Abstract
Recent empirical studies of the determinants of multinational activity across countries have found overwhelming support for a horizontal rather than a vertical model of foreign direct investment (FDI). They all use US or other developed country data. This paper, in contrast, uses a detailed industry-level data set on FDI in a relatively skilled-labor and capital scarce country, Mexico, to shed light on the determinants of FDI between largely dissimilar countries. The results indicate considerably more support for a comparative advantage motive for FDI, although a market access motive is present as well. The correlation between skill differences and FDI is positive in all industries, but when differences are large, FDI flows into sectors that are intensive in total labor, regardless of skill level. The concentration of multinational activity in (unskilled) labor intensive industries suggests a potential for spillover effects.
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Notes
The World Bank now classifies Mexico as an upper middle-income economy.
An example of anecdotal evidence that foreign firms increasingly penetrate capital- and skilled-labor intensive production is General Motors’ locating an automatic transmission plant, which is relatively skilled-labor intensive, in Mexico.
Since there is evidence of a structural break in 1994 (see, e.g., Waldkirch 2003; Cuevas et al. 2005) due to the North American Free Trade Agreement (NAFTA), 1994 appears to be a good starting point for the analysis, thus avoiding any bias from the NAFTA surge. Moreover, no industry detail is available prior to 1994. Later data is classified according to the new North American Industrial Classification System (NAICS) and no longer comparable.
Multinational corporations were welcomed as providers of technology. In 1970, their share exceeded 50% in the transportation equipment, electrical machinery, and chemical industries (Franko 1999: 62).
The data show the volatile nature of FDI flows, which in a given year can be dominated by just one outlier. The large share of developing countries in 1994 is almost entirely due to the acquisition of the steel company SICARTA by the Indian company ISPAT for more than 1.5 billion US$. The low share of EU countries in 2000 is due to the French Telekom selling its 2.5 billion US$ stake in the Mexican telephone company TELMEX which it had acquired 10 years earlier.
Both specifications avoid the potential specification error pointed out by Blonigen et al. (2003).
Estimating a Tobit model is commonly done in the literature on the determinants of FDI flows when data is at such a disaggregated level. See, e.g., Guerin and Manzocchi (2009).
Adjusting for clustering on country rather than industry gives very similar results.
They can be found on the web at http://www.macalester.edu/research/economics/PAGE/HAVEMAN/Trade.Resources/TradeConcordances.html
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Acknowledgments
I thank seminar participants at Oregon State University, the Midwest International Meetings and the NEUDC for their useful comments on an earlier draft. I also thank Daifeng He for excellent research assistance. The usual disclaimer applies.
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Data Appendix
Data Appendix
Real FDI:
The flow measure are FDI inflows in thousands of 1995 US dollars, by 4-digit industry (Mexican classification system CMAP), from the Mexican Ministry of the Economy (Secretaría de Economía, SE). Sector-specific producer price indexes from the US Bureau of Labor Statistics (BLS) are used as deflators. Since the industry classification used by the BLS differs from CMAP, I use industry concordances put together by Jon Haveman Footnote 11 and information collected from Cremeans (1999).
I construct sector-specific FDI stocks in the following manner. Actual stock is only available at the aggregate level for any year. Moreover, not all source countries that sector-specific flows are available for have a stock measure. I first sum flows over all years of the sample period by source country and industry. Then, I distribute the aggregate 1994 stock according to each country-sector pair share in cumulative flows. For countries that do not have a cumulative stock, I use cumulative flows by sector multiplied by the average factor by which stocks exceed flows for other countries. This gives me a stock measure by sector and source country for 1994. In the basic (reported) specification, subsequent years’ stocks are simply constructed by adding the available flows (which is how stocks are evidently constructed for the years and countries that both stocks and flows are available at the aggregate level). For a robustness check, I also allow for an annual 5% depreciation rate. Conversion to real stocks is equivalent to that for flows.
GDP is gross domestic product in billions of 1995 US dollars. GDP and exchange rate information are from International Financial Statistics.
SumGDP = Source country plus Mexican GDP. SumGDP(US): US GDP is used in place of source country GDP.
(DiffGDP)2 = (Source country minus Mexican GDP) squared. (DiffGDP)2(US): US GDP is used in place of source country GDP.
diffskill is the difference between the ratio of skilled labor to the total labor force in the source country and Mexico; skilled labor is measured as professional, technical and associated professionals, other professionals and managerial workers. This information is taken from the International Labor Organization’s Yearbook of Labor Statistics. A sab prefix indicates that the source country is skilled-labor abundant; a mab prefix indicates Mexico is skilled-labor abundant.
diffskillratio is the ratio of skilled to unskilled workers in the source country relative to Mexico.
skillintensity is the ratio of white collar to the sum of white collar and blue collar workers (“obreros” and “empleados”), by industry, from SE.
skillratio is the ratio of white collar to blue collar workers, by industry.
numfirms is the actual number of firms in that industry, from the Mexican Industrial Census of 1999, referring to 1998.
industrysize is total gross production, in thousands of 1995 US dollars.
firmsize is industrysize divided by numfirms.
klratio is the ratio of net fixed assets (in thousands of 1995 US dollars) per employed person, from the 1999 Census.
invcostmex is an index of overall economic freedom, ranging from 0 to 100, from the Heritage Foundation, for Mexico.
transport is the c.i.f/f.o.b. factor by industry and source country from the World Bank’s Trade and Production database.
transport(US):
US trade data is used in place of source country trade data. Various concordance tables were used to translate transport as well as tariff data to CMAP.
sourcetariff:
all data are from John Romalis’ update to the US Tariff Database as described in Feenstra et al. (2002). For the United States, the tariff with respect to Mexico was used. For all other countries, MFN tariffs were used. tariff(US): US tariffs with respect to Mexico were used in place of source country tariffs.
hosttariff:
tariff information is taken from the Western Hemispheric Database. If the source country is the United States or Canada, adjustments for NAFTA tariffs were made using information from the phaseout schedule as calculated by Kowalczyk and Davis, 1996. For each year, the exact reduction in scheduled tariffs was calculated.
Distance is the distance in kilometers from Mexico City to a source country capital.
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Waldkirch, A. Comparative advantage FDI? A host country perspective. Rev World Econ 147, 485–505 (2011). https://doi.org/10.1007/s10290-011-0096-8
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DOI: https://doi.org/10.1007/s10290-011-0096-8