manufacturing FDI in Mexico

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Abstract

We analyze the main characteristics that help explain the regional distribution of manufacturing foreign direct investment (FDI) in Mexico. Our main findings indicate the presence of a positive spatial relationship among states’ FDI which, combined with the zero effect found for the market potential variable, points to the presence of complex vertical FDI. We consider that this is consistent with the fact that just over a third of manufacturing FDI in the country is located in the automotive sector. Moreover, we find positive direct and indirect effects of human capital, agglomeration, and states’ fiscal margins. Based on the results of this research, attraction of FDI should be considered in a regional context and not only from a local perspective.

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Fig. 1

Source: Own calculations based on Ministry of Economy information

Fig. 2

Source: Own calculations based on Ministry of Economy information

Fig. 3

Source: Own calculations based on Ministry of Economy information. Source: Own elaboration based on Banco de México

Fig. 4

Source: Own elaboration with information from INEGI

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Notes

  1. See, for example, Borensztein et al. (1998), Durham (2004) and Li and Liu (2005).

  2. Following Glaeser (2010, p. 1), and broadly speaking, throughout the document we refer to the concept of agglomeration as “the benefits that come when firms and people locate near one another together in cities and industrial clusters.”

  3. In the context of a formal model, Hanson (1996) shows the effects of interactions between agglomerations and cost resources (wages) in the case of the garment industry in Mexico. Although the author does not consider FDI in his analysis, the model is useful to describe how external economies lead to agglomeration processes.

  4. According to Blonigen et al. (2007), this was the first study to use spatial econometric techniques to examine FDI behavior.

  5. A maquiladora is a factory in Mexico that is run by a foreign company, which exports the products produced in the factory to its home country.

  6. See “Sintesis Metodológica Sobre la Contabilizacion de los Flujos de Inversion Extranjera Directa hacia México”, Ministry of Economy http://www.gob.mx/cms/uploads/attachment/file/59194/Metodologia_para_la_elaboracion_de_las_cifras_sobre_los_flujos_de_IED.pdf.

  7. In Mexico, states’ public finances are highly dependent on federal transfers (Hernandez-Trillo and Jarillo-Rabling, 2008). According to INEGI, on average, states’ own revenue accounts for only about 10 percent of their total revenue.

  8. The wage for the manufacturing sector exclusively at the state level was not available.

  9. The data from the Ministry of Economy (Secretaría de Economía) are expressed in millions of current dollars. For the conversion, we use the nominal peso/dollar exchange rate (fix), and the GDP deflator (2008 base) to convert the data in millions of constant pesos. We also considered this variable in millions of constant dollars, which did not change the results obtained below.

  10. In the present case, we use the “queen contiguity” principle: one entity is considered to be neighboring another only if they share a common border. The matrix W is binary and takes the value of 1 if the entities share a border and zero otherwise. Additionally, the elements of the main diagonal of W are equal to zero per construction.

  11. Folowing Anselin (1988), since we have a dependent variable in the right-hand part of the equation, re-expressing the model \( y = \rho Wy + X\beta + \varepsilon \) as \( Ay = X\beta + \varepsilon \), with \( A = I - \rho W \), and the error term as \( \varepsilon = \varOmega^{{\frac{1}{2}}} v \), gives us \( \varOmega^{{\frac{1}{2}}} \left( {Ay - X\beta } \right) = v \), or \( f\left( {y,X,\theta } \right) = v \), with \( \theta \) as a vector of parameters, and f is not linear in y, X, and \( \theta \).

  12. Both cited in Blonigen et al. (2007, p. 1304).

  13. For example, according to INEGI, two of the Mexican states with the heaviest levels of production in the automobile sector, Coahuila and Guanajuato, increased the number of economic units dedicated to produce auto parts between 2008 and 2013 by 52.3% and 102.4%, respectively (from 88 to 124 and from 42 to 84).

  14. LeSage and Pace (2014) suggested that this criticism is misleading, since any W will capture the immediate and more important neighbor impacts.

  15. Considering the possibility of the presence of multicollinearity between the independent variables, we use the variance inflation factor (VIF) test. According to the results, none of the variables was even close to the value of 4, which is used as a “rule of thumb” to identify potential muticollinearity problems.

  16. Although this result is in line with previous literature, we have to point out the potential presence of endogeneity with manufacturing FDI. A higher manufacturing FDI can lead to a higher proportion of workers in the manufacturing sector.

  17. See “Mexico’s ‘El Bronco’ Jaime Rodríguez Bucks at Incentives for Car Plant,” Wall Street Journal, May 16, 2016, https://www.wsj.com/articles/mexicos-el-bronco-jaime-rodriguez-bucks-at-incentives-for-car-plant-1463439790.

  18. “The higher productivity of FDI holds only when the host country (or region) has a minimum threshold stock of human capital. Thus, FDI contributes to economic growth only when a sufficient absorptive capability of the advanced technologies is available in the host economy (region).” Borenztein and De Gregorio (op. cit., p. 115).

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Authors and Affiliations

  1. Dirección General de Investigación Económica, Delegación Regional Guadalajara, Banco de México, Guadalajara, Jalisco, Mexico

    Felipe J. Fonseca & Irving Llamosas-Rosas

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  1. Felipe J. Fonseca
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  2. Irving Llamosas-Rosas
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Correspondence to Irving Llamosas-Rosas.

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Fonseca, F.J., Llamosas-Rosas, I. Spatial linkages and third-region effects: evidence from manufacturing FDI in Mexico. Ann Reg Sci 62, 265–284 (2019). https://doi.org/10.1007/s00168-019-00895-1

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