The Enclave Economy

Foreign Investment and Sustainable Development in Mexico’s Silicon Valley

Kevin P. GallagherBoston University

Lyuba ZarskyMonterey Institute for International Studies

Global Development and Environment InstituteTufts University

Sustainable Industrial Development

• Economic: – Increasing the endogenous capacities of Mexican

firms and workers to learn, innovate and produce for domestic and/or global markets;

• Social:– Creating jobs with labor rights, especially for the

poor and middle classes;

• Environmental: – Mitigating the environmental and health impacts of

industrial growth.

The Promise of Investment Liberalization

• Attract FDI– More stable form of foreign exchange– Employment, tax revenue

• Productivity spillovers– Backward linkages– Human capital spillovers– Forward linkages

• Environmental Spillovers– Clean technology and management transfer– Environmental “spillovers” to domestic firms– Leapfrogging spurred by frontier environmental policy

Attract FDI?

Crowding Out Domestic Investment

0

50

100

150

200

250

300

350

400

450

1980 1985 1990 1995 2000 2005

1980

=10

0

FDI/GDP

GFCF/GDP

Source: World Bank WDI, 2007

Jalisco: Electronics Exports and FDI

0

50

100

150

200

250

300

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

1995

=10

0 Exports

FDI

Source: Cadena Productiva de la Electronica (CADELEC), 2007

Electronics Clusters in Mexico

Source: Gallagher and Zarsky, 2007

Why firms came

• Proximity to U.S.• Markets (hi-tech boom)• NAFTA • PITEX and Maquila• Exchange rate• Infrastructure• Wages• Pollution haven?

Why firms left• 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

Investment Employment Destination ($US millions)

Hard Disk Drives 108 4,250 ChinaComponents 30 1,200 ChinaCommunication Systems n.a. 3,720 ChinaCell Phones n.a. 400 China

24 1,493 China25 1,095 China

Semiconductors 200 2,100 PhillipinesElectronic Cards 24 1,049 China

70 925 MalaysiaPrinters 12 1,900 ChinaPrinting Systems 3 295 ChinaElectronic Equipment 3 300 ChinaTelecommunications 15 2,500 China

Total 514 21,227

High Tech Project Losses in Jalisco, 2001-2003

Source: Dussel Peters, Enrique. 2005. Economic Opportunities and Challenges posed by China for Mexico and Central America: DIE (German Development Institute).

Hi-Tech Employment in Jalisco, 1995-2005

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Source: Cadena Productiva de la Electronica (CADELEC), 2007

Computers Peripherals Telecom

China

2000 Market Share 6.0 4.0 5.72005 Market Share 28.8 15.7 18.3Percentage Point Change 22.8 11.7 12.6

Mexico

2000 Market Share 4.5 2.2 5.22005 Market Share 3.5 1.2 3.5Percentage Point Change -1.0 -1.0 -1.7

(country exports as a percent of world exports)

China vs. Mexico in World IT Markets

Source: United Nations Commodity Trade Statistics, 2006

Country Share Country Share Country Share Country Share Country Share Country Share1 USA 27.0% USA 25.3% USA 22.3% USA 18.1% USA 18.7% USA 12.6%2 Fmr Fed. Rep. of Germany14.1% J apan 17.3% J apan 16.1% J apan 15.2% J apan 10.8% China 12.4%3 J apan 11.8%Fmr Fed. Rep. of Germany11.5%Fmr Fed. Rep. of Germany11.6% Germany 8.8% Germany 7.4% Germany 9.2%4 United Kingdom 10.5% United Kingdom 8.5% United Kingdom 7.5% Singapore 6.9% Singapore 5.8% J apan 6.9%5 France 7.7% France 6.8% France 6.6% United Kingdom 6.8% United Kingdom 5.5% China, Hong Kong SAR 5.9%6 Netherlands 4.1% Italy 3.6% Singapore 4.0% France 5.8% France 5.0% Singapore 5.6%7 Italy 3.8% Netherlands 3.3% Netherlands 3.6% China, Hong Kong SAR 4.2% China, Hong Kong SAR 4.5% Rep. of Korea 4.9%8 Switzerland 3.0% Canada 3.0% Italy 3.5% Rep. of Korea 4.2% Rep. of Korea 4.4% France 4.5%9 Canada 2.5% China, Hong Kong SAR 2.3% China, Hong Kong SAR 2.9% Netherlands 3.5% China 4.0% United Kingdom 4.5%10 Belgium-Luxembourg 2.3% Singapore 2.2% Rep. of Korea 2.8% Malaysia 3.3% Malaysia 3.7% Netherlands 4.1%11 Sweden 2.1% Switzerland 2.2% Switzerland 2.2% Italy 2.5% Netherlands 3.7% Malaysia 3.0%12 Singapore 1.7% Sweden 1.9% Canada 2.2% China 2.1% Mexico 3.4% Belgium 2.7%13 China, Hong Kong SAR 1.3% Rep. of Korea 1.8% Sweden 1.8% Canada 2.1% Canada 2.5% Mexico 2.6%14 Rep. of Korea 1.1% Belgium-Luxembourg 1.6% Belgium-Luxembourg 1.6% Mexico 1.8% Ireland 2.3% Ireland 2.1%15 Poland 1.0% Ireland 1.3% Malaysia 1.6% Switzerland 1.8% Italy 2.0% Italy 1.9%16 Austria 0.9% Malaysia 1.1% Ireland 1.4% Sweden 1.7% Philippines 1.8% Switzerland 1.8%17 Denmark 0.9% Denmark 0.8% Austria 1.1% Ireland 1.6% Belgium 1.5% Canada 1.6%18 Malaysia 0.8% Austria 0.7% Spain 1.0% Thailand 1.5% Sweden 1.5% Thailand 1.4%19 Ireland 0.7% Spain 0.7% Denmark 0.9% Belgium-Luxembourg 1.5% Thailand 1.5% Philippines 1.3%20 Spain 0.6% Poland 0.5% Thailand 0.7% Spain 0.9% Switzerland 1.4% Sweden 1.3%21 Australia 0.4% Israel 0.5% China 0.7% Finland 0.8% Finland 1.0% Spain 1.1%22 Finland 0.3% Czechoslovakia 0.4% Finland 0.5% Denmark 0.7% Spain 0.8% Hungary 0.9%23 Norway 0.3% Brazil 0.4% Israel 0.4% Austria 0.6% Israel 0.7% Finland 0.9%24 Portugal 0.2% Finland 0.4% Australia 0.3% Australia 0.4% Denmark 0.6% Denmark 0.9%25 Hungary 0.2% Norway 0.3% Norway 0.3% Israel 0.4% Hungary 0.6% Austria 0.7%26 India 0.1% Australia 0.3% Brazil 0.3% Philippines 0.3% Austria 0.6% Czech Rep. 0.6%27 Argentina 0.1% Portugal 0.2% Czechoslovakia 0.3% Norway 0.2% Indonesia 0.5% Brazil 0.5%28So. African Customs Union 0.1% Hungary 0.2% Fmr Yugoslavia 0.2% Czech Rep. 0.2% Brazil 0.5% Israel 0.4%29 Indonesia 0.1% China 0.1% Mexico 0.2% Indonesia 0.2% Australia 0.3% Indonesia 0.4%30 Philippines 0.1% Philippines 0.1% Poland 0.2% Brazil 0.2% Czech Rep. 0.3% Poland 0.3%… … …… … …99 China 0.0%

200519951980 1985 1990 2000

China: Taking Away the Ladder?

Source: Gallagher and Porzecanski, 2007

Generate Spillovers?

Sector 1990 2006

All IndustriesAll inputs 32,171,039 719,826,926National Inputs 3,198,158 82,038,088National share 9.9% 11.4%

ElectronicsAll inputs 4,272,927 86,931,211National Inputs 51,339 1,780,876National share 1.2% 2.0%

Source: INEGI, 2007

Thousands of Current Mexican pesos

Domestic Share of Inputs in Foreign Firms

Firm Ownership (percent)

Cumex Electronics 50/50 Mex-US CM of PCBsMitel 51/49 Mex-Canada Telephone ComponentsPhoenix International 50/50 Mex-US Plastic InjectionEncitel 100 Mex CM of PCBsInfo Spacio 100 Mex CM of printersLogix Computers 100 Mex Design and manufacturer of PCsMexel 100 Mex CM of PCBsUnisys 100 Mex CM of computers and peripheralsElectron 100 Mex Design and manufacturer of PCsScale Computers 100 Mex Design and manufacturer of PCsAdvanced Electronics 100 Mex Design and Manufacturer of PCBsCompuworld 100 Mex CM of hard drivesMicrotron 100 Mex Buffers and Carton Packages

Source: Gallagher and Zarsky 2007

IT Plant Closings--Whole or Partly Owned Mexican Firms

Activity

Backward Linkages• 98 percent of inputs are

imported• 80 percent decline in

local suppliers from 1985

• 97 percent of all investment between 1994 and 2002 was foreign

• Survival story:– Electronica Pantera

Human Capital Spillovers

• Assembly work:– Contract employees– “basic” training– Limited joint R&D

• 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

Source: INEGI, 2007, Peres, 1992

National Demand as a Percent of Total ProductionIT Firms in Mexico

0%

10%

20%

30%

40%

50%

60%

1985 1995 1998 2001

Why so few spillovers?

• Market Failures– Barriers to entry into global supplier

networks– No access to credit and finance– Environmental externalities

• Government Failures– Orientation of ISI– Incentive to import inputs– Macroeconomic uncertainty– Little R&D, human capital formation,

leveraging• Firm failures

– Little R&D– Weak capacity– Scale

NAFIN Credit to SMEs in Jalisco

0

50

100

150

200

250

300

350

400

450

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

1991

=10

0

Million Pesos

# of recipients

Source: Gobierno del Estado de Jalisco, 2001

Sector Foreign-Owned Joint-Ventures Domestic Firms and SOEs

Mobile Phones Motorola Motorola/Eastcom TLCNokia/Capitel, SouthernSiemens/Mil SubsidiariesSamsung/KejianSagem/Bird

PCs HP IBM/Great Wall LenovoDell Toshiba/Toshiba Shanghai Founder

Epson/Start TongfangTaiwan GVC/TCL

"Brown Goods" Sony/SVA ChanghongPhilips/Suzhou CTV KonkaToshiba/Dalian Daxian HisenseGreat Wall Electronics/TCL Skyworth

HaierPandaXoceco

"White Goods" Siemens Samsung/Suzhou ChanglingXianxuehai GreeElectrolux/ChangshaLG/ChunlanMitsubishi/HaierSanyo/KelonSigma/MeilingHong Leong/XinfeiToshiba Carrier/Midea

Source: Rodrik, Dani (2005), "Policies for Economic Diversification," CEPAL REVIEW, 87, December, 7-23 .

China: Major Consumer Electronics Firms by Ownership Type

Environmental Spillovers?

IT Assembly and Environment

• Copper and soldering of plates with lead and tin– Formaldehyde and solder

drass• Exposure and waste

water issues• Adding brominated

flame retardants to circuit boards to reduce flammability– Polybrominated diphenyl

ether PBDE• Bioaccumulative

• E-waste

Environmental Spillovers

• Technology Transfer:– Vintage effects vs. end-of-pipe– 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– HP: workshops with locals, some ISO requirements

• Exporting to higher standards:– Not in Guadalajara plants (but in plants closer to higher regulation

markets)– Globalization of environmentalism

Lessons for Mexico and Beyond

• FDI is a means to development, not an end in itself

• Complementary domestic policies are needed to facilitate spillovers, growth and environmental protection

• Trade and financial agreements must preserve the ‘policy space’ for complementary efforts on a national scale

Available from MIT Presswww.mitpress.mit.org

Stanford University Presswww.sup.org

Earthscan Publications

www.earthscan.co.uk

Available from MIT Press

www.mitpress.mit.org

What to do?• Strategies:

– Build domestic capacities for production and innovation (education, R&D, infrastructure)

– Reduce domestic cost of capital – Build domestic and regional markets– Establish ROHS-like environmental regulations for

Mexico

• Challenges:– Fiscal crisis– Government capacity– Constraints of trade regimes– Inflation– Relative wage/productivity/policy space of China

Electronics Clusters in MexicoElectronics Clusters in Mexico

MexicaliMexicali

SONY

DAEWOO(SLRC)

MITSUBISHI GOLDSTAR

AUDIO & VIDEO ELECTRODOMESTIC COMPUTER EQUIPMENT TELECOM OTHER

ReynosaReynosa

VITROMATIC NOKIA

DELCO (Automotriz) PHILIPS SONY MATSUSHITA (Automotriz)

LUCENT TECHNOLOGIES FUJITSU (Automotriz) CONDURA (Automotriz) DELNOSA (Automotriz)

ChihuahuaChihuahua

MOTOROLA ALTEL KIOCERA JABIL

JuárezJuárez

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 MState of Meexicoxico

ELECTROLUX FILTER QUEEN HOOVER IMAN KOBLENZ MABE PHILIPS SUNBEAM OLIVETTI

PANASONIC

OLIMPIA