The University of Akron
Department of Economics
ST Economics: Regional Trading Arrangements and Integration
NAFTA and the Mexican FDI Flows
By
Robert Baape, Nina Johnson-Kanu and Brandon Palmer
Spring 2013
Abstract
In this paper we analyze the effect of belonging to the North American Free Trade Agreement
(NAFTA) on the Foreign Direct Investment (FDI) flows of Mexico- a small country. We find that
NAFTA does indeed increase Mexico’s FDI flows by a large magnitude. We also include
background information on NAFTA, its history, trade flows and patterns and its trade policies.
1.
Introduction
In January 1994, the North American Free Trade Area (NAFTA) came into force between
Canada, United States, and Mexico. It was largely pushed by the Mexican government after the
Canada- US Free-Trade Agreement (CUSFTA). NAFTA, the first trilateral trade bloc in North
America aimed to eliminate barriers to trade and investment among the three member countries.
The FTA was the first trading agreement between a developing country and two developed
countries.
The opposition against NAFTA in U.S. and Canada prior to its formation gave credence to the
fact that Mexico stood to benefit so much from the FTA. Some of the purported benefits were;
Mexico getting access to the larger United States and Canada markets and a huge capital flight in
the form of foreign direct investment to Mexico from the two developed nations. Mexican labor
unions were opposed to NAFTA membership on the grounds that free trade would lead to loss of
Mexican jobs to the high-skilled America labor. The Mexican government, on the other hand,
had a vested interest in the likely huge capital inflows from the United States and Canada. Many
economic pundits argued that NAFTA would serve as a catalyst for businesses to relocate from
the United States to Mexico to escape increasing cost of production from the strict regulations in
the United States. Some also argued that the cheap labor in Mexico would be a pull factor for
firms from the United States and Canada to move to Mexico in order to reduce cost of
production, especially with the lower wages found there.
Foreign direct investment flows into Mexico, from the two member countries, has been and still
is a subject of interest to many economic researchers. Partly due to the huge political opposition
NAFTA faced prior to its final ratification by the three countries, and also because of its
expected economic benefits to Mexico as the only developing country among the three.
This paper aims to analyze the possible effects NAFTA may have on the Mexican net foreign
direct investment flows. We try to answer the question: Did Mexico see an increase in its net
foreign direct investment due to its membership in NAFTA? We analyze the effect of factors that
affect Mexico’s FDI with the gravity model for periods pre and post-NAFTA and across
countries within and without NAFTA.
2.
History of NAFTA
a. Type of RTA
NAFTA was initially notified under GATT on January 29,1993. The agreement came into force
on January 1, 1994. NAFTA was signed in 1992, in Ottawa on the 11th and 17th of December,
Mexico on the 14th and 17th of December and in the US on the 8th and 17th of December1.
The agreement was spurred by the U.S.-Canada free trade agreement (CUSFTA) and Mexico
did not want to be left behind. While CUFSTA was implemented in 1989, talks of NAFTA
actually began before CUFSTA's implementation. CUFSTA's key objectives eventually became
objectives of NAFTA showing that NAFTA continued were CUSFTA left off. The objectives
include: elimination of tariffs, reduction of non-tariff barriers, address trade in services, and a
mechanism to settle disputes.
Every member of NAFTA faces no barriers to trade when they trade with the other countries
within the bloc. However, each country is able to set up different trade barriers to a nonmember
country. The differing tariffs on nonmember countries can become an issue, and lead to problems
dealing with rules of origin. This is because it may be cheaper for a country to export to one
1
Information obtained from the NAFTA secretariat archived files. http://www.nafta-secalena.org/en/view.aspx?x=283
country and have that country be an intermediary that transfers the goods to another country
within the bloc. For example a third country such as Guatemala can export goods destined for
U.S through Mexico in order to avoid higher import duties on the U.S border. To stop this
however, it is necessary to have rules of origin to keep countries from cheating the system. These
‘Rules of Origin’ can be very complex; in fact, the written agreement of NAFTA has a whole
chapter devoted to the rules of origin. It has been annexed, or adjusted four different times to
clarify things that weren’t already in the agreement.
b. Trade in NAFTA
In all trade agreements, one must know about the trade creating and trade diverting effects
among the countries to analyze the RTA's effectiveness. Trade diversion occurs because
countries eliminate tariffs towards other member countries, but trade with an actually cheaper,
nonmember, country to be passed up. The reverse is the case with trade creation where the
imports are made from the least cost and most efficient producer. With NAFTA, the trade
creation and diverting effects are ambiguous at best. While there was rapid growth in trade flows
between the member countries during the first few years after NAFTA ratification, this trade
increase was as a result of Mexico’s tariff reductions and not entirely as a result of NAFTA
(Krueger, 1999).
The volume of trade between members of an RTA should increase after it forms (Krueger,1999).
In her paper, exports from U.S. to Canada increase from 35.4 billion USD in 1980 to 154.2
billion USD in 1998; also a change from 16 percent to 22.7 percent. An incremental change was
also seen from US to Mexico from 6.9 percent to 11.96 percent. The only trade numbers that
don't appear to improve are trade between Mexico and Canada. Mexican imports from Canada
actually drop from 1.8 percent to 0.8 percent. It appears the greatest increases in trade are
between the United States and Mexico. Overall, it seems that the increased trade seems to
gravitate more to the United States. This is probably likely due to the fact that the US is
geographically the center of the FTA which would lower the amount of distance needed to trade
among partners.
c. Tariff Rates
Mexico began to liberalize trade in the mid 1980’s (Krueger 1999). That means that, Mexico
started reducing its tariffs before it even became a member of NAFTA. This likely put Mexico in
a better position when proposing the RTA, as the United States and Canada thought they were
serious about liberalizing. It was estimated that Mexico had an average tariff level of 10 percent
on imports from the US in 1990 (Krueger 1999). The average tariff on imports from Mexico (to
the U.S.) dropped from 2.0 percent in 1992 to 1.4 percent in 1998 (Krueger 1999). So Mexico
was able to export at a much cheaper price than previous. The U.S. has also liberalized trade with
East Asia. However, it still has an average tariff rate of 3.2 percent toward East Asian products
(Krueger 1999). The tariff may actually be leading to trade diversion if an East Asian country is
more efficient at producing a particular good than Mexico. Hence, the Mexican trade share with
the United States grew while East Asian trade share with the US decreased.
3.
Current Trade Patterns
Trade patterns have really changed from what they were before NAFTA. For example, before
NAFTA, Mexico's trade extensively regulated its trade. They had tariffs, import licensing
requirements, domestic-content provisions, and restrictive FDI policies. Where Mexico appeared
to be closed, the United States and Canada had relatively more open economies. This should not
come as a surprise because Mexico is a developing country and developing countries tend to be
more closed than developed ones. A developing country is likely to assume that in order for them
to boost their home market and increase GDP growth, they have to restrict trade.
In 1994, NAFTA created the world's largest free trade area, which now covers about 450 million
people producing about 17 trillion dollar worth of goods and services2. This is a trade agreement
that deals with more goods and services than the entire European Union. The EU is considered
the second largest, with GDP value of 15 trillion dollars. The current data available indicates that
US exports to Mexico accounted to 163.3 billion dollars in 2010 and 248.2 billion dollars to
Canada. That is to say, about 411 billion dollar value of goods and services are exported from the
United States to other NAFTA countries. US exports to the other NAFTA member countries
comprise of; machinery, vehicles, electrical equipment, mineral fuel and plastic.
Most of these imports from U.S to Mexico are similar to those imported from Canada to Mexico
which explains the reason why the volume of trade between Canada and Mexico decreased after
the formation of NAFTA. From 1992 to 2002, Mexico increased agriculture imports from the US
by 93 percent. US exports of agriculture products to the rest of the world grew by only 37
percent within this period3. Bilateral trade between the US and NAFTA grew 111 percent
compared to the 79 percent with the rest of the world. US investment in Mexico also increased
much more than it did in the rest of the world within that period. Overall, NAFTA has led and
increased in the volume of trade between the partners.
2
Information obtained through the web from the office of the US trade representative.
http://www.ustr.gov/trade-agreements/free-trade-agreements/north-american-free-trade-agreement-nafta.
3
Obtained from the US department of Commerce website at
http://www.ita.doc.gov/media/Publications/pdf/nafta10.pdf.
According to the data obtained from the World Bank, NAFTA's openness measure has actually
decreased from around 58 percent to 56 percent. This openness measure is in comparison with
the rest of the world. This shows a lot of trade is going on within the regional bloc due to the
formation of NAFTA which tends to reduce their trade flows with the rest of the world.
Trade flows between NAFTA and the EU is however increasing steadily. In 2008, the value of
trade between NAFTA and the EU stood at 516,636 million euros while in the year 2012, the
value stood at 606,746 million euros.
4. Current Trade Policies
NAFTA aims to remove trade barriers on goods and services. They also aim to eliminate
investment restrictions and protect intellectual property rights among the three member
countries.
The formation of NAFTA led to an immediate removal of 50 percent of all tariffs on goods and
services among the three member countries with the rest of the tariffs to be gradually phased out
within a fifteen year period. The targeted areas for tariff elimination by NAFTA in all the
member countries include the following: construction, accounting, management or consulting,
healthcare, engineering, tourism, advertising among others. All tariff and nontariff barriers were
eliminated by January 2008. The major nontariff barriers to trade that were faced by the three
member countries included border restrictions, environmental standards and licensing
requirements.
NAFTA as a free trade agreement does not have a harmonized trade policy between the three
member countries and the rest of the world. Each individual member country is allowed to
pursue its own trade policy with nonmember countries. This means that each NAFTA member
country has its own external trade policies as defined by the Most Favored Nation (MFN)
principle under the General Agreement on Tariffs and Trade (GATT) towards nonmembers.
All the three member countries however, pursue open trade policies with the rest of the world.
The United States has negotiated and continues to negotiate trading agreements with other
nations and trading blocs such as the trans-pacific partnership (TTP) and the Southern Africa
Custom Union (SACU). Canada has ratified many trading agreements with other regional blocs
such the European Free Trade Association (EFTA) and the European Union (EU). Mexico has
also entered into free trade agreements with the Central American Countries and the European
Union among others.
In order to ensure security and unrestricted flow of goods and services through the borders of the
three member countries, an agreed policy on NAFTA’s ‘Rules of Origin’ has been introduced
for custom officials to determine which goods are entitled for the preferential tariff treatment as
defined by NAFTA and which goods are not. NAFTA certificate of Origin has been adopted as
the official document to be used by both the exporters and importers within the three member
countries if their exports or imports qualify for preferential tariff treatment under NAFTA
provisions. By definition, the ‘Rules of Origin’ in NAFTA implies that firstly, a good should be
wholly obtained or produced entirely from at least one of the member countries. Secondly, all
non-originating materials do undergo the required change in tariffs classification as spell out in
Annex 401 in the NAFTA constitution. Thirdly, if a good is wholly produced in any of the
member countries exclusively from originating materials then it qualifies for preferential tariff
treatment.
It is required for each exporter to calculate the regional value content (RVC) of the good
produced using either the Transaction Value or the Net Cost Content formulas. The Transaction
Value Content formula measures the value of non-originating material as a percentage of the
GATT transaction value of the good (total price paid for the good by the producing country)
If the RVC calculated using this formula is at least 60 percent then the good is qualified for
preferential NAFTA tariffs treatment.
The Net Cost formula calculates the regional value content as a percentage of the net cost to
produce the good. If the RVC calculated using this formula is at least 50 percent then the good is
qualified for the preferential NAFTA tariffs treatment.
Under NAFTA, each member country retain the right to apply their antidumping and
countervailing duty laws to goods imported from another NAFTA country if the recipient
country found those goods harmful to its domestic market or environment.
5. Environmental and Developmental Issues
Prior to the final ratification of NAFTA, several concerns were raised on the possibility of
inefficient and highly polluting industries relocating from areas with strict environmental
regulating laws like in the United States and Canada to a relatively less strict environmental
regulation Mexico in order to minimize cost of production.
While some economists argued that NAFTA will lead to an automatic improvement of
environmental conditions in Mexico, some thought otherwise. The major concern was therefore
based on the fact that environmental law enforcement in Mexico was relatively lax relative to the
enforcement in the United States or Canada. Therefore, the likelihood that high polluting
industries would locate in Mexico for less regulatory reasons appeared great. These concerns
prompted the United States to renegotiate a supplemental agreement to protect its American
workers and also to ensure that the other member countries would observe strict environmental
policies and regulations similar to that of the US.
The North American Agreement on Environment Cooperation (NAAEC) was therefore proposed
and a commissioned (Commission for Environment Cooperation) under the agreement, with the
sole responsibility of continually conducting ex post environmental assessment of NAFTA. With
four evaluations done so far by the commission, no systemic threat to the environment has been
found to have been caused by NAFTA. The only sectors found to have experienced an increased
in pollution with a link to NAFTA were the Mexican Petroleum Sector and the Transportation
and Equipment Sectors in the United States and Mexico. No sector has been harmed in Canada
in connection with NAFTA.
a. Disputes Settlement
In order to encourage free flow of cross-border investment among NAFTA member countries,
provisions are being made to protect cross-border investors and facilitate the settlement of
investment disputes. Each member country has to adhere to non-discriminatory principles in
awarding of contracts to investors from other member countries. Chapter eleven of the agreement
therefore permits an investor from any member country to seek financial damages from actions
of another member country who violates any of the provisions spell out in the chapter.
NAFTA secretariat was therefore established with offices are in all the capitals of each member
country to provide assistance to the free trade commission in resolving trade and investment
disputes. The secretariat is accountable to the NAFTA free trade commission which is
established to oversee the implementation of the agreement. An aggrieved party can either
initiate arbitration against another party under the arbitration rules of the United Nations
Commission on International Trade Laws (UNICITRAL) or rules of the International Centre for
Settlement of Investment Disputes (ICSID Additional Facility Rules). Disputes involving
antidumping and countervailing duties are also handled by the secretariat.
Since the establishment of the secretariat, about seventeen cases have been filed against the US,
thirteen cases filed against the Mexican government and Canada just like Mexico has also been
involved in thirteen cases. The commission has also established an Alternative Dispute
resolution (ADR) at the various committee levels4.
6. Policy Evaluation
a. Survey of Literature
Foreign direct investment (FDI) flows are an important aspect of multilateral and regional
interactions between countries. FDI flows encourage GDP growth and total factor productivity
growth (Ramirez, 2006). Within an RTA, the expected GDP growth and TFP growth are
expected to increase as seen in Canada (Leitao, 2010). Liberalization multilaterally and
economic stability tend to increase the gains from FDI flows (Blomstrom & Kokko, 1997). This
means that belonging to a multilateral and/or regional trading arrangement not only increase FDI
flows, they encourage the proper use of the investment flows which in turn leads to total factor
productivity and GDP growth (Macdermott, 2007).
In line with the previous papers, Waldrick (2010) found that FDI affects Mexico’s total factor
productivity and GDP growth positively; they also found however, that it decreases skilled
wages in Mexico. Being in an RTA encourages FDI for the small countries in the RTA (Mollick,
Ramos-Duran & Silva-Ochoa, 2006). Mexico is a small country in NAFTA and thus benefits
from more FDI inflows that the other countries in NAFTA (Cuevas, Messmacher &Werner,
4
Most NAFTA related information is obtained from the NAFTA secretariat website in English unless otherwise
specified.
2005). As a result the positive effects of FDI are greater for Mexico than it is for the US.
Studying the effects the NAFTA has on Mexico’s net FDI flows is therefore important and we
add to previous literature by also comparing the effect Mexico’s membership in OECD affects its
FDI net flows. While we focus on NAFTS’s effect on Mexico’s flows we compare that effect to
the OECD’s to get a better understanding of the magnitude of NAFTA’s effect.
b. Empirical Design
This paper uses the empirical foundations provided in McDermott (2006) although we add other
variables as suggested by other papers. We use the gravity model to understand Mexico’s net
FDI flows. We test to see if belonging to NAFTA creates an increase in the Mexico’s net FDI
flows. We add other factors that may affect the flow of FDI as used in gravity models in other
papers. The gravity model for FDI is as follows:
𝐿𝑜𝑔(𝐹𝐷𝐼𝑖𝑗𝑡 ) = log(𝐺𝐷𝑃𝑖𝑡 ) + log(𝐺𝐷𝑃𝑗𝑡 ) + log(𝐷𝑖𝑠𝑡𝑎𝑛𝑐𝑒𝑖𝑗 ) + 𝑁𝐴𝐹𝑇𝐴 + 𝑂𝐸𝐶𝐷 + 𝐿𝑎𝑛𝑔𝑢𝑎𝑔𝑒
+ 𝐴𝑑𝑗𝑎𝑐𝑒𝑛𝑐𝑦 + 𝐸𝑐𝑜𝑛𝑜𝑚𝑖𝑐 𝐹𝑟𝑒𝑒𝑑𝑜𝑚𝑖𝑡 + log⁡(𝑅𝑒𝑙𝑎𝑡𝑖𝑣𝑒 𝐹𝑎𝑐𝑡𝑜𝑟 𝐸𝑛𝑑𝑜𝑤𝑚𝑒𝑛𝑡𝑖𝑗𝑡 )
+ 𝜀𝑖𝑗𝑡
Where 𝐹𝐷𝐼𝑖𝑗𝑡 is the dependent variable. It is the bilateral Foreign Direct Investment between
Mexico and its investment partners in time t. it is the absolute value of the difference between the
FDI outflow and the FDI inflow.
𝐺𝐷𝑃𝑖𝑡 is the GDP of Mexico the host country who receives the FDI in time t. it is expected to
positively affect FDI flows.
𝐺𝐷𝑃𝑗𝑡 is the GDP of the source country who gives the FDI in time t. it is expected to positively
affect FDI flows.
𝐷𝑖𝑠𝑡𝑖𝑗 is the distance between the two countries. It is expected to have a negative sign because
the farther apart countries are the less likely investment flows would move between them.
𝑁𝐴𝐹𝑇𝐴𝑖𝑗 is the independent variable of interest. It is the RTA dummy variable showing that the
countries belong to NAFTA. This is expected to be positive as belonging in an RTA should
increase the investment flows between the countries in that RTA.
OECD is a dummy variable showing if the partner country is a member of the OECD. It is
expected to have a positive sign.
We use the ease of doing business, investment rank and trade freedom indexes as proxies for
Economic freedom as used in Turan and Soritis (2011), and is expected to affect FDI flows
positively.
Relative factor endowment consists of relative labor endowment and relative Capital
endowment. Relative Labor factor endowment is the relative labor endowment from Mexico as a
ratio of the relative labor endowment of their investment partners and is expected to affect FDI
flows positively. Relative capital endowment of Mexico as a ratio of the relative capital
endowment from their trading partners and is expected to affect FDI negatively. Relative factor
endowment in the gravity model for FDI derived by Kleinert and Toubal (2010) significant in
two of their models and so we include it in ours.
The language variable is 1 if both countries share the same official language and adjacency if
they share a common border. 𝜀𝑖𝑗𝑡 is the error term in time t.
All other variables in the model above not included in the standard gravity model for bilateral
trade are included here based on the explanatory power of those variables in determining FDI
flows in previous work. Summary statistics for all variables can be found in table 3 in the
appendix while further variable definitions can be found in table 2.
We estimate our model using Ordinary Least Squares (OLS) method. We include variables from
Kleinert and Toubal (2010) that use factor endowment variables to explain bilateral FDI flows.
They calculate the relative factor endowment as follows:
𝑠𝑖
𝑙𝑖
RFEL= [𝑠𝑖+𝑠𝑗] / [𝑙𝑖+𝑙𝑗]
Where RFEL is the relative labor factor endowment of Mexico to its partner countries.
Si is the skilled labor force of Mexico and Sj is that of the partner country.
Li is the unskilled labor force of Mexico and Lj is that of the partner country.
𝑘𝑖
RFEK=⁡[𝑘𝑖+𝑘 ]
𝑗
Where RFEK is the relative capital factor endowment of Mexico to its partner countries.
Ki is the capital stock of Mexico and Kj is that of its partner country.
c. Data
A panel consisting of twenty six countries from 1985 to 2010 is analyzed in this study. The
complete list of the countries can be found in table 1 in the appendix. FDI data would be
collected from the Organization for Economic Cooperation and Development (OECD) databases.
The GDP data was collected from the World Bank World Development Indicator (WDI). The
Relative Factor Endowment is author computed from data obtained from the World Bank WDI.
Distance data used is the Centre d'Etudes Prospectives et d'Informations Internationales (CEPII)
computation of distance. Other indexes and rankings data are collected from the Heritage
foundation economic freedom index database.
d. Gravity model with Zeroes
We came across problems collecting complete bilateral FDI datasets. The data we collected from
the World Bank WDI included a lot of missing observations. To correct for this problem, zeros
are included to make the dataset more balanced and save the number of observations (Kleinert
and Toubal, 2010). The Mexican FDI outflow is an incomplete data set with many countries with
missing entries for most years. A few countries like the United States have values for all the
years but other countries like Sweden or Argentina have very few or no data entries at all.
e. Results
All results from the OLS regressions can be found in table 4 in the appendix. We find that the
NAFTA variable is significant in most of the models especially the models that contain all
observations from 1985 till 2010 making us believe that Mexican bilateral FDI flows benefit
from belonging to NAFTA. For the sample from 1995 till 2010 the NAFTA variable is only
significant in the last specification where the labor endowment variable is taken out of the model.
In the first specification we find belonging to NAFTA increases Mexico’s FDI flows by 4.5
times the value it would have been otherwise5. In the second specification were we take the
capital endowments into account, NAFTA increases Mexico’s FDI inflows by more than 5 times
its original value. In the third specification the impact of NAFTA on Mexico’s FDI is even
greater at 8.76 times the original value. This value may be somewhat biased because the sample
size is almost half what it was in specification I or II.
The same goes for the OECD, where we find that belonging to the OECD increases Mexico’s
FDI flows by 2.6 times what it would have been with the first specification and increases it by
almost 3 times what it would have been with the second specification. The OECD variable is not
5
We take the antilog of the coefficients in table 4 to get the magnitude of the effect of the dummy variables on
FDI.
significant when the sample size decreases just like the NAFTA variable in specifications III and
IV. We can conclude that Mexico’s membership in the OECD increases its FDI flows but not as
much as its membership in NAFTA does.
We find that unlike Turan and Soritis (2011), the economic freedom variable does not affect the
FDI flows between Mexico and its investment partners. The Relative labor endowment variable
is significant in both models it is used in and has the expected signs leading us to believe that
when Mexico’s labor endowment is relatively greater than that of the partner country, investment
flows tend to increase. The relative capital endowment variable is negative on all models it is
present and we can conclude that if Mexico is relatively more endowed in capital, capital flows
between Mexico and the investment partner would decrease significantly with and elasticity of
0.77.
The adjacency variable is somewhat imprecisely estimated and is barely significant in any of the
specifications. We assume this is because the US is the only country in the sample that is
adjacent to Mexico and the possible effects from this relationship may have been swallowed by
the fact that the US is the other country in NAFTA besides Canada. The language variable is
significant in all specifications of the model and shows that sharing a common language
encourages FDI flows.
7. Recommendations and Concluding Remarks
Belonging to NAFTA is beneficial to Mexico as a small country as suggested by Mollick, et al
(2006). Furthermore, belonging to the OECD seems somewhat beneficial to their investment
flows. Mexico has done well be aligning itself with big countries and forming RTA’s with them.
Mexico can also benefit from relations with other countries that share its official language.
References
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since the Approval of NAFTA." World Bank Economic Review 19.3 473-88. EconLit. Web.
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Kleinert J. and Toubal F. (2010). Gravity for FDI. Review of International Economics 18.1 1-13
. EconLit.Web. 16 Mar. 2013.
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MacDermott, R. (2007). "Regional Trade Agreement and Foreign Direct Investment." North
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Appendix: Tables
Table 1:
Countries included in data set
NAFTA
United States
Canada
Others
Argentina
Denmark
Italy
Norway
Australia
Finland
Japan
Portugal
Austria
France
Korea, South
Singapore
Belgium
Germany
Luxembourg
Spain
Brazil
Greece
Netherlands
United Kingdom
Chile
Iceland
Netherlands
Czech Republic
Ireland
New Zealand
Table 2
Variable
description
Source
FDI
FDI is the net foreign direct investment
OECD StatExtract
inflow to Mexico from the 26 partner
countries.
GDPI
This is the GDP of the home country Mexico
World Bank WDI
for that year
GDPJ
GDP for the host country for each year
World Bank WDI
DIST
Distance from the capital city of each country
CEPII
calculated as the crow flies.
ADJ
1 is the countries share a common border and
CEPII
0 otherwise
LANG
1 if the countries have the same official
CEPII
language, 0 otherwise.
NAFTA
1 if the countries are members of NAFTA, 0
Author computed
otherwise
RFEL
Relative capital factor productivity measured
Assets: World Bank WDI
as the ratio of Mexico’s Capital endowment to
that of its partner country.
RFEK
Relative Labor factor endowment measured
Labor stocks: World Bank
as the ratio or Mexico’s labor (skilled and
WDI
unskilled) to the labor endowment (skilled
and unskilled)of its partner country
TradeFree
The country’s level of freedom to trade
The Heritage Foundation
measured in percentages
BusinessFree
The country’s level of ease of doing business.
The Heritage Foundation
Measured in percentages
InvestRank
The countries investment attractiveness to
The Heritage Foundation
potential partners measured in percentages
OECD
1 if the country is a member of the OECD
(excludes Canada and the US), 0 otherwise
Author Computed
Table 3
Variable
Observations
Mean
SD
Max
Min
FDI
657
518.3754871
1855.94
21611.66
-2453.38
GDPI
728
5272616851
29682782443
1.0944803E1
12944019134
65
0
2
0
8689480755
1.8911777E12 1.44194E13
4537763200
GDPJ
728
07
DIST
728
9376.71
2931.57
16623.59
3267.29
ADJ
728
0.0357143
0.1857045
1
0
LANG
728
0.1071429
0.3095074
1
0
NAFTA
728
0.0714286
0.2577164
1
0
RFEL
343
0.8268168
0.3150999
3.5372762
0.2981718
RFEK
717
0.5328113
0.2694023
0.9976520
0.0378834
TradeFree
438
78.9940639
6.8649550
90.00
51.00
BusinessFree
438
79.8312785
10.7532233
100.00
53.500
InvestRank
438
70.0799087
12.2401787
95.00
45.00
OECD
728
0.8214286
0.3832564
1
0
Table 4
Ordinary Least Squares Estimations
Variable
(I)
(II)
lnGDPI
0.80***
1.27***
(4.97)
(6.12)
lnGDPj
1.07***
0.83***
(13.81)
(8.17)
lnDIST
-0.52*
-0.84***
(1.65)
(2.58)
ADJ
1.10*
0.59
(1.82)
(0.95)
LANG
0.54*
0.63**
(1.83)
(2.15)
NAFTA
1.50***
1.68***
(2.77)
(3.13)
RFEL
RFEK
-0.77***
(3.53)
(III)
1.20***
(2.64)
1.07***
(6.59)
-0.51
(0.94)
-0.75
(0.72)
1.35**
(2.27)
1.49
(1.40)
1.91***
(3.81)
-0.80
(1.63)
1.03***
(3.57)
-46.59***
(8.90)
0.43
528
0.77
(1.33)
-53.60***
(4.64)
0.47
294
TradeFree
BusinessFree
InvestRank
OECD
Intercept
R-Squared
Observations
0.96***
(3.33)
-42.42***
(8.23)
0.42
528
(IV)
0.26
(0.26)
1.02***
(6.30)
-0.56
(1.03)
-0.79
(0.76)
1.30**
(2.20)
1.45
(1.36)
2.11***
(4.16)
-0.95*
(1.92)
0.03
(1.51)
0.01
(0.37)
-0.28
(0.95)
0.84
(1.46)
-27.58
(1.05)
0.48
294
(V)
1.25***
(2.65)
1.09***
(6.59)
-0.43
(0.77)
-0.69
(0.65)
2.01***
(3.45)
2.17**
(2.01)
-0.71
(1.42)
0.50
(0.85)
-56.17***
(4.76)
0.44
294
The values in parenthesis are the t-values. ***, **, * represent 1%, 5% and 10% significance levels
respectively