Changes in the Patterns of External Financing in Mexico
Since the Approval of NAFTA
Alfredo Cuevas, Miguel Messmacher and Alejandro Werner
Banco de México
July 2002
We are grateful to Edgar Madinaveitia, Eduardo Cabal and Gerardo Gómez Ruano for
research assistance, and to Lorenza Martinez, Oscar Sánchez and Enrique Dussel Peters
(and his coauthors at UNAM) for sharing data with us. We thank Luis Servén,
participants in seminars at the World Bank and the Banco de México, and an
anonymous referee for their observations. We are responsible for any remaining errors.
The views presented in this document are our own and do not necessarily reflect those
of the Banco de México.
Introduction
In this chapter we try to identify some of the main effects of the North American Free
Trade Agreement on Mexico-bound capital flows. The expression “free trade
agreement” evokes an image of changes in the patterns and volumes of traffic in all
sorts of merchandise among countries. Naturally, however, commerce is not the only
process affected by trade agreements. Changing trade patterns should be expected to be
associated with modifications in the forms, sources and levels of financing. This may
come about for a number of reasons. Some corporations may desire to invest in a
potential export platform; a firm may find financing opportunities abroad a more
appropriate hedge to foreign exchange risk when its exporting activity increases; a
foreign bank may become more willing to lend to a local firm whose earnings do not
depend exclusively on domestic activity; and so on. Moreover, in the case of NAFTA
there are also direct reasons to expect changes in financing patterns, given that the
agreement contains specific provisions for the liberalization of the rules governing
international investment within the region. Among these, the most important are
national treatment and most-favored-nation privileges for any investor residing in North
America.
Changes in financing can be examined both from a nation-wide perspective and from
the viewpoint of individual firms. Abundant macroeconomic data allows the
documentation of important changes in the composition of the capital account of the
balance of payments that coincided with the incorporation of Mexico into this free trade
area. This is a task we undertake in the first part of this chapter, where we discuss the
well-known increase in the importance of private capital flows, particularly foreign
direct investment and direct external borrowing by nonbank agents, as well as the
growing synchronization between the US and Mexican stock marekts. We will also
argue that some of these effects are not particular to the case of Mexico, and will
present the results of the statistical analysis of an international data set suggesting that
free trade agreements have promoted foreign investments elsewhere too.
The application of this statistical framework to Mexican data yields some interesting
insights. The growth in FDI in recent years has responded both to globalization forces
and to Mexico’s own regional integration in NAFTA. In particular, a conservative
estimate of NAFTA’s influence would suggest that it is responsible for increasing FDI
in Mexico by about 70 percent. However, the increase in FDI observed during the
second half of the nineties has been disappointing relative to what one should have
expected on the basis of global capital markets integration, Mexico’s overall economic
performance, and that country’s entry into NAFTA. The main reason for the relatively
modest performance of FDI may be the halt in the structural reform process in Mexico
since around 1997.
The second part of this paper uses micro-level data to explore the new financing
opportunities that may have become available to firms. This work is of a more tentative
nature because of the scarcity of appropriate firm-level data. All the same, we find an
increasing resort to foreign financing after NAFTA went into effect, especially among
export oriented firms, which were better positioned to take advantage of the new
environment. Similarly, we estimated investment equations and found that, despite a
general intensification of liquidity constraints due to the banking crisis, the
1
liberalization of trade and the consequent increase in exports seem to be associated with
a lessening of liquidity constraints.
In the rest of this introduction we discuss some of the methodological difficulties
researchers face when dealing with a phenomenon such as the one we propose to
analyze. The first difficulty has to do with the proper time frame over which one might
want to look for the effects of NAFTA. The agreement went into effect on January 1,
1994, but that is not the only choice for dating the change in economic policy and
circumstances. The formal start of the negotiation process took place after the approval
of fast-track authority for President Bush’s government in May 1991 (although the
governments of Mexico, Canada and the United States had expressed their intention to
seek an agreement well before that time). Discussions on the main body of the
agreement concluded in 1992; however, by then pressure had emerged to negotiate side
agreements on labor and environmental issues, which were not concluded until 1993.
The agreement went into effect in January 1994, but it provided for the gradual opening
of various sectors of the three economies following a multiplicity of calendars varying
by country and by tariff category (See Mayer 2001). In many cases, the attainment of
full liberalization was expected to take a decade or longer. So, the date of “the” policy
change is not a clearly defined point in time. We will take this into account throughout
the paper, by considering the run up to the agreement as a period in which expectations
of an accord may have affected investment and financing flows. In fact, we will see that
it is possible to identify important changes in financing flows starting in 1991 or 1992,
although it is difficult to attribute these changes to NAFTA, as we discuss next.
A second difficulty is that the 1990s, and especially the period following the entry into
effect of NAFTA, saw significant events and structural changes in the economies of
Mexico and the world with important implications for capital flows. That decade was, in
fact, a period of great instability in Mexico’s external accounts, as Figure 1 shows.
These are some of the key changes that had effects on financing flows that may be
difficult to separate from the impact of NAFTA:
•
The restructuring of Mexican Sovereign debt under the Brady deal in 1990.
•
The privatization program of the government since the beginning of the nineties,
which included the sale of commercial banks.
•
The process of financial liberalization in Mexico during the early 1990s, the
Mexican banking crisis of 1995 and its aftermath.
•
The exchange rate shock of 1994 and the adoption of a floating exchange rate
regime in Mexico.
•
The intensification of international financial flows that is a key part of the
globalization process.
•
The movement toward more investment-friendly policies and more open
markets in a large number of countries.
We will attempt to control for these factors by taking into consideration the domestic
and international contexts and by making comparisons with other countries, especially
2
emerging market economies and countries that have joined free trade areas. Once these
other events and trends are taken into consideration, however, it is still possible to see
the influence of NAFTA on the evolving composition and increasing volume of external
financing coming into Mexico.
40,000,000
30,000,000
20,000,000
Thousands of US dollars
10,000,000
0
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
-10,000,000
-20,000,000
-30,000,000
-40,000,000
Curent Account
Capital Account
Change in Net International Reserves
Figure 1. Mexico: Main Elements of the Balance of Payments
Source: Banco de México.
Macroeconomic Analysis of Aggregated Financial Flows
In this section we start by developing some of the arguments that might be put forward
in support of the hypothesis that NAFTA has promoted the growth of foreign capital
flows into Mexico. In fact, for many observers this was the main purpose of this
agreement from Mexico’s perspective. It was not a matter of liberalizing trade further,
this argument goes, but of creating a legal and economic environment conducive to the
settlement of foreign investors. In fact, as we have mentioned already in the
introduction, a key chapter of the agreement aims to facilitate foreign investment.
Furthermore, trade liberalization was a process that had advanced considerably since the
entry of Mexico into GATT in 1986 –even though Mexico was lagging in other
structural reform areas (see Morley et al, 1999). Later in the section, we look at whether
or not capital flows evolved in the expected direction during the nineties, both before
3
and after NAFTA went into effect. However, we should be careful not to establish a
simple causal relationship between NAFTA and the evolution of the capital account.
Other forces have contributed to shape capital flows into Mexico, and we look at them
in a special subsection. The two most important among these forces are the
globalization of capital markets and the Mexican banking crisis. The first of these
processes helped foreign funds flow into countries such as Mexico, while the second
may have sent Mexican agents in search of alternative financing sources beyond their
country’s borders. Finally, we look in detail at the international experience in the area of
foreign direct investment with the aid of a panel data set. The application of estimates
from the regression analysis of the panel data to Mexican data allows us to measure,
however tentatively, NAFTA’s contribution to the growth in FDI. Roughly, without
NAFTA, the flow of foreign direct investment in Mexico would be only half as high as
it is (all else equal).
What was, or should have been, expected from NAFTA
We will begin by discussing some of the main effects on capital flows into Mexico that
could have been expected from the signing of NAFTA, especially in light of the
investment-related provisions of the agreement. Some of these expectations are
grounded on theoretical arguments, while others are based on the lessons from the
experience of Spain and Portugal, two countries that officially joined the European
Economic Community in January 1986.1
It is possible to formulate some arguments in favor of the hypothesis that NAFTA
would inhibit foreign investment in Mexico. For instance, to the extent that planned or
ongoing investment may have been motivated by a desire to circumvent old trade
restrictions, some capital flows may be rendered unnecessary by the liberalization of
trade flows agreed upon in NAFTA. As for temporary effects, it seems plausible that the
expectation of better investment conditions in the near future created by the negotiation
of the agreement may have led to the postponement of certain undertakings until the
agreement, or some of its clauses, went into force. Also, after 1995 the preference for
foreign credit was subject to opposite influences: on the one hand, the domestic banking
crisis caused domestic credit sources to shrink and thus increased any residual demand
for external credit; but on the other hand the move to a floating exchange rate regime
increased the riskiness of foreign borrowing and may have thus reduced its
attractiveness to Mexican firms.
In contrast, there are good reasons to think that, on balance, NAFTA should promote the
increase in capital flows, especially of FDI, into Mexico:
•
The free trade agreement and the general policy framework of which it is a part
foster a friendly atmosphere for investment. Moreover, by giving a heightened
legal status to the Mexican government’s commitment to open markets, NAFTA
contributes to enhance the stability of the economic and policy environment. The
locking-in of the structural reforms started with membership in the GATT in
1986 was widely considered one of the key benefits of NAFTA (Kehoe and
Kehoe 1994a).
1
Levy-Yeyati, Stein and Daude (2001) offer a useful taxonomy of theoretical links between the freeing of
external trade and changes in foreign investment.
4
•
The policy stability argument also applies to Mexico’s partners: the US
Congressional Budget Office (1993) noted that, as a result of NAFTA, Mexican
producers would “face lower tariffs, fewer quotas and, and greater certainty that
the United States would not suddenly put up protectionist barriers if they
expanded exports.” Naturally, such stability would make Mexico a more
attractive place to invest in export-oriented activities.
•
Being the smallest of the NAFTA partners, Mexico’s cost advantages become
magnified by liberalization of trade in goods, an effect that ought to stimulate
North American investment to locate in Mexico.2
•
Third countries located outside North America should see Mexico as a more
promising exporting platform into the United States as a result of NAFTA, and
may thus want to locate some of their production facilities in Mexico.
•
Mexican firms taking advantage of export opportunities may find it easier --and
more appropriate from the point of view of risk management-- to obtain credit
abroad.
•
The investment chapters in the agreement should facilitate the decision to
establish production facilities in Mexico by firms headquartered in the US and
Canada.
The last item in this list needs further elaboration. Foreign investment in Mexico had
been significantly restricted under the law of 1973, which would be overhauled on the
eve of the inauguration of NAFTA .3 This law was written still under the framework of
the import substitution doctrine that dominated economic policy making in Mexico
during the postwar period. This law, in places echoing the constitution but often going
beyond it, prohibited or limited foreign investment in a number of key sectors of the
economy. In some cases, such as oil, electricity, railroads and telegraphs, state owned
firms were responsible for all activity. In other cases, such as air transportation,
distribution of gas, forestry, and radio and TV, only Mexicans were allowed to invest.
Regarding the economic sectors not reserved for the government or Mexican nationals,
the 1973 law gave the government broad discretionary powers to limit foreign
ownership to 49 percent of the capital of a firm. In December 1993, Congress approved
a new foreign investment law. This new law took into account the investment
framework laid out by NAFTA.
The free trade agreement was respectful of the state monopolies established in the
Mexican Constitution –emphatically, the state control of the oil and electricity
industries. But it did imply the adoption of important principles that improved the
relative standing of foreign investors in Mexico as well as an expansion of the areas
2
Krugman and Hanson 1993 explain this effect with the following example. Imagine a product with such
economies of scale that it ought to be produced in one location only. Suppose that unit production and
transport costs are $9 if production is located in Mexico and $10 if in the US, and that both countries
apply tariffs of $1.5. Then, locating production in the US, where the bulk of this good is consumed,
would achieve the lowest overall cost by avoiding the tariff that would otherwise fall on most units. But
when both tariffs are removed Mexico’s cost advantage will make it optimal to move production there.
3
See Dussel Peters et al (2002).
5
where they could participate. The key principles incorporated in the free trade
agreement were the following (Serra Puche, 1992):
•
The most favored nation (MFN) principle, which ensured that no investor from
outside North America would be granted benefits exceeding those available to
North American investors.
•
The national treatment principle, guaranteeing that there would be no
discrimination among investors from each one of the three members of NAFTA.
•
The absence of trade-related performance requirements for foreign investors.
•
The freedom to buy foreign exchange and to transfer funds across countries
(such as royalties, profits, and dividends) is fully guaranteed.
There were exceptions to these principles, some times only during a transition period.
For example, the automobile industry in Mexico would continue to be subject, for a
period of 10 years, to net export performance requirements. Also, for a period of six
years, there would be a limit on foreign ownership of firms producing auto parts and
components.4 The commercial banking sector was also due to remain, for the six years
following the entry into effect of NAFTA, subject to rules imposing narrow limits on
foreign ownership of individual banks and on foreign participation in the banking
industry as a whole (by the start of the sixth year, the limit on aggregate participation by
US and Canadian investors in the banking system would reach 15 percent). Even after
that period, safeguards could be invoked to impose new limits on foreign ownership of
commercial banks. This safeguard permitted freezing foreign ownership if it were to
exceed 25 percent of total capital in the banking system. The original liberalization
schedule for this sector, however, had to be accelerated to facilitate the recapitalization
of banks after the crisis of 1995. During the following years, a series of legal changes,
including the approval in 1999 of the new deposit protection law, finally resulted in the
full liberalization of foreign ownership in the commercial banking system. 5
The new foreign investment law of 1993, though preserving limitations on foreign
ownership, was more liberal than the 1973 law by adopting the logic that, unless
otherwise determined in the law, foreign investors could participate in any proportion in
the ownership of Mexican corporations. As of 2002, the exceptions, besides those
corresponding to state monopolies, concern largely the following areas: the retail sale of
gasoline, passenger transportation by land, credit unions, development banking, and
radio and TV other than by cable, which are areas reserved for Mexicans. The law also
limits to 49 percent or less the foreign stake in firms operating in the areas of insurance,
air transportation, explosives, fishing, and telephony. In other areas, such as private
education, sea shipping, and the operation of railroads, airports and maritime ports,
foreign investment is allowed to exceed 49 percent with approval by the National
Commission for Foreign Investments. To allow a measure of compromise in some of
these areas, the 1993 law created the figure of “neutral investment.” Neutral investment
4
Car makers had to generate 80 percent of the foreign exchange they required for their imports.
The main beneficiaries of these changes were Spanish. Except for Banamex, recently acquired by
Citicorp, and Banorte, still in Mexican hands, all large Mexican banks are owned by Spanish banks.
5
6
is foreign investment in non-voting shares, and it does not count in the computation of
the proportion of a firm owned by foreign investors.6
4
3.5
3
Percent of GDP
2.5
2
1.5
1
0.5
Portugal
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
0
Spain
Figure 2. FDI inflows into Spain and Portugal, in percent of GDP
Source: World Bank, World Development database.
Besides the specific changes in the laws governing foreign investment, the adoption of
rules of origin for the determination of the goods that could benefit from the preferences
established by the NAFTA also provided new incentives for the location of investments
in the NAFTA region, Mexico in particular. Specific rules of origin are based on at least
one of the following four principles. A good is considered made in the region if a) it is
wholly produced in the region; b) its tariff classification7 is different from that of the
imported inputs used in its production; c) it has a minimum regional content measured
either by the proportion of costs or by the proportion of the sale price; or d) it contains
inputs from outside the region with a cost not exceeding 7 percent of its value. The third
criterion varied by product category, and was in some cases subject to change during an
initial transition period. For example, for an automobile to benefit from tariff
preferences under NAFTA during the first four years of the treaty, more than 50 percent
of its net cost had to be represented by regional components; this floor would be raised
6
E. Dussel (2002) observes that information on neutral investment is difficult to obtain, as it is not
reported in official statistics as foreign investment. This has given rise to some pressure to eliminate this
form of investment by foreigners.
7
Using the harmonized tariff system defined by the Council of Customs Cooperation, based in Brussels.
7
to 56 percent starting in the fifth year of the treaty, and to 62.5 in the ninth year of the
treaty. Rules or origin like this one are meant to prevent trade benefits from leaking to
goods produced largely outside the region. For this reason, their effects should include
an increase in investment in those industries where existing (or prospective) levels of
integration were (would have been) below the threshold levels determined by the rules.
The lesson from the experiences of other countries entering free trade arrangements is
also suggestive of the potential for increased capital inflows. For example, Kehoe and
Kehoe (1994b) explain that for Spain one of the key benefits from joining the European
Community was a large increase in foreign investment: “For the six years before Spain
joined the EC in 1986, that country averaged $1.5 billion per year in foreign investment;
in the six years after it joined, Spain averaged $12.8 billion.” It has also been noted that
in the early 1980s FDI was equivalent to under 10 percent of gross fixed capital
formation excluding construction, and that this proportion rose to over 20 percent in the
1986-1992 period, even though GFCF grew at a real rate of 8 percent during this period
(Bajo-Rubio and López-Pueyo, 1997). Portugal also experienced a large increase in
capital inflows after joining the EC. During 1986-1991, cumulative net foreign direct
investment into Portugal was almost eight times as large as it had been during 19801985. Over two thirds of this capital originated in other EC countries.8
10.0
9.0
8.0
7.0
Percent of total
6.0
5.0
4.0
3.0
2.0
1.0
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
0.0
Figure 3. Combined Share of Spain and Portugal in World FDI Inflows
Source: World Bank, World Development database; and UNCTAD, WIR database.
8
World Bank Development Indicators, various years.
8
As Figure 2 shows, there was a veritable boom in FDI into Spain and Portugal starting
around 1985; however, the boom was not permanent: by the mid-nineties, the FDI to
GDP ratio had returned roughly to the level it had before the accession of these
countries to the European Community. Figure 3 indicates that the post 1985 boom in
FDI into Spain and Portugal was not just a reflection of international trends, and it
suggests that a good proportion of this boom involved a sort of FDI diversion effect,
since the percentage of world FDI inflows going to Spain and Portugal rose for a period
of six or seven years following their entry into the EC, and then fell back again.
Moreover, the monotone decline in these countries’ share in world FDI inflows during
the nineties shown in Figure 3 indicates that the recovery of the FDI-GDP ratios in the
second half of the 1990s in Portugal and Spain shown in Figure 2 was not an event
specific to those to countries, but rather a manifestation or part of the globalization
process. Combined, these figures suggest that a stock adjustment process took place
after these countries joined the EC, with world investors, as it were, rebalancing their
portfolios in favor of Spain and Portugal in a process that lasted several years.
The lesson from Spain and Portugal, therefore, was that Mexico should expect a boom
in foreign investment following its entry into NAFTA, at least for a period of several
years. One possible caveat to the drawing of such a parallel is the difference between
the levels of development of Mexico and its NAFTA partners, which was considerably
more pronounced than the corresponding difference between Spain and Portugal, on the
one hand, and the core countries of the European Community on the other. The larger
imbalance in the case of Mexico and NAFTA, especially in the sense that it involved
large differences in overall levels of education and in the quality of institutions, could
represent a larger obstacle to foreign investment. Moreover, NAFTA, a free-trade area,
was from the start more limited in scope than the European Community, which involved
a closer integration already in 1986 as a customs union and has continued to evolve
toward an even deeper integration since then, including through the unification of labor
markets, the coordination of macroeconomic policies, and the adoption of a common
currency. The European Community (now the EU) also had a series of compensatory
policies in favor of its poorest members, and these policies were complementary to
private investment. Perhaps partly as a result of this fact, outward flows of FDI
originating in European countries have tended to be directed towards other European
nations, a bias not observed to the same extent in other regions.9 These differences
relative to the Spanish and Portuguese experiences suggest that Mexico should not have
expected to obtain as strong an effect from its own integration process as Portugal and
Spain had obtained from theirs (see Berzosa, 2000, and Oyarzún, 2000).
Changes in Capital Flows Observed Around the Time of Implementation of NAFTA
Although the great instability shown by the external accounts through the 1990s makes
data excessively noisy, it is possible to appreciate at least three major changes in capital
flows into Mexico: an increase in the volume of net inflows, an increasing weight of
private agents as recipients of foreign capital, and the strengthening of foreign direct
investment. This constellation of developments is consistent with the expectations of
change in capital movements as a result of NAFTA that were discussed previously.
9
This is not to say that FDI inflows in Europe have been predominantly European. According to Segre
(1998), prior to 1985 the US was the most dynamic source of investment for most countries in the
European Community, and that after 1985 Japan became an increasingly important source.
9
However, there are other possible explanations for some of the changes, as we will
discuss later. (For detailed capital flow accounts see Appendix 1.)
As Figure 1 illustrates, capital inflows increased following the signing of NAFTA. The
capital account reached its maximum of the last twenty years during 1991-1993, when
the current account deficit also was at its widest (except for 1994). As we will see
shortly, it is likely that a part of this increase in capital inflows responded to the
positioning of foreign investors in Mexico in anticipation of the launching of NAFTA,
although other reasons for this increase in inflows can be found in the liberalization of
domestic financial markets and in the privatization program of the government. That
program reached its maximum during 1991-92 with the sale of the phone company, the
commercial banks nationalized in 1982, various large steel works and other enterprises.
Foreign investors participated actively in most of these operations (the main exception
was the sale of banks and of the national phone company, where legal restrictions
strongly favored Mexican buyers). Despite the large drop in the capital account of the
balance of payments after its high of 1993, and with the possible exception of 1996,
during the years following the signing of NAFTA the capital account surplus has
hovered significantly above the level observed before negotiations of a free trade
agreement started in 1991.
35,000
30,000
25,000
Millions of US dollars
20,000
15,000
10,000
5,000
0
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
-5,000
-10,000
-15,000
Capital Account
Consolidated Public Sector
Private Sector
Foreign Direct Investment
Figure 4. Mexico: Main Components of the External Capital Account
Source: Banco de México
10
Also the composition of the capital account balance showed important changes since
1991. As Figure 4 shows, the capital account came to be increasingly a reflection of net
private inflows, which remained positive even at the height of the crisis in 1995. The
behavior of private inflows during the 1990s thus stands in contrast with that observed
during the 1990s, when they were negative most of the time. The reverse change seems
apparent in public sector flows. These showed limited variation between 1982 and
1990, but then oscillated strongly in the 1990s, with high inflows in 1995 reflecting the
international rescue package, and outflows in the second half of the decade when the
government pursued fiscal consolidation and repaid the funds received during the 1995
rescue operation.
15,000
Millions of US dollars
10,000
5,000
0
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
-5,000
-10,000
Commercial Banks
Loans to Nonbank Agents
Foreign Direct Investment
Investment in the Stock Exchange
Figure 5. Mexico: Main components of Private Capital Flows
Source: Banco de México
We can divide the study of the effects of the free trade agreement on private flows in
two stages, the first of which was a boom in portfolio investment that preceded the entry
into effect of NAFTA (Figures 4 and 5). It is possible that one of the reasons for this
boom was that some foreign investors sought to buy into Mexican firms positioned to
take advantage of the strengthened relationship with the US that could already be
anticipated. These flows subsided after 1994. The trajectory of portfolio related flows,
however, is likely to have been influenced also by contemporaneous changes that
11
affected Mexico and other countries. We can mention here the privatization program of
the government and the renegotiation of Mexico’s sovereign debt under the Brady plan,
concluded in 1990 (See World Bank 2002, Appendix 2). Following this renegotiation,
the Mexican government started to issue securities in external markets. The correlation
between the placement of this type of securities and foreign investment in the Mexican
stock market suggests that the latter may have been responding in part to the same
effects as the former (Figure 6).
12,000
10,000
8,000
Millions of US dollars
6,000
4,000
2,000
0
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
-2,000
-4,000
Investment in the Stock Exchange
Public Securities Issued Abroad
Figure 6. Mexico: Some Foreign Capital Flows Received by Public and Private Agents
Source: Banco de México
An additional piece of evidence, albeit indirect, against the hypothesis that the
expectation of NAFTA was a key factor behind the boom in foreign portfolio
investment comes from the behavior of the Mexican stock exchange itself. Figure 7
shows the sector-specific stock indexes that comprise the general stock index. Figure 7
presents these indexes deflated by consumer prices and scaled so they all equal 1 in
May 1991, when the US Congress granted President Bush fast-track authority for the
negotiation of NAFTA. If the anticipation of this agreement had been an important
force, we would have expected the manufacturing10 industry index to exhibit aboveaverage growth. However, this was the least dynamic of all sectors, worse even than
services and retail and wholesale trade, two essentially nontraded sectors that followed
closely the overall performance of the market. (We will look again at the stock market
later, to gauge the change in the comovement between US and Mexican stock prices).
10
This is an approximate translation of the original name of this group, the “industria de transformacion.”
12
The second stage in the process of growth of the private external capital account has
been dominated by the increase in foreign direct investment. As noted earlier, NAFTA
addresses issues of foreign investment explicitly (see Serra Puche 1992 and Borja
Tamayo 2001). The regional investment regime established by NAFTA is based on the
principle that each one of the NAFTA countries should give “national treatment” to
firms from the other NAFTA countries. This principle is supplemented by the adoption
of the “most favored nation” clause. This way, NAFTA residents are entitled to the best
treatment available in each one of the NAFTA countries. The agreement also reduced or
eliminated existing limits on foreign ownership of Mexican firms, and prohibited the
imposition of certain performance requirements on foreign investors (such as export
quotas). All of these factors tended to promote intraregional investment. However, at
least in the case of Mexico, the agreement also seems to have improved the investment
environment for firms headquartered outside the NAFTA region. One of the most
contentious issues during the negotiation of the agreement was the definition of rules of
origin, which determine under which conditions a producer, possibly owned by a
resident of a third country, can take advantage of the benefits established in NAFTA.
These rules were chiefly meant to prevent Mexico from becoming a cheap platform for
exports into the United States originating in third countries. In the end, these rules act as
an encouragement for firms coming from outside North America to establish substantial
operations in the NAFTA region if they wish to take advantage of the free trade
agreement.
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
General Index
Wholesale & Retail
Mining
Comm. & Transport
Manufactures
Services
Oct-1994
Jul-1994
Abr-1994
Ene-1994
Oct-1993
Jul-1993
Abr-1993
Ene-1993
Oct-1992
Jul-1992
Abr-1992
Ene-1992
Oct-1991
Jul-1991
Abr-1991
Ene-1991
Oct-1990
Jul-1990
Abr-1990
Ene-1990
0.0
Construction
Other
Figure 7. Mexico: CPI-Deflated Sector-Specific Stock Price Indexes (May 1991 = 1)
Source: Infosel
13
The empirical evidence tends to confirm the expectation of increased foreign direct
investment flows following NAFTA. Figure 5 indicates that FDI, which was slowly
improving through the second half of the eighties, shows two distinct jumps. The first
one, still modest, took place in 1991, and was again probably associated with the
prospect of an agreement. FDI then plateaus and even trends slightly downward until
the effective implementation of the agreement. Then, the second jump occurs in 1994,
and FDI remains high even during the critical 1995-96 period.
Table 1. Mexico: FDI originating inside and outside North America before and after
NAFTA went into effect
1989-1993
1994-Sep 2001
From North America
In millions of US dollars
Annual Average
In percent of total
13,860
2,772
60.7
64,764
8,096
71.2
From Other Regions
In millions of US dollars
Annual Average
In percent of total
8,967
1,793
39.3
26,228
3,279
28.8
Sources: period 1989-1993, Borja Tamayo 2001, Table 3;
period 1994-2001, Dirección nacional de Inversiones Extranjeras.
The significant increase in the volume of FDI in Mexico after NAFTA went into effect
and the growing dominance of North American investment in Mexico are reflected in
Table 1, an updated version of a table appearing in Borja Tamayo (2001). However, as
it is shown by the change in the annual average inflows reported in that table, other
regions of the world did increase their investment in Mexico following the entry into
effect of NAFTA. This stands in contrast with the results reported for Canada by Borja
Tamayo (2001). That author notes that NAFTA meant a swelling of North American
FDI in Canada, but had virtually no effect on FDI originating outside the region.
A more detailed analysis of FDI in Mexico by country of origin is presented in Table 2.
In that table we can see that two thirds of FDI in Mexico has come from the United
States during the time NAFTA been in effect. The share of American capital in FDI has
been significantly above average during 2000-2001. In 2001 especially American FDI
was boosted by the acquisition of Banamex by Citigroup. Conversely, except for the
period 2000-September 2001, the European Union increased its share in total foreign
direct investment in Mexico since NAFTA went into effect. However, it is not possible
to discern a clearly increasing trend in European investments as we would expect to see
in the run up to the signing of the free trade agreement between Mexico and the
European Union in 2000. Investments of Japanese origin occupy a very distant third
place and show considerable volatility.
14
Table 2. Mexico: Inward Foreign Direct Investment by Place of Origin
Jan.-Sep. Cumulative
2001 '94-sep '01
1994
1995
1996
1997
1998
1999
2000
In millions of US dollars
Total
10,632
8,227
7,689
11,927
7,784
12,165
13,665
18,903
90,992
North America
United States
Canada
European Union
Japan
Switzerland
India
Cayman Islands
South Corea
Netherlands Antilles
Other
5,564
5,394
170
1,827
156
200
51
29
104
70
226
5,694
5,178
516
1,128
139
80
286
49
86
63
164
7,517
7,281
236
3,140
350
29
29
330
191
9
332
5,287
5,106
181
1,991
99
19
0
106
50
6
226
7,320
6,747
573
3,151
1,231
106
0
90
44
3
220
11,170
10,623
547
1,605
416
101
27
97
20
17
212
16,518
15,989
529
1,945
62
63
-1
60
18
22
216
64,764
61,271
3,493
16,721
3,084
652
1,611
854
528
659
2,119
Growth rates
Total
-22.6
-6.5
55.1
-34.7
56.3
12.3
n.a.
North America
United States
Canada
European Union
Japan
Switzerland
India
Cayman Islands
South Corea
Netherlands Antilles
Other
-2.3
8.9
-77.1
-5.5
-75.3
270.4
-95.8
-68.8
593.3
-85.1
-56.8
2.3
-4.0
203.5
-38.3
-10.9
-60.0
460.8
69.0
-17.3
-10.0
-27.4
32.0
40.6
-54.3
178.4
151.8
-63.8
-89.9
573.5
122.1
-85.7
102.4
-29.7
-29.9
-23.3
-36.6
-71.7
-34.5
-100.0
-67.9
-73.8
-33.3
-31.9
38.5
32.1
216.6
58.3
1,143.4
457.9
n.a.
-15.1
-12.0
-50.0
-2.7
52.6
57.4
-4.5
-49.1
-66.2
-4.7
n.a.
7.8
-54.5
466.7
-3.6
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
North America
53.6
67.6
74.1
63.0
67.9
United States
46.6
65.6
67.3
61.0
65.6
Canada
7.0
2.1
6.7
2.0
2.3
European Union
18.2
22.2
14.7
26.3
25.6
Japan
5.9
1.9
1.8
2.9
1.3
Switzerland
0.5
2.4
1.0
0.2
0.2
India
11.5
0.6
3.7
0.2
0.0
Cayman Islands
0.9
0.4
0.6
2.8
1.4
South Corea
0.1
1.3
1.1
1.6
0.6
Netherlands Antilles
4.4
0.9
0.8
0.1
0.1
Other
4.9
2.7
2.1
2.8
2.9
Source: Dirección Nacional de Inversiones Extranjeras and author´s calculations
60.2
55.5
4.7
25.9
10.1
0.9
0.0
0.7
0.4
0.0
1.8
81.7
77.7
4.0
11.7
3.0
0.7
0.2
0.7
0.1
0.1
1.6
87.4
84.6
2.8
10.3
0.3
0.3
0.0
0.3
0.1
0.1
1.1
71.2
67.3
3.8
18.4
3.4
0.7
1.8
0.9
0.6
0.7
2.3
Shares in total
Total
5,694
4,953
741
1,934
631
54
1,219
93
15
469
523
100.0
Other Factors that Contributed to the Observed Changes in Capital Flows
Were the trends described in the previous section in any way typical of the times, or did
they distinguish Mexico from other countries? In this section we will discuss other wellknown forces that, besides NAFTA, lie behind the behavior of capital flows into
Mexico during the 1990s. We focus our attention on globalization and on the Mexican
banking crisis.
15
Global trends
Essentially, no developing country received significant amounts of foreign portfolio
investment before 1989. But starting in 1989, and especially since 1991, portfolio
investment into many developing economies grew dramatically. As Figure 8 illustrates,
in this trend Mexico (shown by the heavy line) had a leading role during the years of
negotiation of the free trade agreement. In 1993 alone, Mexico received US$14 billion
in this type of investment. In that chart, the flows into a group of emerging economies
from different regions show that portfolio flows became important during the 1990s.
But these inflows exhibit the most explosive growth in the case of Mexico before 1994.
By the second half of the past decade, however, Mexico seemed to have ceased being a
prime destination of portfolio investment.
16,000
14,000
12,000
Millions of US dollars
10,000
8,000
6,000
4,000
2,000
0
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
-2,000
Argentina
Brazil
Chile
Hungary
Korea, Rep.
Malaysia
Mexico
Peru
Poland
Thailand
Figure 8. Portfolio Equity Flows into Selected Countries
Source: World Bank
FDI flows into developing countries have a longer history than portfolio flows; but in
this case too the overall trend during the 1990s was one of growth, as Figure 9
illustrates. Once more, however, Mexico –represented in that chart by the heavy line—
seems to have been running ahead of many other emerging market countries. This is
particularly clear starting in 1994, when Mexico-bound FDI jumps up. This discrete
change in the behavior of FDI in Mexico contrasts with the gradual increase seen in the
flows going elsewhere. Nevertheless, as in the case of portfolio flows, other countries
16
have eventually overtaken Mexico as recipients of FDI. In particular, the main Mercosur
partners, Brazil and Argentina, became important destinations for foreign investment in
the last years of the 1990s. Part of the apparent switch in the places of Mexico and
Brazil or Argentina as recipients of FDI reflects the timing of privatization activity. By
1994, Mexico was essentially finished with its main privatizations (those of the phone
company and the banking system), whereas privatization activity remained important in
Brazil and Argentina well after that. Not only timing was important; it was also a matter
of volume, as the Mexican privatization program, important as it was, was considerably
smaller than the Brazilian and even the Argentine ones. In particular, the Argentine
government sold its remaining stake in the national oil company to Repsol of Spain in
1999 in an operation worth over US$15 billion. Besides selling some electric utilities,
Brazil auctioned off numerous licenses for the operation of long distance carriers and
mobile telecommunications companies in 1998, which explains a large proportion of the
high level of FDI experienced by that country in 1998-1999.
35,000
30,000
25,000
Millions of US dollars
20,000
15,000
10,000
5,000
0
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
-5,000
Argentina
Brazil
Chile
Hungary
Korea, Rep.
Malaysia
Mexico
Peru
Poland
Thailand
Figure 9. FDI inflows into Selected Countries
Source: World Bank
17
Table 3. Inward Flows of FDI by Receiving Region
Average
1990-91
Average
1992-93
Average
1994-95
Average
1996-97
Average
1998-99
2000
Average
1996-2000
World
180.8
188.0
270.3
428.0
884.0
1,271.0
779
Developed countries
Developing Countries
141.9
37.5
121.7
61.8
168.0
93.3
245.6
166.0
656.5
205.0
1,005.2
240.0
562
196
South, East and Southeast Asia
China
Hong Kong
South Korea
Other
20.3
3.9
1.1
1.0
14.2
36.8
19.3
1.9
0.7
15.0
59.3
35.6
2.1
1.2
20.5
93.5
42.0
11.0
2.5
38.0
91.0
42.0
20.0
8.0
21.0
137.0
41.0
64.0
10.0
22.0
101
42
25
6
28
Latin America
Argentina
Brazil
Mexico
Other
12.1
2.1
1.0
3.6
5.3
18.6
5.2
1.7
4.4
7.3
25.9
2.6
4.0
7.5
11.9
58.5
8.1
14.9
11.4
24.2
96.5
15.7
30.0
11.8
39.1
86.0
11.2
33.5
13.2
28.1
79
12
25
12
31
Other Developing Areas
5.1
6.4
8.1
14.0
17.5
17.0
16
Central and Eastern Europe
1.4
4.6
9.0
16.4
22.5
25.8
21
World
100
100
100
100
100
100
100
Developed Countries
Developing Countries
78.5
20.8
64.7
32.8
62.1
34.5
57.4
38.8
74.3
23.2
79.1
18.9
72.1
25.2
11.2
2.2
0.6
0.5
7.9
19.6
10.3
1.0
0.3
8.0
21.9
13.2
0.8
0.4
7.6
21.8
9.8
2.6
0.6
8.9
10.3
4.8
2.3
0.9
2.4
10.8
3.2
5.0
0.8
1.7
13.0
5.4
3.2
0.8
3.6
Latin America
Argentina
Brazil
Mexico
Other
6.7
1.2
0.6
2.0
2.9
9.9
2.8
0.9
2.3
3.9
9.6
0.9
1.5
2.8
4.4
13.7
1.9
3.5
2.7
5.6
10.9
1.8
3.4
1.3
4.4
6.8
0.9
2.6
1.0
2.2
10.2
1.5
3.2
1.5
4.0
Other Developing Areas
2.8
3.4
3.0
3.3
2.0
1.3
2.1
Central and Eastern Europe
0.8
2.5
3.3
3.8
2.5
2.0
2.7
Shares in FDI Received by Developing Regions
Developing Countries
100
100
100
100
100
100
100
In Billions of US Dollars
Shares in Total FDI
South, East and Southeast Asia
China
Hong Kong
South Korea
Other
South, East and Southeast Asia
China
Hong Kong
South Korea
Other
54.1
10.5
3.0
2.6
38.0
59.6
31.3
3.0
1.1
24.2
63.6
38.2
2.2
1.2
21.9
56.3
25.3
6.6
1.5
22.9
44.4
20.5
9.8
3.9
10.2
57.1
17.1
26.7
4.2
9.2
51.5
21.3
12.8
3.2
14.3
Latin America
Argentina
Brazil
Mexico
Other
32.3
5.7
2.8
9.7
14.1
30.1
8.5
2.7
7.1
11.8
27.8
2.7
4.2
8.0
12.8
35.2
4.9
8.9
6.9
14.5
47.1
7.7
14.6
5.7
19.1
35.8
4.7
14.0
5.5
11.7
40.3
6.0
12.5
6.1
15.7
Other Developing Areas
13.6
10.3
8.7
8.4
8.5
7.1
8.1
Source: UNCTAD World Investment Reports 1995, 2000 and 2001 and authors' calculations.
18
The growth of FDI in developing countries, however, has lagged behind the growth of
FDI in advanced economies in recent times. Table 3 shows that, after rising
dramatically in the early nineties, the share of FDI going to developing economies has
fallen back to levels not seen since the second half of the nineties. This shrinkage masks
important changes in the destination of FDI inside the developing world. Thus, Hong
Kong and Brazil have become key recipients of FDI, while most other developing
regions have seen their participation in FDI flows fall in the last years of the past
decade. In particular, Mexico’s share in global FDI seemed to rise first in the run-up to
NAFTA (which coincided with the height of privatization program, as we have
observed), then to reach its maximum during the initial years of NAFTA, when it
reached a level of 2.8 percent, only to fall back to under 1.5 percent after 1997. (Despite
its visibility, India’s share of FDI remains small enough that it does not enter Table 3.)
70.0
60.0
50.0
Percent
40.0
30.0
20.0
10.0
0.0
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
-10.0
Canada
Europe
Mexico
Asia and Pacific
Latin America w/o Mexico
Figure 10. US Investment Abroad by Receiving Region
Source: US Department of Commerce
Even Mexico’s share of American investment abroad is small, as inspection of Figure
10 shows (as usual, Mexico is represented by the heavy line). This share jumped up in
2001 due to the Banamex transaction, but it is not clear that the share will stay at its
2001 high. In that sense, what seems more remarkable is the stability of the Mexican
share of US investment abroad since the late 1980s. Throughout the nineties, the US
stepped up and stabilized the proportion of its investment going to Europe and Canada,
left the share going to Asia more or less unchanged, and dramatically reduced the share
of its external investment that went to Latin America. In that regard, it appears that
NAFTA prevented the repetition of this trend in the case of investment in Mexico.
19
Table 4. Mergers and Acquisitions (Sales) and Greenfield FDI Inflows
1996
1997
1998
1999
2000
Average
1995-2000
227
305
532
766
1,144
527
165
16
189
35
235
65
445
81
681
74
1,057
70
462
57
South, East and Southeast Asia
China
Hong Kong
South Korea
Other
6
0
2
0
4
10
2
3
1
4
19
2
7
1
9
16
1
1
4
10
28
2
4
10
12
21
2
5
6
8
17
2
4
4
8
Latin America
Argentina
Brazil
Mexico
Other
9
2
2
1
4
21
4
7
1
9
41
5
12
8
16
64
10
29
3
21
42
19
9
1
12
45
5
23
4
13
37
8
14
3
13
Other Developing Areas
1
4
5
1
3
3
3
Central and Eastern Europe
6
4
6
6
11
17
8
World
59.2
60.1
63.8
76.7
71.3
90.0
70
Developed countries
Developing Countries
81.0
16.0
85.9
23.9
86.5
34.5
92.1
43.0
82.1
33.2
105.2
29.0
89
30
South, East and Southeast Asia
China
Hong Kong
South Korea
Other
9.7
1.1
81.1
12.8
16.6
11.1
4.8
29.7
28.2
11.5
18.8
4.2
66.6
27.9
20.9
18.4
1.8
6.3
79.5
46.1
29.6
6.0
16.7
91.5
59.0
15.4
5.5
7.5
64.5
34.6
17
4
35
51
31
Latin America
Argentina
Brazil
Mexico
Other
32.5
47.9
36.2
10.3
39.6
44.6
51.6
59.4
15.9
47.0
57.9
50.4
64.5
57.4
56.2
77.0
142.4
103.1
25.9
59.4
38.1
80.5
29.8
7.2
29.0
52.6
47.1
68.7
30.0
46.2
50
70
60
24
46
Other Developing Areas
13.0
40.4
28.7
5.2
20.0
19.6
21
Central and Eastern Europe
49.9
27.3
28.2
26.4
48.7
65.6
41
Estimated Greenfield FDI (FDI Inflows minus M&A Sales, in billions of US dollars)
128
151
173
161
309
127
175
1995
World
Mergers and Acquisitions (billions of US dollars)
187
Developed countries
Developing Countries
M&A as a Percent of FDI Inflows
World
Developed countries
Developing Countries
39
84
31
110
37
122
38
107
149
148
-52
170
40
124
South, East and Southeast Asia
China
Hong Kong
South Korea
Other
59
37
0
1
20
78
38
8
1
31
80
42
4
2
32
70
43
14
1
12
68
38
21
1
8
116
39
59
4
14
79
39
18
2
20
Latin America
Argentina
Brazil
Mexico
Other
18
2
3
6
7
25
3
4
8
10
30
5
7
6
13
19
-3
-1
9
14
68
5
22
11
30
41
6
10
9
15
34
3
8
8
15
7
7
12
18
13
14
12
16
12
9
11
Other Developing Areas
Central and Eastern Europe
6
10
14
Source: UNCTAD World Investment Reports 2000 and 2001 and authors' calculations.
20
One of the reasons that Mexico’s participation in the flow of FDI appears to be
relatively lower than one might expect is the combination of two factors: the increasing
importance of mergers and acquisitions (M&A) in the global flows of FDI, and the
relative bias towards greenfield FDI in Mexico.11 Table 4 presents information from
UNCTAD on M&A sales by region and country. The table also presents estimates of
Greenfield FDI obtained by subtracting M&A from net inflows of FDI. This estimation
is only approximate, because, due to methodological problems, reported M&A sales
activity is not strictly a subset of FDI inflows. Table 4 shows that M&A activity has
been growing faster than overall FDI, as noted by the increasing proportion of FDI
accounted for by M&A. In contrast, the bottom panel shows that Greenfield FDA has
been relatively stagnant, displaying an inverted U shape interrupted by the year 1999,
which looks like an outlier. M&A activity has been highly important in developed
countries through the entire period covered in table 4. Among developing countries,
M&A operations seem to have been most important in Latin America, and especially in
Brazil and Argentina. This is in large part a reflection of privatization activity in those
countries, as we explained above.
For our purposes, the most remarkable piece of information from Table 4 is the very
limited role of M&A activity in Mexico for most of this period. In every one of the
years covered in the table, M&A is a smaller proportion of total FDI inflows in Mexico
than in Latin America as a whole -- and much lower than in Brazil in particular. In four
of the six years covered, and on the entire period, the proportion of M&A in Mexico is
lower than it was for the average developing country. When discussing Table 3, we had
remarked that Mexico’s share in global FDI inflows had been falling during the second
half of the nineties. Now Table 4 makes clear that this was due to the fact that Mexico
was not participating of the growth in M&A activity. In fact, using the information in
the bottom panel of Table 4 we can see that Mexico’s share in total greenfield FDI
shows no discernible trend, oscillating around a mean of 4.6 percent and in fact,
climbing as high as 7.3 percent of world greenfield FDI in 2000.
Finally, Table 5 shows FDI as a ratio of gross capital formation. From our previous
discussion, it is clear that we do not mean to imply that all (and not even most) FDI are
reflected in new physical investments. Table 5 is just mean to compare FDI with a
reasonable metric, in this case capital formation. Now, what this table indicates is that
the importance of FDI relative to investment increased during the second half of
the1990s throughout the world.12 While this tendency was truly global, it seemed more
pronounced in the advanced economies and in Hong Kong. Mexico did participate in it,
as is especially apparent for the years 1996-97, but it was by no means an exceptional
case. Once again this is a reflection of Mexico’s declining share in global FDI inflows.
All the same, it should be noted that the high level shown by the ratio of FDI to capital
formation in Mexico during 1985-1995 could reflect in part the large privatizations that
took place during the Salinas administration.
11
As their names indicate, greenfield and M&A forms of foreign investment are different in their
immediate economic effects, with the first one implying the actual formation of capital and the second
involving the transfer to foreign investors of ownership over existing corporations. See Calderón, Loayza
and Servén (2002).
12
In Table 5, we have grouped together Central European countries with the developed economies, which
tends to exaggerate the apparent rise in this ratio for that group of countries. But this is not relevant to the
comparison among Mexico, the world, and developing nations.
21
Table 5. Inward Flows of FDI as Percentages of Gross Fixed Capital Formation, by
Receiving Region
Average
1985-1995
1996
1997
1998
1999
Average
1996-1999
World
4.0
5.9
7.5
10.9
16.3
10.2
Developed countries
Developing Countries
3.8
4.7
4.8
9.1
6.2
10.9
10.6
11.7
17.1
13.8
9.7
11.4
South, East and Southeast Asia
China
Hong Kong
South Korea
Other
6.0
6.4
18.9
0.9
7.2
9.1
14.3
21.7
1.2
7.4
9.8
14.6
19.8
1.8
8.4
10.5
12.9
29.9
5.5
6.5
11.2
11.3
60.2
9.3
5.8
10.2
13.3
32.9
4.5
7.1
Latin America
Argentina
Brazil
Mexico
Other
5.7
7.5
2.1
10.5
6.4
12.3
13.2
7.0
15.5
18.0
15.9
15.4
11.7
17.7
19.8
17.6
11.0
18.4
13.2
22.0
27.3
47.7
31.3
11.7
28.5
18.3
21.8
17.1
14.5
22.0
1.9
4.4
6.6
6.0
4.6
5.4
Other Developing Areas
Source: UNCTAD World Investment Reports 2000 and 2001 and authors' calculations.
Events affecting the domestic banking system
The nature of external borrowing changed during the 1990s, as we saw earlier with the
aid of Figure 3. Private nonbank agents had been net repayers of external debt during
the 1980s, but starting in 1990 they became net takers of foreign loans. This behavior
became entrenched as the decade progressed, to the extent that direct foreign borrowing
by nonbank agents became the second largest source of external capital starting in 1998.
These developments stand in contrast with the shrinking role of banks in the
intermediation of foreign capital associated with the onset of the banking crisis in 1995.
To understand them, it is useful briefly to recall some of the main events in the banking
system in the 1990s.
The first half of the 1990s produced a strengthening of the role of the domestic banks in
the market for private credit. Since the beginning of the 1990s a process of liberalization
took place in the banking industry, including the privatization of commercial banks and
the elimination of mandatory reserve requirements and directed credit.13 At the same
time, the net debt of the public sector to the banking system shrank dramatically from
the equivalent of 20.9 percent of GDP in 1989 to about 5.5 percent of GDP in 1994, in
large part as a consequence of the government’s privatization revenues, fiscal
adjustment, and debt management strategy. As noted earlier, this strategy included the
issue of securities abroad following the Brady renegotiation, and some of the funds thus
borrowed were used to reduce public indebtedness to domestic banks. In addition, as
Figure 3 shows, commercial banks borrowed substantial amounts abroad over the 19891994 period. All of these convergent processes, along with the liberalization of
financial markets in Mexico, produced a major enhancement in the intermediation of
13
Morley et al (1999) have developed a financial liberalization index running from zero to 1. On this
scale, Mexico went from 0.609 in 1988 to 0.99 by 1990.
22
resources of foreign origin by commercial banks in the first half of the 1990s. The
counterpart of these forces was the increase in domestic bank credit to the private
nonbank sector. Thus, between 1989 and 1995, the private sector went from being a
creditor of the banking system (with a net position of 4 percent of GDP) to being a net
debtor of the banks (with a net position of –4.5 percent of GDP).14 This change in the
balance sheets of the banks made them increasingly vulnerable to the type of shocks that
rocked the economy in 1994. By then, the banks’ balance sheets seemed to be well
hedged in terms of the currencies in which assets and liabilities were denominated.
However, some “foreign-currency denominated assets” were in reality loans to domestic
firms with no significant source of foreign-currency income and complex securities
such as the exotic derivatives discussed by Garber and Lall (1996), which carried
foreign exchange risks.15
The currency and financial crisis that broke out at the end of 1994 led a large number of
debtors to stop servicing their loans to the banking system. The proportion of nonperforming to current loans went from 9.8 percent at end-1994 to 28.5 by end-1995.
Starting in 1995, the government pursued a strategy to prevent a systemic crisis that
included the extension of full deposit guarantees; a debtor support program featuring
restructurings involving the redenomination of loans in indexed units; enhanced
supervision, accompanied by bank interventions and liquidations; the acceleration of the
liberalization of the rules governing foreign ownership of banks; the exchange of bonds
issued by the deposit insurance agency (FOBAPROA) for nonperforming bank loans
subject to the condition that bank owners should contribute to recapitalize their
banks;the temporary capitalization of banks through the purchase by FOBAPROA of
subordinated, convertible bonds issued by banks with low capital/asset ratios; and a
dollar liquidity facility for those banks with high levels of foreign currency liabilities
(which was not a major problem, since preexisting regulations had succeeded in limiting
the extent of foreign currency risk taken on by banks). As a result of this strategy, the
banks ended up with very large quantities of FOBAPROA bonds in their portfolios and
became dependent on these assets.16
Bank credit to the private sector never recovered from that crisis. Commercial banks’
assets fell from 39 percent of GDP in 1995 to only 25 percent in 1999, a proportion
lower than the Latin American average, as Gonzalez Anaya and Marrufo (2001) have
observed. Credit to the private sector was a decreasing slice of this dwindling pie:
Serrano (2001) estimates that commercial bank credit to the private sector shrank from
25 percent of GDP in 1996 to 6.6 percent in 2000, and that by mid 2001, virtually one
half of the bank loans in good standing were owed by the public sector, including the
government and the deposit insurance agency. As a consequence of the collapse in bank
credit to the private sector, private agents have had to look for new sources of finance,
including direct external borrowing and suppliers loans. Thus, the collapse of domestic
bank credit has doubtless led to an increase in demand for external credit by Mexican
residents which contributes to explain the behavior of external capital flows (especially
direct external borrowing) that we have described above. However, it would be virtually
impossible to quantify the exact influence of these demand factors on the evolution of
the external capital account.
14
For an account of this period, see Hernández and Villagómez 2001.
By the close of 1994, the depreciation of the currency caused this part of the banks’ loan portfolio to
balloon to over 40 percent of the total.
16
See Banco de Mexico 1996.
15
23
A statistical look at the importance of regional trade agreements, with an application to
Mexico
In the first two parts of this section this section we use regression techniques to look at
the influence of membership in a free-trade area on foreign direct investment, and then
use our estimates to try to gauge the relative contribution of regional integration,
globalization, and other factors to the evolution of FDI in Mexico. The most
straightforward results we obtain are that joining a free trade area will generally help
promote FDI, and that this has indeed been the case in Mexico. Looking at the Mexican
case more closely, however, three tentative conclusions can be drawn. Firstly, NAFTA
and the rest of the trade agreements signed by Mexico seem to have led to an increase of
between 40 and 70 percent in FDI relative to what it would have been on a
counterfactual scenario without trade agreements. Secondly, globalization seems to
have made a larger contribution to the growth of FDI in Mexico than NAFTA. And
third, in the latter half of the nineties Mexico received less FDI than our models would
have led us to expect. This disappointing performance of foreign investment may well
be related to the slow progress in some structural reform areas experienced since
approximately 1997. In the last part of the section we take a look at stock market data
from the US and Mexico in search of evidence of increasing co-movement between
stock prices since NAFTA went into effect. The conclusion from that section is that
movements in Mexico’s stock price data seem to be increasingly explained by the
evolution of American stock prices, a result consistent with the deeper integration of
financial markets in the region.
Panel Regressions of FDI
Our approach in estimating regressions is similar to that of Levy-Yeyati, Stein and
Daude (2001), who fitted a gravity model to bilateral FDI flows data. In their basic
model, the stock of direct investments by residents of country A in country B depends
on gravitational factors represented by the gross domestic products of the two countries
and geographic distance, and on dummies for common membership in a free trade area
and common language, which attempt to measure reductions in economic distance. In
addition, they include two variables measuring “extended market effects.” The first one,
expected to make investment in B more attractive, is the sum of the gross domestic
products of all countries that have free trade agreements with B. The second extended
market variable is the sum of all the gross domestic products of countries that have free
trade agreements with A. This last variable, therefore, represents the menu of options
open to investors residing in country A, and its growth is expected to divert investment
away from country B. This model yields results supporting the idea that regional
integration and membership in a free trade area promote bilateral FDI.
We estimate a model to explain the behavior of total (net) inflows of FDI into each
country, rather than bilateral stocks, and so we must construct our extended market
variables differently. Also, we include some indicators of macroeconomic stability and
a direct measure of the globalization process. The data set we use is a panel of 45
countries with observations over the period 1980-1999 (the list of countries constitutes
Appendix 2). The free trade areas we considered for the construction of these variables
are largely the same blocks studied by Frankel and Wei (1998). These are ASEAN,
EFTA, what today is the EU, NAFTA, the Group of Three, the Andean Group in its
24
recent revival, Mercosur, and COMESA. In this regard, we considered joining the EU
from EFTA a jump in the FTAMEM variable, and did only considered COMESA’s
upcoming upgrading as a free trade area for the construction of EXFTAMEM.
Our dependent variable is total net inflows of FDI into a country measured in constant
(1995) dollars. We run the regressions in logarithms to aid interpretation, but we will
have the occasion to revert to levels to illustrate the implications of our results for
Mexico. The list of right-hand side variables includes two dummy indicators of
participation in free trade agreements. FTAMEM is a dummy taking on a value of 1 if
the country was officially a member of a free trade area in a given year. EXFTAMEM,
representing the expectation of joining a free-trade area, takes on a value of 1 during the
two years preceding the country’s entry into a free trade area.17 In addition, we
constructed extended market variables to capture the positive and negative effects of
integration on FDI mentioned above. FTAGDP is the sum of the gross domestic
products of all countries with which a given (“index”) country has free trade agreements
and the GDP of the index country itself (PARTNERGDP excludes this last quantity).
For the investment diversion effect we constructed an overall measure of integration,
INTEGRATION. This is a weighted sum of the gross domestic products of all countries
in the sample which belong to a free trade arrangement. The weights are the proportion
of total sample GDP covered by its trade agreements. Thus, Chile’s GDP is already
included in this measure; but if it reaches and agreement with the US, its coefficient in
the sum will rise. Eventually, if all countries in the sample signed free trade agreements
with one another, INTEGRATION would equal the value of aggregate sample GDP. At
a particular country, if it has a constant level of FTAGDP, an increase in
INTEGRATION would signal stronger competition from other countries. This should,
ceteris paribus, make the focus country less attractive for global investors. 18 Therefore,
we expect the coefficients of the free-trade dummies and of FTAGDP to be positive,
and that of INTEGRATION to be negative.19
As noted earlier in this paper, the bulk of FDI flows among rich countries, and we
wanted to measure this effect. The variable we used, RELGNIPH, is a measure of how
well off a citizen of a country is, regardless of how big that country’s economy may be.
This variable is the ratio of a country’s PPP-adjusted per capita gross national income to
that of the United States. So, if GDP captures the size of an economy, RELGNIPH
measures the prosperity of its citizens relative to that of their American contemporaries.
Our earlier discussion leads us to expect that this variable will have a positive
coefficient. Size itself, measured by both GDP and exports (which also captures the
outward orientation of an economy), should have a positive impact on FDI inflows.
17
We tried several variations on the form of this variable, such as using 1-and 3-year lengths for the
anticipation period (instead of 2), and using leads of partner GDP instead of dummy variables. These
changes don’t affect the overall fit of the regressions nor the estimated coefficients of the other variables
in any major way. The various representations of the expectation of an upcoming FTA are significant in
most cases. Appendix 3 shows regression 2 from Table 6 along with similar regressions where the
expectations variable is measured in the several ways we have explained in this footnote.
18
In principle, this variable should be able to handle some cases that might give trouble to the investment
diversion variable in the model of Levy-Yeyati et al (2001). That model has trouble capturing the adverse
competitive effects that might arise among third-party countries. For example, when Brazil joined
Argentina in Mercosur in 1991, they became more attractive to third party-investors who might also have
been considering investing in other countries in the region (say, Chile). Our variable would show no
change in Chile’s FTAGDP, while reporting an increase in INTEGGDP.
19
All variables with a monetary dimension, such as FTAGDP and others that will be mentioned below,
are measured in constant dollars and then expressed in natural logs.
25
The rest of the explanatory variables in our regressions are controls. Many of these
variables are meant to capture important elements of the investment environment such
as macroeconomic stability and good economic policy management. This is the case of
the external current account balance (CURRENT) and the budget surplus
(BUDGETBAL), both measured in percent of GDP, and of consumer price inflation and
real growth of output (GDPGRWTH). As controls for the state of the world in any
given year we use the rate of real growth in global output, WORLDGRTH, and the level
of the one-year treasury bill rate in the US. This variable can also be viewed as a
measure of the opportunity cost of investing. The key scale variable is the aggregate
level of inward foreign direct investment flows in the world, FDIWORLD. This
variable serves as control for the increasingly important globalization forces.
The regressions were estimated using a fixed-effects model. Fixed effects techniques are
standard for this type of setting, and seem better advised than the random effects model
because they do not rely on the assumption of the lack of correlation between the
identity of the country (i.e., the “random” effects) and the explanatory variables
(Greene, 1990). The first set of regressions is reported in Table 6, where each one of the
numbered columns represents a variant of our estimated model. Our preferred
specification is that of the second column, where we have avoided the redundancy
between FTAMEM and FTAGDP observed in the first column. The sign of FTAMEM
in that first column is in fact contrary to expectations; but it is not significant. The third
and fourth columns show variants of columns one and two where we have replaced
FTAGDP with PARTNERGDP. The bottom panel of the table indicates that all
regressions have reasonably good fit for a panel data set.
The coefficients of the variables measuring different aspects of the free-trade
dimension, which are the main focus of our attention, strongly support the notion that
entering a regional trade block should lead to higher FDI inflows. All regressions
confirm that the expectation of joining a free trade area has a positive impact on foreign
investment. In no regression is the coefficient of this variable lower than one third,
indicating that announcing an imminent entry into a larger regional market raises
investment by that proportion, and it is significant in all. The fact that the free trade area
dummy has a statistically insignificant coefficient is a reflection of the inclusion of a
more direct measure of integration in the form of FTAGDP. The elasticity of foreign
investment with respect to this extended market variable is approximately between one
tenth and one seventh, which is not necessarily low when we consider the fact that
joining a free trade area produces a discrete hike in the value of FTAGDP. If a country
joins a free trade area five times as large as the country itself, it can expect FDI inflows
to rise by one half or more. The only surprise is the absence of an investment diversion
effect. INTEGRATION has positive but insignificant coefficients. This may be due to
the fact that this variable has no inter-country variability, and thus cannot capture all of
the competitive effects that are suffered by individual countries.
26
Table 6. Fixed-Effects Regressions of the Ln of FDI Against Membership in a Free
Trade Area and Other Variables (t-stats under each coefficient)
Variable \ Model
FTAMEM
1
2
-0.254
-1.160
EXFTAMEM
RELGNIPH
0.332
1.667
3
4
0.038
0.175
0.406
2.153
0.360
1.799
0.348
1.845
-1.959
-1.752
-1.940
-1.966
-1.634
-1.477
-1.612
-1.646
0.034
2.961
0.033
2.881
0.032
2.808
0.032
2.827
INFLATION
0.000
-1.168
0.000
-1.337
0.000
-1.546
-0.001
-1.540
BUDGETBAL
-0.033
-2.252
-0.031
-2.159
-0.033
-2.237
-0.330
-2.286
CURRACCT
-0.040
-3.679
-0.400
-3.691
-0.041
-3.767
-0.041
-3.766
WRLDGRWTH
-0.084
-2.038
-0.081
-1.967
-0.083
-2.002
-0.083
-2.019
US1YTBILL
0.004
0.207
0.006
0.287
0.004
0.188
0.004
0.179
EXPORTS
0.723
3.298
0.690
3.174
0.719
3.268
0.724
3.329
FDIWORLD
0.774
6.668
0.770
6.629
0.794
6.821
0.795
6.844
GDP
0.243
1.006
0.280
1.170
0.353
1.490
0.353
1.490
FTAGDP
0.159
2.200
0.102
1.920
0.003
0.218
0.005
0.456
GDPGRWTH
PARTNERGDP
INTEGRATION
0.170
1.202
0.173
1.230
0.182
1.288
0.182
1.285
-16.209
-8.548
-15.780
-8.483
-15.947
-8.389
-15.989
-8.484
0.474
0.662
0.579
0.473
0.679
0.591
0.471
0.651
0.572
0.470
0.650
0.571
F test regressors
DF
46.84
14, 728
50.32
13, 729
46.200
14, 728
49.810
13, 729
F test country effects
DF
14.39
44, 728
15.03
44, 729
14.03
44, 728
14.33
13, 729
0.013
0.304
0.01
0.215
0.005
0.121
0.006
0.130
787
787
787
787
CONSTANT
R-sq:
within
between
overall
GDPGRWTH Endogeneity
F-equivalent t-stat
Number of observations
27
The negative sign of the coefficient of RELGNIPH seems to contradict our expectation
that richer countries are the preferred destination of FDI. Although the coefficient is not
significantly different from zero at the 5 percent significance level, it is right at the
threshold for rejecting a one-sided test on its being positive. This suggests that in a
broad sense, being rich is really a summary of other characteristics that make a country
attractive to investors, such as having a relatively stable economic environment or an
educated labor force, and that once we control for them, the simple fact of being rich
ceases to be a factor that attracts investment. Globalization forces have the right sign
and are significant; in fact, FDIWRLD is one of the key determinants of net FDI
inflows into any given country in any given year, and the elasticity of the latter with
respect to the former is almost 0.8 in all regressions.20
Similarly, the elasticity of FDI inflows with respect to exports is about 0.7 in all models.
While this is consistent with our expectations, it is possible to wonder if there might not
be some simultaneity problem affecting exports, which could arise if FDI targets traded
sectors and leads to stronger export performance. However, there is likely a long
gestation period between new investment and exports, which reduces the risk of
simultaneity. Furthermore, a considerable part of FDI is represented by the purchase of
existing production facilities through mergers and acquisitions. As Calderón, Loayza
and Servén (2002) have noted, this type of operation represents the majority of FDI in
developed countries and a substantial proportion of it in developing ones, and it is only
with a lag that such operations tend to lead to new investments in additional physical
capital. This extra lag further reduces the risk of simultaneity. A more serious
simultaneity possibility is the one affecting GDPGRWTH. To rule out this possibility,
we performed a regression-based version of the Hausman test for endogeneity of
regressors. The test consists of regressing the suspect variable, GDPGRTH, on all other
right hand side variables in the regression and at least one more exogenous variable not
included in the regression. We chose the ratio of gross fixed capital formation to GDP
as this instrument. The errors from this auxiliary regression are then added as a right
hand side variable to the original regression, and if they are significantly different from
zero, the maintained exogeneity of GDPGRWTH must be rejected (see Wooldridge
2002). The results of these tests are reported in the bottom panel of Table 6. We cannot
reject the hypothesis of exogeneity in any one of the regressions.
For the most part, the coefficients of the control variables reflecting the economic
environment have the expected signs in Table 6. Low inflation and high economic
growth, both signs of a stable economy, facilitate foreign investment . The main puzzle
in this case is the “wrong” sign in front of the budget balance in all versions of the FDI
regression –the coefficients are not significant, though. With its negative coefficient, the
current account balance seems to represent financing need rather than an unstable
environment in all columns. Another two puzzles are those related to the unexpected
signs in front of the US T-bill rate and the rate of economic growth of the world,
especially the latter, which is statistically significant.
20
A reason this elasticity is different from 1 may be that some of countries not covered by the panel have
been growing in importance as recipients of FDI. This is possible because our measure of total FDI
inflows is not the sum of the inflows into the sampled countries, which are obtained from a World Bank
database, but a worldwide total reported by UNCTAD’s World Investment Report.
28
Table 7. Fixed-Effects Regressions of the Ln of FDI Against Membership in a Free
Trade Area and Other Variables (t-stats under each coefficient)
Variable \ Model
FTAMEM
5
6
-0.178
-0.715
7
8
-0.011
-0.043
EXFTAMEM
0.312
1.540
0.371
2.004
0.335
1.652
0.339
1.825
RELGNIPH
-4.944
-3.469
-4.844
-3.417
-5.005
-3.495
-5.000
-3.507
0.037
2.784
0.036
2.733
0.035
2.649
0.035
2.657
INFLATION
0.000
-0.328
0.000
-0.414
0.000
-0.577
0.000
-0.580
BUDGETBAL
-0.028
-1.784
-0.027
-1.742
-0.030
-1.873
-0.030
-1.890
CURRACCT
-0.035
-2.702
-0.035
-2.683
-0.036
-2.705
-0.036
-2.707
WRLDGRWTH
-0.114
-1.811
-0.112
-1.787
-0.110
-1.753
-0.110
-1.754
US1YTBILL
0.044
1.116
0.044
1.127
0.043
1.091
0.043
1.092
EXPORTS
0.636
2.362
0.615
2.299
0.625
2.315
0.624
2.326
FDIWORLD
0.643
4.611
0.638
4.581
0.645
4.607
0.645
4.622
-0.006
-0.018
0.030
0.100
0.107
0.367
0.108
0.371
0.147
1.854
0.109
1.842
0.015
0.878
0.014
1.111
GDPGRWTH
GDP
FTAGDP
PARTNGDP
INTEGGDP
0.265
1.596
0.261
1.574
0.273
1.641
0.273
1.642
GOVTSTAB
0.140
2.897
0.141
2.928
0.146
2.997
0.146
3.006
LAWORDER
0.281
4.281
0.288
4.433
0.294
4.487
0.294
4.511
BUREAU
0.072
0.906
0.067
0.851
0.092
1.162
0.092
1.178
-12.812
-5.762
-12.538
-5.727
-12.561
-5.559
-12.551
-5.626
0.497
0.328
0.361
0.496
0.343
0.372
0.494
0.303
0.348
0.494
0.326
0.361
F test regressors
DF
33.810
17, 583
35.92
16, 584
33.090
17, 575
35.660
16, 584
F test country effects
DF
12.29
44, 583
12.76
44,584
12.59
44, 575
11.99
44, 575
-.006
-0.106
-.010
-0.158
-0.011
-0.185
-0.011
-0.187
645
645
645
645
CONSTANT
R-sq:
within
between
overall
GDPGRWTH Endogeneity
F-equivalent t-stat
Number of observations
29
Finally, Table 7 reports additional regressions where we have added a few institutional
quality variables. These are indexed of government stability, law and order, and the
bureaucracy’s quality put together by the World Bank. These variables have positive
signs as one should expect, and only the quality of the bureaucracy fails to be
significant. These regressions and those of Table 6 are not strictly nested, because the
institutional information starts only in 1984, and thus we proceeded to estimate our
regressions without some 200 observations. For the most part, the coefficients on the
variables appearing in both tables are quite similar. The main exception is RELGNIPH,
which becomes strongly significant in Table 7. Both exports and world FDI flows see
their coefficients fall in this table. We also ran regression-based tests of the exogeneity
of GDPGRTH. In the last two models, where we use partner’s GDP rather than the
aggregate GDP of the free trade area, the test statistics come out high, capable of
rejecting exogeneity at the 10 percent significance level.
Application of Results from FDI Regressions to the Mexican case
In this section we will combine Mexican data with the estimates of the relation between
foreign direct investment and the explanatory variables indicated in Table 6 in order to
try to determine the contribution of different factors to the growth of FDI inflows in
Mexico. The main conclusion emerging from this analysis is that Mexico’s participation
in NAFTA and other free-trade arrangements during the second half of the nineties may
have meant about a 70 percent rise of the foreign direct investment it would have
received had it remained outside those arrangements. A second conclusion is that
factors outside the model have caused an exceedingly slow growth of FDI inflows in
Mexico. Given the strong globalization forces at work in the world and Mexico’s active
participation in free-trade blocks, especially NAFTA, we would have expected much
higher levels of FDI than those we have observed in recent years. A likely explanation
of this disappointing performance is the stop in the process of economic reforms in
Mexico since the mid nineties, which increasing has placed this country at a
disadvantage relative to other countries that have continued reforming.
Figure 11 shows the predicted values of FDI in Mexico on the basis of Mexican data
and the coefficients of regression 2 in Table 6. The variables included in that regression
have been combined to produce a series of fitted values, which we call Yhat. Yhat is the
in-sample prediction of our dependent variable, the logarithm of FDI inflows. The fit of
the model is quite good, as evidenced by a high correlation of 0.86 between Ln(FDI)
and Yhat. Since the Mexican data are only a subset of the data used to estimate
regression 2, we cannot decompose the variance of Ln(FDI) into the variances of Yhat
and of the estimated errors to compute a sort of R2 for the Mexican data. The reason is
that the estimated error term and Y hat are not orthogonal for any given subset of the
observations, although they are mutually orthogonal by construction for the whole set of
observations. Indeed, they are negatively correlated for the Mexican observations, a
meaningful fact we will discuss shortly.
30
12.0
10.0
Natural Log of FDI Inflows
8.0
6.0
4.0
2.0
0.0
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
-2.0
Ln( FDI )
Error
Y hat
Figure 11. Actual and predicted values of the logs of FDI in Mexico
Between 1991 and 1999, foreign investment inflows in Mexico approximately doubled.
Using the coefficients estimated in regression 2 in combination with the data for
Mexico, one can try to distinguish the different forces behind this overall increase in
FDI. Table 8 shows, in levels (constant dollars), an illustrative calculation of those
forces. The calculations in Table 8 are illustrative since the regressions we estimated,
linear in logs, are therefore multiplicative in levels, and thus the order in which we
present each independent effect influences the apparent magnitude of its contributions
to the change in FDI. Clearly, such order does not affect the magnitude of the overall
change in FDI. The main forces we single out in Table 8 are FTA effects and
globalization effects, and other effects dominated by the growth in size of the country,
measured by its GDP and exports. The fact that the last two lines of table 8 are equal
does not imply that our model is a perfect fit for the Mexican data. The model predicion
error is being treated, for purposes of Table 8, as another variable. This “variable” is in
fact responsible for a steep “decline” in FDI as shown between the second and third
lines of the table. This is simply a numerical representation of the fact, evident in Figure
10, that the model overpredicts FDI toward the end of the sample –that is, the error term
turns large and negative. For our purposes, the most interesting piece of information is
the jump in FDI due to the integration of Mexico into NAFTA. This jump from
US$7,864 million to US$10,782 million implies that the contribution from joining
NAFTA is an increase of nearly 40 percent of FDI relative to what it would have been if
Mexico had remained outside any regional arrangements.
31
Table 8. Mexico: Illustrative Decomposition of the Rise in FDI Between 1991 and 1999
(millions of 1995 US dollars)
Concept
FDI in 1989
Plus: Increase in country size and other factors identified in the regression
Plus: Decrease due to steep negative change in error term
Plus: Increase due to globalization process
Plus: Increase due to Mexico’s entry into NAFTA and other arrangements
FDI in 1999
Amount
5,306
9,457
2,509
7,864
10,782
10,782
The decomposition presented in Table 8 underestimates the true contribution of regional
integration in NAFTA to the rise in FDI. The reason is that the growth in exports, which
we include in “size effects,” is due in part to the free trade agreement. A back-of-theenvelope calculation, however, suggests that a more reasonable estimate of NAFTA’s
true contribution to FDI growth may be a hike of over 70 percent rather than one of 40
percent. The details of this computation are described in Appendix 4, and we offer it as
a counterpoint to the basic characterization of this effect presented in Table 8.
Our higher estimate seems remarkably similar to that obtained by A. Waldkirch (2001),
who uses bilateral FDI data to conclude that FDI from North America would have been
some 42 percent lower in the absence of NAFTA (i.e., that NAFTA lead to a 72 percent
increase in FDI from Canada and the US). However, the resemblance between these
results is less complete than it appears at first blush. Waldkirch argues that NAFTA has
not brought about a significant increase in FDI from other countries. For our part, we
noted earlier with the aid of Table 1 and Figure 8 that FDI originating in the NAFTA
region had reacted more positively to Mexico’s membership in NAFTA than FDI
originating elsewhere had, but that even this third-party FDI seemed to have risen after
NAFTA went into effect, although it was not possible to determine the contribution to
such increase from the trade agreement itself. Thus, the estimates of the effect of
NAFTA on total FDI derived in this section must be considered an average of relatively
higher effects for investments originating in the NAFTA region and lower effects for
investments coming from elsewhere, although the data do not permit a separation of
these two effects, since it does not correspond to bilateral FDI flows.
The point to keep from this discussion is that, if we had been asked in 1991 to forecast
FDI growth with only knowledge about future global forces and regional integration
factors, we would have said that FDI would grow by a factor of eight, with an initial
less-than-doubling on account of Mexico’s future growth (excluding here growth effects
due to accession to NAFTA), a second more-than-doubling on account of Mexico’s
participation in global currents of investment, and finally an additional increase of some
two thirds due to joining NAFTA. However, with this forecast we would have far
overshot our target. Our regression-based model, however, cannot account for the
relatively disappointing growth of FDI inflows during the past decade. The model can
only offer an adverse evolution of the error term, whose effect can be seen in the second
row of Table 7.
Figure 11, depicting the in-sample prediction error, shows that the moment of accession
to NAFTA was one of actual overshooting of FDI, even beyond the predictions of the
32
model. But after 1996, the model increasingly overpredicts foreign direct investment in
Mexico. In the latter part of the nineties Mexico became relatively less attractive to
foreign investors despite objective factors working in favor of increased investment
there, such as the growing intensity of global capital flows, Mexico’s closer integration
with its NAFTA partners and its recent GDP and export growth. This phenomenon of
overprediction towards the end of the sample is not typical of the model as a whole. For
the entire sample, the correlation between a simple time trend and the in-sample
prediction error of the model is small 2.5 percent. For the Mexican data, this correlation
is large and negative: –65.6 percent.
The lackluster performance of FDI during the last few years of the 1990s is probably the
result of several processes. We have previously documented an overall decline in the
proportion of FDI going to developing countries during the second half of the nineties
(Table 3). Mexico’s relatively low levels of FDI may just be a manifestation of this
general trend.21 A second candidate explanation is the limited size and early end of the
Mexican privatization program. As noted by Calderón et al (2002) and explained earlier
with the aid of Table 4, a growing proportion of FDI takes the form of mergers and
acquisitions of existing firms. Measured with that yardstick, Mexico has been an outlier
in recent years. However, this just tells us which form of FDI Mexico has failed to
receive. It does not explain why Mexico has been so different from other countries.
Following our earlier discussion of Portugal and Spain, it is also conceivable that
NAFTA was only responsible for a stock adjustment that took place during a few years
starting in 1994, and that such adjustment is over and FDI is now settling toward more
“normal” levels (see Figures 2 and 3).
In addition to the arguments presented above, however, we must point to a policy issue.
The weakening of the growth of FDI flows into Mexico seems to have coincided with
the decline of that country’s competitiveness as measured by the World Economic
Forum (2000) and similar organizations. Between 1999 and 2000, in fact, Mexico
worsened its position in the global competitiveness ranking, jumping from the 31st to
the 42nd place. A partial list of the countries that overtook Mexico is quite informative:
Hungary, Poland, the Czech Republic, Turkey and Slovakia were all working to
upgrade their institutions with a view to joining the European Union, while Greece and
Italy were trying to strengthen their macroeconomic policies to meet the Maastricht
criteria for monetary integration. These countries were working on structural reforms
and on deepening their regional bonds. The case of Mexico offers a clear contrast: the
pace of structural reform slowed down drastically after the approval of a new system of
social security for private sector workers in 1997, and NAFTA is and will remain for
the foreseeable future a trading block.
21
This suggests two avenues for further work: testing the stability of the coefficient of GNI in the
regressions of Table 5 around 1995, and making detailed country estimates such as the ones presented in
this section for several other countries.
33
12.0
10.0
Natural Log of FDI Inflows
8.0
6.0
4.0
2.0
0.0
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
-2.0
Ln( FDI )
Error
Y hat
Figure 12. Actual and predicted values of the log of FDI in Mexico based on a
regression including some institutional quality variables.
The data from the regressions of Table 7 might be used to conduct a similar analysis,
but this time trying to take into account some institutional factors. Granted, the
government stability, law and order, and bureaucracy quality indexes are only limited
indicators of structural reform. Yet, it is interesting to attempt to incorporate these
factors. Figure 12 shows the actual and predicted values of FDI inflows for Mexico
during 1984-1999 on the basis of regression 6 (Table 7), and the corresponding
prediction errors. Remarkably, we find the same pattern of underprediction at the start
of NAFTA and overprediction toward the end of the nineties.
For this case too we carried out the same calculations as before. Our main results are
remarkably similar despite the difference between the sample sizes: a direct estimation
of the impact of NAFTA on FDI, excluding any export size effects, indicates that FDI is
40 percent than it would be without NAFTA, and a more reasonable estimate including
possible effects through export growth rises the contribution of NAFTA to FDI growth
during the nineties to the figure of 72 percent. The underprediction towards the end of
the sample is, however, more moderate than before: now the correlation between a time
trend and the prediction error is –35.7 percent (for the entire sample it is 1.7 percent). In
other words, bringing some measurement of institutional development into the analysis
helps explain part of the disappointing performance of FDI in Mexico. This suggests
that, at least in part, relatively low FDI can be explained by the slowing down of the
structural reform process in Mexico.
34
The Growing Integration of Stock Markets in Mexico and the US.
In this last section of the analysis of aggregate trends we report on some simple
measures of co-movement between American and Mexican stocks. It was to be
expected that entry into NAFTA would promote a closer coordination of the movement
between those markets for two reasons. One is that foreign investors more often look at
Mexican stocks as potential investment targets, and the other is that firms listed in the
Mexican exchange with increasing frequency take advantage of the American
Depositary Receipts (ADR) to obtain funds abroad. Both mechanisms should heighten
the transmission of stock price shocks across both countries (and especially from the US
to Mexico). As we will see, this is supported by the data, although a first rough cut
would seem to imply otherwise.
1.2
1
0.8
0.6
0.4
0.2
2001/06
2000/12
2000/06
1999/12
1999/06
1998/12
1998/06
1997/12
1997/06
1996/12
1996/06
1995/12
1995/06
1994/12
1994/06
1993/12
1993/06
1992/12
1992/06
1991/12
1991/06
1990/12
1990/06
-0.2
1989/12
0
-0.4
-0.6
-0.8
-1
Figure 13. Moving retrospective 12-month correlations between the DJ and IPC indexes
(deflated by the American and Mexican CPIs), 1989-2001.
We start by looking at twelve-month moving correlations between the end-of-month
readings of the Dow Jones and the IPC (the main Mexican index, “the indice de precios
y cotizaciones”). The indexes have been deflated by the consumer price indexes of each
country, and the correlations are backward looking. The trajectory of these correlations,
depicted in Figure 13, seems to contradict the expectation expressed above. Between
1989 and 1994, they were consistently positive, but starting in 1995 they exhibit a rather
erratic behavior, becoming at times negative. The behavior of these correlations reflects
a basic instability in the Mexican market in the nineties that is most likely associated
with its vulnerability to sudden confidence shifts, including through contagion. This fact
becomes clear when we look at the indexes themselves. Figure 14 shows the DJ and
IPC, deflated by the US and Mexico CPIs, and expressed on a common base. As we see,
35
most of the time both indices exhibit an upward trend. This is especially certain of the
first several years represented in the chart. The simple positive correlation indicates that
both indexes were showing positive growth, but cannot, by its arithmetic nature,
indicate the fact that the growth of the IPC was so much the faster. This tremendous
growth was due to the liberalization of financial markets, and its efficient cause was the
rise, virtually from zero, of foreign flows of portfolio investment in Mexico, which
boomed dramatically diring the 1990-1993 period, as we saw earlier with the aid of
Figure 6. In other words, this initial stage reflects a large stock adjustment in the
portfolios of foreign investors, instead of a more normal or settled situation.
700
600
500
400
300
200
100
DJ
2001/07
2001/01
2000/07
2000/01
1999/07
1999/01
1998/07
1998/01
1997/07
1997/01
1996/07
1996/01
1995/07
1995/01
1994/07
1994/01
1993/07
1993/01
1992/07
1992/01
1991/07
1991/01
1990/07
1990/01
1989/07
1989/01
0
IPC
Figure 14. CPI-deflated DJ and IPC stock indexes (end-of-month closings), 1989-2001.
The Mexican index, which during upswings tends to grow faster than the American
index, was subject to large and some times relatively long reversals that had no
comparable counterpart in the US data. These reversals can be individually identified
with the drop in the correlations of Figure 13, and respond to well specified events. The
1995 precipitous drop in the Mexican exchange was due to the generalized economic
crisis of that year, which clearly was an idiosyncratic shock. The negative correlation of
1996 reflects the combination of a (by now) clearly dynamic American market and a
sluggish level of prices in the Mexican stock exchange that year. However, in 1996, and
despite a fall of five percent in the real value of the IPC, the Mexican stock exchange
started its recovery, with an increase in capitalization, valued in dollar terms, of over 20
percent, in part due to the return of some of the portfolio investment flows that had
vanished in 1995. This partial recovery of portfolio inflows was already noted when
discussing Figure 8. The 1998 drop in the IPC was a result of contagion from Asia and
especially Russia. During that year, as we also saw in Figure 8, gross inflows of
portfolio investment returned to their depressed levels of 1995, and the net result of both
36
portfolio inflows and outflows was negative.22 In other words, the peaks in instability
arising from Mexico’s condition as an emerging market in a more volatile period in the
international economy that contrasts with the resilience of the American market in the
face of shocks originating outside the US.
However, starting in 1999, the IPC seems to track the DJ a lot better than before, even
though this index no longer exhibits a monotonic behavior. This enhanced association
between the two stock markets likely reflects the growing coincidence between the US
and Mexican cycles resulting from NAFTA.23 In fact, the behavior of the IPC around
the fall of 2001 reflects the change in mood in the US in the face of uncertainty arising
from terrorism and the quick (albeit partial) recovery of expectations seen in October
2001 in the US as a consequence of the vigorous policy response implemented by the
FED and the Treasury of the US. At the same time, it is hard to find convincing signs of
contagion from Turkey or Argentina. Figure 13, then, suggests that Mexico may be
becoming more closely associated with its main NAFTA partner, despite being an
emerging market, which is shown in the volatility of the IPC, which seems to remain
higher than that of the DJ.
One way to look for confirmation of the hypothesis of growing integration between the
two countries’ equity markets is to perform a sequence of naïve regressions and
examine their explanatory power. We regress the change in the IPC against the change
in the DJ (and a constant) over three different sample periods, all of which end in
December 2001. The first sample period starts in February 1989, the second one in
January 1994, and the third one in January 1998. The idea is to exclude first the preNAFTA period, and then also the currency and banking crisis of 1995 and its aftermath,
up till the Asian crisis, but leaving already in the last period the Russian and Brazilian
crises. The data we used in the first set of regressions were the stock indexes from the
two countries deflated by the CPI; in the second set, we used the dollar-valued indexes.
The raw data were seasonally adjusted using a multiplicative X11 algorithm, and then
differenced. We tried to include lags of both the dependent and independent variables in
the equations, but these always came out insignificant, so we report only the simplest
form of the regressions (the lack of explanatory power of the lagged variables in these
regressions offers additional support for these procedures themselves).
The main result of the exercise is the increase in the value of the adjusted R2 observed
as we reduce the sample size. A secondary result is the increasing value of the
coefficient of the DJ variable in the regression as the sample period reflects more
directly a post-NAFTA, post-crisis era. This result is not too strong, however, since in
all regressions the hypothesis of a common elasticity of the IPC with respect to the DJ
(e.g., a unit elasticity) cannot be rejected. The estimated values of the regression
constants contain are never statistically different from zero, and their absolute
magnitude does decline markedly in the shortest samples, as does the estimated
probability that they are nonzero. So, the model does not seem to have changed all that
drastically; but its predictive usefulness has increased. As time passes, the ability of
movements in the American stock exchange to explain movements in the price of
Mexican stocks has grown, confirming the closer linkage of the Mexican to the US
economy since NAFTA went into effect.
22
23
See Banco de Mexico (1996, 1997 and 1999).
See Cuevas, Messmacher and Werner (2002).
37
Table 9. Regressions of Changes in the IPC against Changes in the DJ.*
Sample Period
Constant
t statistic
DJ Coeff.
t statistic
Adj. R squared N. of Obs.
CPI-Deflated Indexes
Feb 1989 - Dec 2001
Jan 1994 - Dec 2001
Jan 1998 - Dec 2001
0.454
-0.899
-0.150
0.737
-1.192
-0.016
1.018
1.127
1.212
6.416
6.361
6.064
0.207
0.294
0.378
155
96
60
Indexes in Current Dollars
Feb 1989 - Dec 2001
Jan 1994 - Dec 2001
Jan 1998 - Dec 2001
0.707
-0.891
0.397
0.960
-0.919
0.376
1.139
1.253
1.333
6.066
5.563
6.045
0.189
0.240
0.376
155
96
60
* Seasonally adjusted data.
Microeconomic Analysis of Financial Flows
After having discussed foreign capital flows from a macroeconomic perspective, in this
section we will explore the effects of NAFTA on financing opportunities from the point
of view of individual firms. As before, our expectation is that the free trade agreement
will open new doors to the private sector, especially to exporters, and that firms will try
to obtain foreign financing to match their increasing openness. This expectation, as we
will see, is mostly confirmed by the analysis. The first part of this section uses data on
listed firms to answer some questions about the composition of financing. The upshot of
that analysis is the finding that foreign financing has become more important for the
relatively large firms in our sample. The second part of this section fits investment
equations both to the listed-firms data set already mentioned and to a data set more
broadly representative, since it comes from the Annual Industrial Survey. The results of
the estimation in the second data set are stronger, showing that liquidity constraints
remained a significant determinant of investment after NAFTA went into effect, but
also suggesting that NAFTA provided firms with additional incentives to invest and
contributed to reduce the severity of liquidity constraints.
Firm financing
To test our expectations we will use data collected by the Mexican stock exchange.
These data have been used before to test hypotheses concerning the effect of the 1995
banking crisis on firm financing in Mexico (Martínez Trigueros, 2001). The data set is
an unbalanced panel of 367 firms sampled between 1989 and 2000. Of these firms, only
64 are present for the whole sample period.
The firms in the sample are not fully representative of the private sector: they are
relatively large and modern, since they have been listed in the Mexican Stock exchange
(or placed debt in domestic capital markets). These firms employ, in any given year,
between three and six percent of the formal private labor force in Mexico (on average
for 1994-2000, 4.4 percent of the workers contributing to the private-sector social
insurance scheme). Since listed firms tend to be relatively sophisticated, their
38
participation in economic activity is larger than their participation in the labor market.
On average, these firms’ net sales (excluding taxes and transportation costs) were
equivalent to six percent of GDP, and their total assets, to 36 percent of GDP.
Within the data set itself, the distribution of firms by the size their total assets is very
skewed, with a few large firms pulling up the average size in the sample, as can be
inferred from Table 10. In that table, we present selected percentiles of the distribution
of relative size of the firms, defined as the ratio of a firm’s own assets to the average
level of assets among firms sampled during a given year.
Table 10. Distribution of Relative Size in the Stock Exchange Sample
Selected Percentiles, by Year
Year
P5
P 25
P 50
P 75
P 95
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2.8
2.9
3.2
3.2
2.2
2.1
1.8
1.9
1.5
1.6
1.3
1.2
11.6
9.9
9.7
8.9
8.0
6.5
5.5
6.3
5.0
6.0
6.9
6.6
26.1
31.8
29.3
28.7
24.3
23.3
23.9
27.8
23.8
27.4
28.3
27.9
111.4
96.6
92.1
83.4
88.7
85.4
87.5
97.4
79.1
116.0
89.1
96.9
470.4
378.7
400.3
405.7
433.9
470.0
477.5
466.7
431.5
404.5
417.5
347.8
The data set consists of the main items in the balance sheets and profit-and-loss
statements of these firms, such as total assets, bank debt, payables and receivables, and
pre-tax profits. In addition, the data set contains important miscellaneous items such as
proceeds from the disposition of physical and financial assets, whether a firm issued
ADRs (American Depositary Receipts), the breakdown of net sales between exports and
domestic transactions, and the breakdown of debt by the residence of the creditor
(external and domestic).24 Using these data it is relatively easy to produce a series of
indicators of leveraging (the ratio of debt to assets), profitability (pretax profits to
assets), and openness (the ratio of exports to sales). It is also a simple matter to produce
indicators of the composition of debt by type and residency of creditors. The average
levels of these and other indicators in our sample are presented in Table 11.
The impact of the free trade agreement seems evident from Table 11, as the average
percentage of sales accounted for by exports went from single to double digits starting
in 1995. During the sample period, the average degree of indebtedness reached its peak
in 1995, doubtless influenced in part by the revaluation effect of the depreciation of the
peso. Debt ratios, however, have not fallen back to their pre-1995 levels. Consonant
with the behavior of debt, the burden of servicing it jumped in 1995, as a result of the
24
Strictly speaking, the data indicate the currency in which liabilities are denominated. We are equating
dollar denominated liabilities with liabilities to foreigners.
39
drop in sales due to the recession and the jump in interest rates and in the cost of the
dollar associated with the exchange rate crisis.
Table 11. Means of Key Variables and their Ratios in the Sample of Firms Listed in the
Mexican Stock Exchange
Year
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Total
Total
Assets
Count Thou.Pesos
109
223
259
260
253
237
224
220
209
186
169
149
Pretax Profit
Over Assets
Percent
Exports
Over Sales
Percent
Debt to
Assets
Percent
Interest
Over Sales
Percent
Foreign Debt
Over Debt
Percent
Bank Debt
Over Debt
Percent
Suppliers
Over Debt
Percent
ADR
Issue
Percent
2,317,417
1,801,015
1,682,519
1,704,289
1,885,097
2,234,010
2,659,633
2,539,101
2,688,463
3,016,180
3,137,924
3,795,149
1.6
1.5
1.6
1.3
1.1
-0.2
0.4
1.8
1.8
1.1
1.5
1.9
12.4
10.0
8.4
8.3
8.0
9.4
16.6
15.8
15.9
16.7
14.6
17.5
34.1
36.9
39.9
41.3
42.7
44.1
49.2
48.5
46.5
45.7
48.5
56.5
8.7
9.8
9.0
8.9
9.9
9.9
24.2
18.8
12.0
13.2
16.7
8.9
26.6
27.3
29.7
30.4
32.8
37.7
45.0
44.1
44.8
46.1
43.0
44.0
40.8
39.4
40.2
40.7
39.7
41.1
45.5
43.9
42.1
43.4
42.0
33.6
16.8
19.7
18.2
17.1
17.1
17.1
16.5
18.3
20.3
22.7
22.7
18.5
1.8
0.9
1.2
1.5
4.0
5.9
9.8
13.2
14.4
19.9
17.2
23.5
2,366,912
1.2
12.3
44.3
12.5
37.4
41.2
18.6
8.7
As for the composition of the liabilities of firms, the most remarkable development has
been the increase in the proportion of foreign debt starting in 1995. Again, even if a
revaluation effect was in action in 1995, it cannot be claimed as an explanation for the
continued high proportion of foreign debt after 1995, let alone in 2000, when the real
exchange rate appreciated. It is highly likely, thus, that the increase in the outward
orientation of sales and financing may be related, as we will see below. Bank debt has
been least dynamic, while payables have become a more important source of financing.
If we consider the deleterious effects on credit of the Mexican banking crisis, it is quite
possible that the relative stability in the average levels of bank debt masks an increasing
patronage of foreign banks. Unfortunately, the data set does not permit the strict
verification of this conjecture, although below we will attempt to find additional
evidence of this relationship. Lastly, table 11 also shows the increasing resort to the
issue of ADRs by Mexican firms.
The changes in some of these dimensions of financing have not always been evenly
distributed across firms. Tables 12-16 present the distribution of key ratios during the
sample period; for example, Table 16 shows that the increase in the average proportion
of liabilities represented by suppliers’ credit is explained by the increase in payables
among less than one half of the firms in the sample. These tables also show that, while
virtually all firms increased their degree of indebtedness during the nineties, a group of
firms seems to have avoided external financing throughout that decade. Similarly, a
large proportion of firms continued to shy away from exporting even after NAFTA went
into force, and the overall increase in exports came from a subset of firms. It seems
logical to suppose that firms concentrating in the production of nontraded services
would account for the lack of exporting activity among almost one half of all firms in
the sample. In any case, the group of firms borrowing exclusively in pesos seems
smaller than the group concentrating in domestic sales, and seems to be shrinking faster
too. This might reflect an increased resort to foreign credit even among firms without an
export orientation in the face of the paralysis of banking credit that has been observed
since 1995, as we discussed in previous sections of this chapter.
40
Table 12. Distribution of Exports-Sales Ratios by Selected Percentiles
Year
P5
P 25
P 50
P 75
P 95
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
6.4
3.0
1.4
1.2
0.6
1.0
3.5
5.2
5.8
5.2
5.6
6.3
18.9
13.5
10.8
10.2
9.0
10.4
28.4
23.0
22.2
25.3
24.0
25.9
53.3
50.7
42.8
44.6
40.5
53.1
65.1
63.1
64.9
73.4
63.8
72.0
Table 13. Distribution of Debt-Assets Ratios by Selected Percentiles
Year
P5
P 25
P 50
P 75
P 95
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
13.4
12.6
12.9
11.7
13.4
15.0
12.8
11.3
10.1
9.8
10.2
16.5
24.1
25.6
27.9
29.4
29.9
29.3
33.1
31.2
28.3
25.5
27.1
36.4
32.2
36.1
39.8
42.8
43.4
43.8
48.9
45.7
43.7
42.1
42.5
50.4
40.3
47.8
49.7
52.3
54.3
55.5
61.4
60.5
56.5
56.7
57.8
64.8
63.6
65.4
69.9
68.7
71.3
77.0
94.9
95.8
104.0
84.1
87.4
83.8
Table 14. Distribution of Foreign Debt Ratios by Selected Percentiles
Year
P5
P 25
P 50
P 75
P 95
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
6.0
3.5
5.4
3.8
3.7
5.9
12.5
11.4
11.1
13.0
12.4
11.1
21.0
21.3
24.7
24.6
30.0
32.1
45.6
44.5
44.5
45.5
42.7
42.5
43.0
47.6
49.5
52.8
57.1
68.2
77.9
75.3
76.3
79.5
73.4
72.2
71.4
72.2
80.7
80.8
83.8
87.0
90.9
92.1
92.5
93.2
93.2
92.4
41
Table 15. Distribution of Bank Debt Ratios by Selected Percentiles
Year
P5
P 25
P 50
P 75
P 95
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
0.4
0.2
1.1
1.3
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
24.2
21.2
20.7
24.6
19.5
19.0
22.3
22.3
16.2
19.5
18.4
14.7
43.3
41.1
41.7
42.0
40.9
41.1
50.2
44.5
44.6
44.5
40.5
32.0
61.3
58.7
58.4
57.4
59.0
63.1
67.8
66.7
68.1
69.6
66.2
50.3
72.2
73.8
75.5
78.0
79.3
81.8
85.1
86.6
82.3
86.1
84.9
76.6
Table 16. Distribution of Supplier Credit to Debt Ratios by Selected Percentiles
Year
P5
P 25
P 50
P 75
P 95
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
1.3
2.2
2.0
1.6
1.9
1.2
1.0
0.6
0.8
0.9
0.9
0.5
7.4
7.9
7.3
6.1
6.0
6.2
5.0
5.1
5.8
7.1
7.6
6.4
13.9
15.6
13.4
12.1
11.8
11.2
10.5
12.0
13.6
15.0
15.8
12.2
22.3
26.9
25.1
21.9
20.1
20.8
21.3
25.0
27.2
32.8
28.4
23.9
44.2
50.0
46.8
49.4
58.6
49.5
48.2
61.0
65.7
71.0
71.3
60.0
Looking at Tables 12 and 14, it is tempting to look for a connection between increased
exports and higher proportions of foreign debt, and possibly of suppliers’ credit if we
consider that some fraction of foreign debt is actually owed to nonresident suppliers.
Table 16 constitutes a first pass at these issues. This table includes pairwise correlations
among export-sales ratios (labeled exportrt), indebtedness levels (indebt), bank debt
ratios (bnkdbtrt), foreign debt ratios (frdbtrt), relative firm size (relsize), profitability
(profitab), and whether the NAFTA was in effect. As we expected, export orientation is
highly correlated with foreign debt ratios, and it seems to be positively linked, although
more weakly, to the size of the firm and its degree of leveraging. Another conjecture
that seems supported by Table 17 is that the reason that bank debt has not fallen despite
the Mexican banking crisis is that foreign banks may be picking up part of the slack, a
development surely facilitated by the increased presence of Mexican firms abroad, both
as exporters and as issuers of securities such as ADRs (as we saw in Table 11, the
proportion of firms in our sample that issued ADRs rose from less than two percent in
1989 to 23.5 percent in 2000; we will return to this matter shortly). The conclusions we
are drawing from the correlations table may seem too strong, but they are not. As Tables
42
12-16 show, not all firms in the sample display the same behavior, and thus the strong
correlations between export behavior and foreign borrowing, and between the latter and
bank borrowing must reflect the processes and connections we are describing.
Table 17. Correlations Between Pairs of Selected Variables
exportrt
indebt
bnkdbtrt
frdbtrt
relsize
profitab
nafta
exportrt
indebt
bnkdbtrt
frdbtrt
relsize
profitab
nafta
1
0.12
0.29
0.54
0.14
-0.06
0.16
1.00
0.27
0.15
-0.03
-0.21
0.16
1.00
0.49
0.05
-0.17
0.04
1.00
0.27
-0.06
0.22
1.00
0.09
0.00
1.00
-0.04
1.00
The most interesting results for us are those presented in the last row of Table 17. The
figures in that row are the arithmetic summary of the developments reflected in all of
the year-by-year information we have presented so far in this section. Remarkably, the
strongest correlation is that between NAFTA and foreign debt ratios, even more than
that between export ratios and NAFTA. This is consistent with our discussion of Tables
11 and 13, where we noted that the group of those firms limiting themselves to domestic
credit sources was shrinking faster than the group of firms producing only for the
domestic market. It thus seems that even producers of nontraded goods are taking
advantage of more integrated capital markets to borrow abroad, be it from their
suppliers or from financial intermediaries.
To seek confirmation for the tentative conclusions advanced so far, we ran regressions
of our indicators of the composition of liabilities against a suitable set of explanatory
variables (including sector dummies). The main focus of our regressions are the effects
of export ratios (exportrt), because NAFTA’s indirect effects happen through exports,
and the effects of other more direct measures of NAFTA. The latter include a dummy
variable taking on the value of 1 during the period of effect of NAFTA; sector-specific
measures of the preferential component in US tariffs on Mexican imports (ustariffadv),
defined as the difference between the average tariffs imposed by the US on imports
from Mexico and from Mercosur;25 and a measure of average Mexican tariffs
25
This simple average is taken over the import-weighted means of the tariffs imposed on the goods that
fall in each one of the chapters of the Harmonized Tariff Schedule (HTS). The average over the many
chapter-specific mean tariffs corresponding to each sector is a simple average to moderate the possible
bias in our measure of the tariff advantage, because imports of any good should respond to tariff levels,
which would tend to make import-weighted average tariffs lower than average tariffs. (Incidentally, the
matching of the HTS chapters and the sectorial classification used by the Mexican Stock Exchange was
done on the basis of the authors’ judgment.) However, we could not avoid using import-weighted mean
tariffs at the HTS chapter level, because the tariff information had to be estimated from public data on
dutiable imports and collected duties classified by HTS chapter (available at the United States
International Trade Commission’s website). Also, it might have been desirable to estimate an alternative
measure of the advantage obtained by Mexican exporters by calculating the difference between
NAFTA/Mexico and Most-Favored-Nation tariffs, but the latter are not available in formats that may be
easily used in statistical analysis. Moreover, measuring tariff advantage as the difference between tariffs
on certain Mexican goods and tariffs on like goods coming from another country is more meaningful,
since tariffs are on a downward trend in general. The USITC website allows the choice of almost any
comparator country or region, and we chose Mercosur because this region consists of countries similar to
Mexico in many respects, but which do not have a close commercial relationship with North America.
43
(mextariff26) and its interaction with a measure of the importance of intermediate inputs
as a proportion of total product value (intinput). We control for some of the
characteristics of the firms in our sample, such as the firm’s size, measured by its assets,
relative to that of the average firm in the sample in the year of the observation (relsize);
its profitability, measured by its ratio of pre-tax profit to assets (profitab) ; and whether
or not it issues ADRs. The regressions also include as independent variables some
environmental factors impinging on financial choices, including American and Mexican
real interest rates (rxrintus and rintsect; the latter is a common interest rate deflated by
relevant sector-specific price indexes) and the nominal depreciation of the Mexican
peso. 27 The third set of regressors consists of a group of sector dummies for extractive
activity (nonoil mining), manufacturing, construction, commerce, communications and
transportation, and services. The omitted sector is “other activities,” which includes
some holding firms as well as some firms that could not be assigned to a specific sector,
a group that turns out to be relatively export oriented. The bottom panel of the table
contains versions of the main regressions where we control for fixed-effects at the level
of the firm; for that reason, the sector dummies have dropped out. Each pair of columns
contains the coefficient and t-statistic corresponding to every explanatory variable in
each one of the three regressions we report: for the ratio of foreign debt to total debt
(frdbtrt); for the ratio of bank debt to total debt (bnkdbtrt); and for the ratio of supplier’s
credit received to total debt (supprat).
The foreign debt ratio regressions shown on the first pair of columns of Table 18 are the
one with the best fit. The export ratio is, naturally, a key determinant of foreign debt
ratios. Interestingly, the stand-alone NAFTA dummy is positive while the interaction
between exports and that dummy is significant and negative. This indicates that since
NAFTA, foreign financing has become more popular even beyond the circle of the most
outwardly oriented firms. The trade agreement has therefore led to a rising resort to
foreign debt, especially –but perhaps not only—among exporters. The issuing of ADRs
is also significantly associated with higher foreign debt ratios, suggesting that various
forms of foreign financing may be pursued by the same firms. Relative size is also
significantly associated to higher ratios of foreign indebtedness. Finally, although they
are not significant, the interest rate and peso depreciation coefficients have the correct
sign most of the time (on a one sided-test, the US interest rate coefficient would just be
rejected at the 10 percent level of significance. As far as sectors are concerned, the most
remarkable coefficient is that on communications and transportation, a sector that
boomed in the 1990s following the privatization of the phone company and the
subsequent opening of the sector to foreign investment in mobile communications.
Similarly, and understandably, commerce is the least dependent of all sectors on foreign
financing. In the fixed-effect regression some of the direct effects of NAFTA come out
more clearly, as the net effect of Mexican tariffs is negative, since intinput is less than 1
by construction (all the same, it is puzzling to see larger effects from tariff reductions in
sectors where intermediate inputs are lower).The main puzzle in both regressions is the
negative coefficient on the profitability variable.
26
The average is taken over import-weighted mean tariffs on inputs imported by firms in different
industrial classes. The information on Mexican tariffs, produced by the Secretariat of the Economy, was
generously shared with us by Enrique Dussel Peters, Luis Miguel Galindo and Eduardo Loría, of
UNAM’s Economics Department. They are using these data in a broad project on microeconomic aspects
of FDI in Mexico (see Dussel Peters et al, 2002).
27
Real interest rates are computed as the difference between interest rates observed today and the
inflation observed from this day forward. In other words, inflation expectations are “rational” and are
estimated by actual inflation.
44
Table 18. Regressions of the Structure of Firm Liabilities
(t statistics to the right of the coefficients)
A) Foreign Debt Ratio
Coefficient
t statistic
B) Bank Debt Ratio
Coefficient
t statistic
C) Suppliers' Debt Ratio
Coefficient
t statistic
OLS regressions
exportrt
exportrt*nafta
ustaradv
mxtariff
mxtariff*intinput
relsize
adr
profitab
rintsect
rxrintus
pesodep
nafta
extractive
manufactures
construction
commerce
commun. & transprt.
services
constant
0.854
-0.198
-0.437
-0.127
0.047
0.028
10.491
-0.322
0.058
-0.946
-0.001
10.517
-11.311
-1.929
-5.324
-15.174
9.075
0.007
26.711
No. Obs
F statistic
F stat d.f.
Adjusted R2
15.249
-3.205
-0.691
-0.272
0.143
9.551
5.241
-1.938
0.932
-1.640
-0.044
4.479
-3.359
-1.111
-2.243
-6.987
2.600
0.003
5.250
0.482
-0.207
-0.291
0.556
-1.054
0.008
0.252
-1.300
0.062
-0.300
0.036
1.380
-7.525
-2.791
-4.840
-9.081
-5.205
-3.237
42.160
2,321
85.30
18, 230
0.395
8.648
-3.362
-0.463
1.192
-3.189
2.823
0.126
-7.853
0.994
-0.523
1.623
0.590
-2.244
-1.614
-2.048
-4.198
-1.497
-1.259
8.320
-0.042
-0.001
0.151
-1.009
0.807
-0.009
-3.809
0.876
-0.018
0.496
-0.021
-0.128
-0.673
2.916
-1.906
22.325
-4.147
-6.297
18.939
2,321
18.81
18, 230
0.121
-1.178
-0.031
0.372
-3.364
3.797
-4.584
-2.970
8.228
-0.461
1.343
-1.439
-0.085
-0.312
2.620
-1.253
16.041
-1.854
-3.809
5.809
2,321
51.00
18, 230
0.280
Fixed effects regressions
exportrt
exportrt*nafta
ustaradv
mxtariff
mxtariff*intinput
relsize
adr
profitab
rintsect
rxrintus
pesodep
nafta
constant
No. Obs
F statistic
F stat d.f.
No. groups (firms)
R2 within
between
overall
F stat. firm effects
F stat d.f.
0.128
0.065
0.424
-0.835
0.715
0.025
2.379
-0.312
0.074
-1.261
0.036
8.886
33.547
2.369
1.433
1.035
-2.437
2.473
3.505
1.334
-2.670
1.856
-3.587
2.642
5.559
9.824
2,321
33.93
12, 1939
370
0.174
0.292
0.266
13.43
369, 1939
0.174
-0.037
-0.613
-0.310
0.107
0.013
-2.022
-0.461
0.003
-0.113
0.043
-0.794
41.606
2.934
-0.741
-1.367
-0.826
0.336
1.649
-1.036
-3.605
0.066
-0.293
2.904
-0.454
11.127
2,321
4.96
12, 1939
370
0.030
0.154
0.090
10.21
369, 1939
-0.076
0.036
0.044
-0.570
0.171
-0.003
-2.514
0.242
-0.044
0.527
-0.004
-2.614
24.245
-2.412
1.371
0.182
-2.845
1.010
-0.774
-2.409
3.542
-1.888
2.561
-0.448
-2.794
12.131
2,321
3.64
12, 1939
370
0.022
0.074
0.074
17.15
369, 1939
The second pair of columns of Table 18 shows the regressions for bank debt, which
have the worst fit of the table, as we could have expected from the rather low variability
45
of bank debt ratios shown in Tables 10 and 14. The main result from these columns
worth mentioning is the fact that the coefficient of exports in this regression is unstable,
in the sense that its interaction with the NAFTA dummy is negative and significant, in
indicating that an outward orientation is important to obtain bank debt, but it generates
less additional debt during the NAFTA years than it did before. Unlike in the foreign
debt regression, this is not accompanied by a high and significant coefficient for the
stand-alone NAFTA dummy. In fact, in the fixed effect regression this dummy is even
negative (though insignificant). The other measure of NAFTA to come out significant in
the OLS regression is the interaction of mxtariffs and intinput; the negative coefficient
suggests that firms benefiting from the reduction in Mexican tariffs because of their
high use of traded inputs increased their indebtedness to banks. This result, however, is
not robust to the introduction of firm-level fixed effects. Commerce is the activity with
the least dependence on banks.
The last pair of columns, reporting the results from the suppliers’ credit regression,
indicate that relatively small size and inward orientation have a positive impact on this
type of borrowing (in the fixed effects regressions, in fact, the export ratio has a
significant and negative coefficient). Profitability is an important determinant of access
to suppliers’ credit.28 By the nature of its activity, commerce is by far the most
dependent on suppliers’ credit. The net effect of Mexican tariffs is again negative,
indicating that trade liberalization increased this type of credit. It is possible to
hypothesize that, as price competition from imports became stronger thanks to the
reduction in tariffs, suppliers made the terms of their financing more favorable to their
customers. However, we can’t verify this conjecture with the data we have. The
combination of these last two regressions suggests that, faced with the Mexican banking
crisis, outwardly oriented firms have gone at least in part to foreign banks, while
domestically oriented firms seem to have relied more on domestic supplier financing.
This result is broadly consistent with the empirical literature on trade credit, which has
established that firms tend more often to resort to supplier financing when they are
unable to secure financing from banks (Petersen and Rajan, 1996).
Table 19. Foreign Debt Ratios (in Percent) and Openness
ADR
0
1
Total
29.1
39.7
63.8
65.7
29.8
43.4
34.7
65.5
37.4
Nafta
0
1
Total
28
In an alternative specification (not reported), the interaction of profitability and the NAFTA dummy
had a negative sign. Looking at this data set from the perspective of the firms granting trade credit,
Martínez Trigueros (2001) finds the reciprocal of these results: firms with access to foreign and bank
credit offer trade credit to their customers, and after NAFTA, profitability became an important
determinant of trade credit offered, as the banking system crisis that coincided with the NAFTA period
intensified the liquidity restrictions affecting suppliers of trade credit themselves.
46
Besides issuing debt, firms get financing by placing equity, and we had observed that
this activity is increasingly taking place both in the Mexican and US markets. Earlier we
had noted the fact that issuing an ADR is a sign of outward orientation. Table 19 offers
a simple confirmation of this observation. There, we see that firms issuing ADRs also
tend to have high foreign debt ratios. However, the increase in the propensity to borrow
abroad seems to have been larger outside the group of firms issuing this type of
security. Under NAFTA, however, the proportion of firms issuing ADRs has increased
(see also Table 11). This relation is further explored in Table 20, where we report the
results of logit regressions for the issue of ADRs.
Table 20. Logit Regressions of ADR Issuance
exportrt
exportrt*nafta
exportrt*ustariffadv
ustaradv
mxtariff
mxtariff*intinput
relsize
profitab
rxrintus
pesodep
nafta
extractive
manufactures
construction
commerce
commun. & transprt.
services
constant
No. Obs
LR Chi Square
Chi Square d.f.
Pseudo R2
1
Coefficient
z statistic
2
Coefficient
z statistic
0.016
4.347
0.047
-0.034
3.589
-2.473
0.125
-0.459
-0.088
0.005
0.000
0.147
-0.004
1.492
-6.923
-1.473
9.945
-0.007
1.392
-1.193
-2.464
0.454
0.986
-0.352
2.168
-0.563
-0.077
-2.297
1.689
2.966
-0.845
5.476
-0.956
-0.126
0.092
-0.350
-0.080
0.005
0.004
0.034
-0.006
1.617
-2.652
0.465
1.052
-0.333
2.138
-0.599
-1.980
1.071
-4.134
-1.370
9.884
0.185
0.290
-1.708
2.993
-2.468
1.687
3.096
-0.788
5.344
-1.010
-2.145
2,321
441.12
14
0.316
2,321
452.52
16
0.324
3
Coefficient
z statistic
0.016
3.511
-0.001
0.109
-0.340
-0.080
0.005
0.003
0.041
-0.006
1.066
-2.559
0.402
0.955
-0.389
2.099
-0.656
-1.504
-0.253
1.076
-4.063
-1.341
9.908
0.155
0.348
-1.729
2.337
-2.365
1.457
2.792
-0.928
5.233
-1.107
-1.720
2,321
447.31
16
0.321
Table 20 reports the results from a set of logit regressions for the issue of ADRs. The
main difference among them is the way we model NAFTA. The fit of all three models is
reasonably good, and most coefficients of interest have the expected signs and appear
significant. Thus, export orientation is major predictors of ADR issue; but it becomes
less important during the NAFTA era (the sign of the interaction of export ratios with
ustariffadv is negative too, but not significant). The NAFTA dummy comes out
significant and positive. This is a configuration much like the one we saw in the foreign
47
debt equation: foreign sources of finance have become available even to firms beyond
the circle of the most clearly export oriented. The signs on Mexican tariff variables may
at first blush be taken to represent simple time trends. However, mxtariff remains highly
significant even though we include the NAFTA dummy, and its interaction with
intinputs has also a negative sign (although it is not significant). This then suggests that
trade liberalization is associated with a higher rate of ADR issue. Table 20 also
indicates that larger firms are more likely to issue ADRs. Looking at the sector-specific
coefficients, communications and transportation is again remarkable for its use of
foreign financing despite being largely oriented to the domestic market.
Investment equations
As a final exercise we look at some investment equations. The first set consists of
regressions from our panel of firms listed in the stock exchange; the second reports
regressions made using data from the Annual Industrial Survey collected by the
Mexican Statistics Institute. We take as a starting point the well-known model of
Fazzari, Hubbard and Petersen (1988). This model has been used often to analyze
Mexican investment data, as in Gelos and Werner (1998), Martínez-Trigueros (2001),
Sanchez (2001), and Castillo (2002), all of whom find significant liquidity restrictions,
especially in the second part of the nineties.
14.0
12.0
10.0
Percent
8.0
6.0
4.0
2.0
0.0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
Figure 15. Mexican tariffs on imported inputs (simple mean for all industrial classes).
Source: Authors’ calculations using data from the Secretariat of the Economy.
48
Table 21 reports the results of the estimation of several investment equations for the
Mexican stock exchange datat set. The ratio of investment in plant and equipment to the
stock of productive assets at the start of the year is our dependent variable, and we
regressed it against a measure of cash flows, given by the profitability ratio (profitab),
and against the prospects for a firm, given by the change in net sales normalized by the
firm’s productive assets (chgsales/k). In addition, we include the ratio of exports to sales
and two trade-related measures of NAFTA . The first one is the sector-specific tariff
advantage defined earlier (UStariffadv), which measures the difference between the
average tariffs imposed by the US on imports from Mexico and from Mercosur. We
don’t use this variable in isolation, but interacted with the export ratio and with profitab.
The second measure of NAFTA is the annual average tariff on inputs imported by
Mexican firms for the period 1990-2000 that we introduced before (Mxtariff). In Figure
15 we can see the evolution of average Mexican tariffs during the sample period. We
use this variable by itself, but also interacted with the ratio of intermediate inputs to
sales, since the benefit from liberalization of imports should be proportional to the
importance of intermediate inputs (which are our best approximation to the tradable
component of costs). In general, a positive and significant coefficient on profitab is
interpreted as an indication of liquidity restrictions; we have interacted profitab with a
NAFTA dummy as a Chow test of the stability of the coefficient on this variable, and
also with the US tariff advantage variable.
Table 21 shows two sets of regressions: the top panel has OLS models including sector
dummies, and the bottom panel has fixed-effects regressions where the fixed effect is
taken to exist at the level of the firm, thus eliminating the sector dummies. In each
panel, the main difference among the various models is the way we model NAFTA. The
first model includes only trade-related measures of NAFTA; the next two models
include a NAFTA dummy interacted with profitab and also by itself; and the final two
models substitute Ustariffadv for the NAFTA dummy in the interactions with profitab.
One of the main results from the investment equations of Table 21 is that liquidity
restrictions seemed to be relatively unimportant in the first part of the sample but
became important in the NAFTA period, as evidenced by the instability of the
parameter for profitability, which becomes significant and positive in the more recent
part of the sample. This change is totally clear in models 2 and 3, where the interaction
of NAFTA and profitab is positive and significant; but the positive sign of the
coefficient of the interaction of profitab and UStariffadv in models 4 and 5 can also be
interpreted this way, since the tariff advantage tended to grow after NAFTA went into
force, and this temporal dimension of the variability of UStariffadv may well be the
effect being captured in this coefficient. The initial situation, in which liquidity
restrictions were not a problem, is likely a reflection of the nature of our sample,
consisting of firms large and sophisticated enough to be listed in the stock exchange.
The appearance of liquidity restrictions in the NAFTA period doubtless reflects the
temporal coincidence of the banking crisis and the entry into effect of the trade
agreement. It is in fact a measure of the severity of the banking crisis and its aftereffects that this set of firms shows evidence of liquidity constraints in the post-1994
period. The other standard component of the typical investment equation, the change in
net sales, is an important determinant of investment through the sample period, and
shows a stable and significant coefficient across all model specifications.
49
Table 21. Investment Equations for the Sample of Listed Firms
1
Coefficient t statiistic
2
Coefficient t statiistic
3
Coefficient t statiistic
4
Coefficient t statiistic
5
Coefficient t statiistic
OLS regressions
change sales / k
profitab
profitab*nafta
profitab*UStariffadv
rintsect
exportrt
exportrt*UStariffadv
mxtariff
mxtariff*intinput
nafta
manufactures
construction
commerce
commun. & transprt.
services
constant
0.0082
0.0531
3.607
2.423
0.0082
-0.1475
0.2393
3.639
-2.917
4.397
0.0080
-0.0660
0.1455
3.564
-1.272
2.594
0.0339
0.0119
-0.0034
-0.4534
-0.0141
4.606
2.818
-1.439
-10.695
-0.305
0.0355
0.0111
-0.0033
-0.3797
-0.0474
4.839
2.638
-1.400
-8.363
-1.019
-0.4674
-0.5803
-0.3206
0.3676
-0.1764
4.1945
-2.252
-1.982
-1.199
0.800
-0.539
12.181
-0.4513
-0.4842
-0.2757
0.3368
-0.2423
3.8037
-2.184
-1.657
-1.035
0.736
-0.743
10.740
0.0573
0.0085
-0.0033
-0.1084
-0.0210
1.7474
-0.4914
-0.6097
-0.3779
0.2682
-0.3348
0.2162
7.079
2.033
-1.415
-1.718
-0.453
6.128
-2.398
-2.099
-1.428
0.591
-1.035
0.317
No. Obs
F statistic
F stat d.f.
Adjusted R2
2,061
30.14
12, 2048
0.145
2,061
29.56
13, 2047
0.153
0.0082
0.0387
3.616
1.377
0.0079
0.0467
3.543
1.680
0.0176
0.0342
0.0120
-0.0036
-0.4508
-0.0166
0.821
4.639
2.845
-1.500
-10.603
-0.358
-0.4643
-0.6080
-0.2984
0.3629
-0.1693
4.1833
-2.237
-2.063
-1.110
0.790
-0.517
12.138
0.0117
0.0590
0.0088
-0.0035
-0.1178
-0.0009
1.9434
-0.5029
-0.6964
-0.3998
0.2747
-0.3033
0.0267
0.553
7.302
2.086
-1.478
-1.867
-0.019
7.068
-2.451
-2.389
-1.503
0.605
-0.936
0.039
2,061
30.62
14, 2046
0.168
2,061
27.87
13, 2047
0.145
2,061
30.07
14, 2046
0.165
Fixed effects regressions
change sales / k
profitab
profitab*nafta
profitab*UStariffadv
rintsect
exportrt
exportrt*UStariffadv
mxtariff
mxtariff*intinput
nafta
constant
No. Obs
No. groups (firms)
F statistic
F stat d.f.
R2 within
between
overall
F stat. firm effects
F stat d.f.
0.0083
0.0301
3.543
1.210
0.0084
-0.1042
0.1466
3.573
-1.625
2.273
0.0089
-0.0257
0.0605
3.803
-0.390
0.908
0.0260
0.0265
-0.0006
-0.3708
-0.0534
3.621
3.472
-0.210
-6.781
-0.804
0.0279
0.0259
-0.0008
-0.3149
-0.0864
3.862
3.401
-0.278
-5.259
-1.273
3.2057
8.846
2.9678
7.877
0.0485
0.0218
-0.0012
-0.0786
-0.0629
1.5320
-0.1996
5.778
2.862
-0.432
-1.012
-0.930
4.736
-0.260
2061
366
32.24
7, 1688
0.118
0.194
0.135
1.80
365, 1688
2061
366
28.93
8, 1687
0.121
0.204
0.142
1.76
365, 1687
2061
366
28.53
9, 1686
0.132
0.222
0.159
1.73
365, 1686
0.0084
-0.0159
3.563
-0.475
0.0089
-0.0092
3.816
-0.276
0.0488
0.0273
0.0268
-0.0010
-0.3624
-0.0569
2.047
3.785
3.509
-0.366
-6.616
-0.858
3.1593
8.709
0.0413
0.0494
0.0222
-0.0015
-0.0864
-0.0521
1.5782
-0.2405
1.741
5.895
2.904
-0.542
-1.122
-0.791
5.065
-0.316
2061
366
28.79
8, 1687
0.120
0.186
0.133
1.82
365, 1687
2061
366
28.81
9, 1686
0.133
0.210
0.156
1.76
365, 1686
Export orientation contributes positively to investment, as evidenced by the sign and
strong t statistics of the coefficient on exportrt in all models. Naturally, one of the main
effects of NAFTA has been to increase the export rate of Mexican firms, and this is
clearly true of the firms in this sample (see Table 11), and thus the trade agreement can
be credited, indirectly, with some of the impulse to investment. The interaction of the
export term with Ustariffadv, however, is insignificant and has the wrong sign in all
models, indicating that this variable does not have other independent effects beyond its
influence on exports. However, NAFTA’s other more direct impacts can be appreciated
by looking at the reduction of costs faced by Mexican firms as a result of the reduction
in Mexican tariffs. The mxtariff variable is consistently negative and significant,
suggesting that the liberalization of imports was an incentive to invest. Moreover, this
result is robust to the inclusion of the NAFTA dummy (compare models 3 and 5 to
models 2 and 4), indicating that mxtariff is not just acting as a time trend. The
interaction of Mexican tariffs with with the tradable component of costs (intinputs) has
the expected negative sign, but is not significant. Regarding the different sectors, the
only remarkable finding is the rise in investment in communications and transportation
50
after NAFTA, which reflects activity in telephony. More surprisingly, and consistent
with our discussion of Figure 5 earlier in this document, manufacturing had a below par
performance.
In sum, the stability of most coefficients across models, and the increase in the
importance of our measure of cash flow point to a hardening of liquidity constraints.
This effect, due to the banking crisis, counteracted the positive effects expected from
NAFTA and which acted, directly, through the positive investment effects of the
reduction of tariffs on imported inputs used by Mexican firms, and indirectly through
the power of exports to explain investment and the rise in exports due to the free trade
agreement.
Our second set of investment equations uses a different data set. Table 22 below reports
the results from a series of regressions of the ratio of investment during a given year to
productive capital at the start of the year for a panel put together using investment and
cash-flow information from INEGI’s Annual Industrial Survey and the mean tariffs on
imported inputs inputs by industrial class produced by the Secretariat of the Economy
for the period 1990-1999.29 The dataset covers 111 industrial classes and is organized
following INEGI’s 1994 classification, into which we have assimilated the data for
groups of establishments organized according to the 1984 classification. The post-1994
surveys include 204 classes, but the number of classes in our sample dropped to 120
upon matching of the 1994 and 1984 classifications, and further to 111 upon matching
with the Mexican tariff database, which is organized according to the 1994
classification. Although the data from our two sources correspond to the same industrial
classes, they do not correspond to the same respondents.30
The 111 classes in our sample comprised well over 4000 establishments (either firms or
geographically independent production facilities owned by a firm) employing nearly
one million people in 1998-1999. This sample comprises large and medium firms, with
an average payroll of 268 employees in 1998-1999 (by contrast, the average payroll in
the stock exchange sample had over 2000 employees). Thus, this is a much broader
sample than the one we have explored so far. The simple average across classes of the
ratio of exports to sales grew from 13.6 percent in 1994 to between 20.6 and 21.6
percent throughout the 1995-1999 period. This growth reflects the change in export
behavior of most classes, even those with a moderate outward orientation. This is made
clear by observing that the percentage of classes selling less than 5 percent of their
production abroad dropped from 41.9 percent of all classes in 1994 to 22.8 percent in
the period 1995-1999, and that the proportion of all classes selling over 20 percent of
their output abroad grew from 23.3 percent to 39.1 percent between those two periods.
We estimated investment equations for this data set along the lines of the Fazzari,
Hubbard and Petersen (1988) framework: the investment ratio is regressed against a
measure of cash flows (computed as paid out profits plus depreciation allowances), a
measure of the prospects for the firms in each class in the form of the change in their
sales over capital, and a real interest rate as a general measure of conditions in credit
29
The industrial survey data are produced by the Mexican Statistical Institute (INEGI), and the cash-flow
and investment variables were kindly shared with us by Oscar Sánchez, who used them in a study of the
effects of the banking crisis on liquidity constraints among firms (Sánchez, 2001).
30
The investment, cash-flow and sales data corresponds to samples of establishments surveyed by INEGI,
whereas the tariff data correspond to national averages for the same classes.
51
markets (in this case the US real interest rate we have used in other parts of this
section31). The main differences among the various models we fitted were in the way
NAFTA is specified in each one of them. In all of them we have included the average
tariff paid on imports purchased by the firms in the class. Largely as a result of NAFTA,
the average tariff on class imports (among all classes in our sample) fell from 12.4
percent in 1990 to 8.9 percent in 1994 and further to 5.91 percent in 1999 (see Figure
15). Thus, this is a direct measure of NAFTA in our regressions, where it is called “Mex
tariff.” We expect its influence on investment to be negative. In some models, we have
interacted the “Mex tariff” variable with the cash-flow variable to produce a new
regressor. A positive coefficient on this interaction term indicates a lessening of the
severity of the liquidity restriction when tariffs fall (the combined coefficient in front of
the cash-flow variable shrinks if tariffs decline). This would indicate that trade
liberalization has been associated with some degree of relaxation in the liquidity
constraints facing firms, given that tariffs have been falling in almost every single year
and class in the sample, especially since the entry into effect of NAFTA, since the
largest drop in tariffs is clearly linked to the entry into effect of NAFTA, as the dip in
1994 in the average tariff curve shown in Figure 17 indicates. Lastly, we have included
in some specifications both a NAFTA dummy and its interaction with the cash-flow
term as a possible test of the stability of the coefficients.
Table 22 reports the results of the estimation of the investment equations. The top half
of the table shows simple OLS regressions, and the bottom half the corresponding
models estimated using fixed effects; t-statistics are reported to the right of the
corresponding coefficient. In all models the standard cash flows and sales variables
have the expected signs and are strongly significant. Altogether, the simple
interpretation of the coefficients on the cash flow variable is that the equivalent of
between 13 and 21 cents out of every peso in cash flows is directed to investment.
Similarly, the real interest rate variable has the expected negative sign in most cases,
although it is not significant in some of the specifications. The first measure of NAFTA
effects, the Mex tariffs variable, has the expected negative sign in all but one model, and
it comes out significant in most cases. This supports the hypothesis that trade
liberalization, and therefore NAFTA, has contributed to increase investment.
The more difficult issue is whether liquidity restrictions have become more or less
severe since the entry into effect of NAFTA. Here our preferred specifications are those
in columns 3 and 4, both of which are robust to the choice between fixed effects and
OLS. The interaction between cash flows and tariffs has the expected positive sign and
is statistically significant in both regressions, suggesting that trade liberalization within
the North American region has helped Mexican firms become less dependent on their
own cash for the financing of investment. This is true regardless of whether we include
a NAFTA dummy in the regression. The coefficient on this dummy turns out significant
and positive, and it takes away some of the explanatory power of the Mex tariff
regressor, but without rendering it insignificant (although it does make the coefficient
on interest rates insignificant).
31
We have chosen the US real interest rate for various reasons. For one, it was virtually impossible to
construct class-specific interest rates as we did with the listed firms data because of the difficulty of
matching the list of industrial classes to the lists of elements in the baskets that compose the major price
indexes. In addition, the US rate has the advantage of being fully exogenous to the estimated equations.
52
Table 22. Investment Equations for the Annual Industrial Survey Data
1
Coefficientt-statistic
2
Coefficientt-statistic
3
Coefficientt-statistic
4
Coefficient t-statistic
OLS regressions
cash flow / K
cashflow*tariff
cashflow*nafta
sales chng. / K
US real interest
Mex tariff
nafta dummy
constant
0.1436
8.400
0.2161
10.950
0.0950
0.0208
-0.0859
-0.0310
4.846
6.167
-0.975
-0.516
8.5790
10.248
-0.0314
0.0196
0.0535
0.0543
7.6702
2.7808
-1.187
5.928
0.604
0.904
6.937
2.375
No. Observations
F statistic
F test, d.f.
Adj. R2
1,104
60.830
5, 1098
0.213
0.1257
0.0082
5.116
3.370
0.1246
0.0087
5.239
3.728
0.0217
-0.1598
-0.3515
6.419
-1.828
-3.778
11.8529
11.482
0.0191
0.0487
-0.2025
6.8534
5.5019
5.832
0.553
-2.207
8.591
4.425
1,104
60.890
6, 1097
0.246
1104
57.790
5, 1098
0.205
1,104
63.660
6, 1097
0.254
Fixed effects regressions
cash flow / K
cashflow*tariff
cashflow*nafta
sales chng. / K
US real interest
Mex tariff
nafta dummy
constant
0.1763
8.495
0.2254
9.824
0.1070
0.0160
-0.0148
-0.3185
5.261
5.068
-0.184
-3.073
9.7324
8.163
0.0236
0.0154
0.0639
-0.1110
5.4127
4.3644
0.089
4.890
0.787
-0.997
4.790
2.683
No. Observations
F stat for class dummies
F test, d.f.
F statistic regressors
F test, d.f.
R2 within
between
overall
1,104
3.180
110,988
57.930
5,988
0.227
0.188
0.203
1,104
2.940
110, 987
53.180
6, 987
0.244
0.252
0.239
0.1882
0.0045
6.139
1.578
0.1963
0.0048
6.558
1.746
0.0166
-0.0671
-0.7150
5.183
-0.831
-5.603
13.8637
10.433
0.0153
0.0662
-0.2661
6.0954
5.3798
4.870
0.817
-1.908
7.142
3.059
1104
3.010
110, 988
51.600
5, 988
0.207
0.156
0.175
1,104
2.830
110,987
53.670
6,987
0.246
0.274
0.247
The specifications in columns 1 and 2 of Table 22 are distinguished by the use of an
interaction between the NAFTA dummy and the cash flow regressor. This specification
is not robust to the inclusion of a NAFTA dummy, and that is one of the reasons we find
it suspect: the coefficient on the interaction term changes sign and becomes insignificant
between models 1 and 2 in the OLS regression, and the coefficient on Mex tariff
becomes insignificant upon inclusion of the NAFTA dummy in the fixed-effect
regressions and changes sign (while remaining insignificant) in the OLS regressions.
The use of a NAFTA dummy, by reducing horizontal heterogeneity, seems to increase
the difference between the OLS and fixed effects regressions. In this sense, the fixed
effects models should be considered more reliable, and in fact the F-statistic for the joint
significance of fixed effects is higher for the models in columns 1 and 2 than in their
counterpart models in columns 3 and 4. These fixed effects models do show that the
reduction of tariffs raises investment, but they now show an intensification of the
liquidity restrictions after NAFTA went into effect (the interaction of cash flow and
NAFTA has a positive coefficient). Since the NAFTA dummy is just a time dummy,
53
this coefficient may be capturing other effects, such as those of the banking system
crisis and its aftermath.
In short, our investment equations for data on industrial classes indicate that NAFTA
had a favorable effect on investment by reducing the severity of liquidity constraints.
The results from the regression using data from listed firms are broadly consistent with
these findings insofar as investment is positively affected by export behavior and by the
reduction in Mexican tariffs. A remarkable result of those regressions is that even
relatively large and sophisticated firms as those listed in the stock exchange
experienced, on average, an intensification of liquidity constraints in the aftermath of
the banking crisis.
Final Remarks
In this paper we have looked for evidence of changes in financing patterns that might be
related to the negotiation and entry into effect of the North American free trade
agreement. This is a task made difficult by the concurrent influence of other events
during the nineties such as the intensification of international capital flows, and the
liberalization of financial markets and the banking crisis in Mexico. All in all, however,
at the end of this exercise it is possible to propose some tentative conclusions.
The arrival of NAFTA coincided with a transformation of the capital account of the
balance of payments in Mexico. The most salient features of this transformation are the
decline in importance of capital flows related to the operations of the public sector (with
the exception of the 1995 rescue), and the declining role of Mexican banks in the
intermediation of external funds. First, a boom in portfolio flows into the stock
exchange was observed during the period of negotiation of the free trade agreement. It
is difficult to gauge, however, the extent to which these inflows were motivated by
investors’ desire to take positions in anticipation of the agreement, given the
coincidence of a strong privatization program at the time and the normalization of the
Mexican government’s borrower status. (Additionally, some indirect evidence against
the role of an anticipation of NAFTA comes from the evolution of sector-specific stock
indexes.) And second, foreign direct investment series show at list two clear jumps, one
when negotiations of NAFTA get underway and another when the agreement goes into
effect. In fact, during the NAFTA years FDI has been by far the most important
component of the capital account of Mexico’s balance of payments.
Free-trade agreements, as well as the anticipation created in the run up to their adoption,
have a positive influence on foreign direct investment. This presumption is supported by
the analysis of a multi-country panel data set. In the case of Mexico, NAFTA seems not
only to have helped increase FDI by some two thirds of what it would have been in a
counterfactual scenario without NAFTA, but it may even have prevented a sharper drop
in the share of global FDI going to Mexico. Such a drop might have been a natural
result of the winding down of Mexico’s privatization program, which coincided with a
boom in international mergers and acquisitions operations. Moreover, the combination
of the rules of origin under NAFTA and the promise of access to a large regional market
seems to have increased Mexico’s appeal to foreign investors coming from outside
North America. However, in spite of all these positive factors, foreign direct investment
seems to have been relatively low in recent years, perhaps as a result of the apparent
54
halt in the structural reform process in Mexico. In contrast, reforms have continued
apace in other countries, especially in Europe. The fact that Mexico is lagging behind
other countries in the structural reform effort is preventing that country from taking full
advantage of the opportunities afforded by NAFTA for the promotion of investment in
Mexico.
At the level of individual firms listed in the Mexican exchange, it is easy to identify a
strengthening of exports and of foreign financing, although a significant number of the
firms in our sample remain clearly oriented toward domestic product and financial
markets. On balance, however, the data suggest that the group of firms using only
domestic credit is shrinking faster than the group of firms selling only to domestic
customers. In this regard, the effect of NAFTA as a promoter of foreign financing seems
to be stronger among firms that are relatively outward oriented to begin with, and the
search for foreign resources can assume many forms, including bank debt, suppliers’
credit and the issue of ADRs. In fact, the data suggests that domestic bank credit, which
fell after the Mexican banking crisis of 1995, has been replaced in part by domestic
suppliers credit among domestically oriented firms, and by foreign bank financing
among outward oriented firms. But the liquidity crunch due to the banking crisis has
counteracted some of the positive effects on investment and financing we might have
expected from NAFTA. These findings are highly tentative, though, especially because
they are based on the analysis of a sample of large and modern firms. The examination
of broader data sets is needed to confirm those results. As a first step in this direction,
we estimated investment equations for a data set of firms grouped by industrial classes
from the Annual Industrial Survey. Those equations indicate that reductions in tariffs on
imported inputs –largely associated with NAFTA—are linked to a lessening of liquidity
restrictions on investment by private firms during the nineties. This result confirms that
the benefits from trade liberalization may have included better access to credit, other
things equal.
55
References
Banco de Mexico (1996, 1997, 1998) The Mexican Economy, Mexico D.F.
Bajo-Rubio, O. and C. López-Pueyo (1997) “An Industry Análisis of Foreign Direct
Investment in Spanish Manufacturing, 1986-1992”, Documento de Trabajo 9804,
Universidad de Navarra
Berzosa, C. (2000) “México y España ante dos procesos de integración” Comercio
Exterior, agosto, pp. 718-723
Borja Tamayo, A. (2001) “El TLCAN y la inversión extranjera directa: el nuevo
escenario” in A. Borja Tamayo, ed., Para evaluar el TLCAN, México: Miguel Angel
Porrúa, 2001, 269-309
Calderón, C. N. Loayza and L. Servén (2002) “Greenfield FDI vs. Mergers and
Acquisitions: Does the Distinction Matter?” mimeo, World Bank
Castillo, R. (2002), “Restricciones de Liquidez, el Canal de Crédito y la Inversión en
México” mimeo
Congressional Budget Office (1993) Estimating the Effects of NAFTA: An Assessment
of the Economic Models and Other Empirical Studies, Washington DC, 96 p.
Cuevas, A., M. Messmacher and A. Werner (2002), “Macroeconomic Synchronization
Between Mexico and its Nafta Partners,” mimeo, Banco de Mexico
Dussel Peters, E., L.M. Galindo Paliza, and E. Loria Díaz (2002) “Visión
Microeconómica de los impactos de la Integración Regional en la Inversión Inter e
Intraregionales,” mimeo, Facultad de Economía, UNAM
Fazzari, S., G. hubbard and B. Petersen (1988), “Financing Constraints and Corporate
Investment,” in Brookings papers on Economic Activity, 1988:1, pp. 141-205
Fernández de Cordoba, G. And T. Kehoe (1999) “Capital Flows and Exchange Rate
Fluctuations Following Spain’s Entry into the European Community”
Frankel, J. A. and S. Wei (1998) “Regionalization of World Trade and Currencies:
Economics and Politics” in J.A. Frankel, ed., The Regionalization of the World
Economy, Chicago: University of Chicago, 1998, pp.189-219
Garber, P. and S. Lall (1996) “Derivative Products in Exchange Rate Crises,” presented
at the Conference on managing Capital Flows organized by the Federal Reserve Bank of
San Francisco.
Gelos, G. and A. Werner (1998), “La Inversión Fija en el Sector Manufacturero
Mexicano 1985-1994,” Documento de Investigación 9805, DGIE, Banco de México.
56
González-Anaya, J. A. And G. Marrufo (2001) “Financial Market Performance in
Mexico,” paper prepared for the Mexican Credit Conference organized by the Center
for Research on Economic Development and Policy Reform, Stanford university,
October, 2001
Green, W. (1990) Econometric Analysis New York: MacMillan
Hernández, F. and A. Villagomez (2001) “El sector financiero mexicano en el tratado de
libre comercio: una evaluación preliminar” in A. Borja Tamayo, ed., Para evaluar el
TLCAN, México: Miguel Angel Porrúa, 143-180
Kehoe, P. and T. Kehoe (1994a) “Capturing NAFTA’s Impact with Applied General
Equilibrium Models” Federal Reserve Bank of Minneapolis Quarterly Review v.18, n.1
(Spring)
Kehoe, P. and T. Kehoe (1994b) “A Primer on Static Applied General Equilibrium
Models” Federal Reserve Bank of Minneapolis Quarterly Review v.18, n.1 (Spring)
Krugman, P. and G. Hanson (1993) “Mexico-US Free Trade and the Location of
Production” in P. Garber, ed., The Mexico-US Free trade Agreement, Cambridge, Ma:
The MIT Press, 1993, 163-186
Levy Yeyati, E. E. Stein and C. Daude (2001) “Regional Integration and the location of
FDI” mimeo
Mayer, F.W. (2001) “Juego de dos niveles: las negociaciones del TLCAN” in A. Borja
Tamayo, ed., Para evaluar el TLCAN, México: Miguel Angel Porrúa, 2001, 47-100
Morley, S., R. Machado and S. Pettinato (1999) “Indexes of Structural Reform in Latin
America,” mimeo available at ECLAC’s internet website.
Oyarzún de la Iglesia, J. (2000) “México en el TLCAN, España en la Unión Europea:
balance de la integración,” in Comercio Exterior, agosto, pp. 688-710
Petersen, M. And R. Rajan (1996) “Trade Credit: Theories and Evidence” NBER
Working paper 5602, 41p.
Sanchez, O. (2001), “The Transmission of Monetary Policy and the Behavior of
manufacturing Firms in Mexico,” paper prepared for the Mexican Credit Conference
organized by the Center for Research on Economic Development and Policy Reform,
Stanford University, October, 2001.
Serra Puche, J.J. (1992) Conclusión de la Negociación del Tratado de Libre Comercio
entre México Canadá y Estados Unidos, México DF: SECOFI,, 80p.
Serrano, C. (2001), “The Role of commercial banks in the Provision of Credit to Small
and Medium Enterprises in Mexico,” paper prepared for the Mexican Credit Conference
organized by the Center for Research on Economic Development and Policy Reform,
Stanford university, October, 2001.
57
Trigueros Martínez, L. (2001), Did Public Firms Take the Role of Banks After the 1995
Mexican Crisis?” paper prepared for the Mexican Credit Conference organized by the
Center for Research on Economic Development and Policy Reform, Stanford
University, October, 2001.
United Nations Conference on Trade and Development (2000, 2001) Global Investment
Report, available in electronic version on the internet.
Waldkirch, A. (2001)”The New Regionalism and Foreign Direct Investment: The Case
of Mexico,” mimeo, Oregon State University
Wooldridge, J. (2002) Econometric Analysis of Cross-Section and Panel Data,
Cambridge Ma.: The MIT Press, 752 p.
World Bank (2002) Global Development Finance, Washington DC: The World Bank
World Economic Forum (2000) Global Competitiveness Report 2000, Oxford
University Press
58
Appendix 1. Mexico: Capital Account of the Balance of Payments 1980-2000
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
9,996
8,966
1,458
1,438
6,071
0
646
0
5,425
1,029
-2,269
317
2,223
1,900
0
-1,141
339
2,728
354
-158
2,532
0
-519
0
3,051
-2,388
1,415
-3,156
-2,309
2,192
0
-530
1,306
3,843
1,076
1,229
1,538
0
-435
0
1,973
-2,537
-416
-1,605
-1,760
1,541
0
-298
-316
1,247
1,065
293
-111
0
-596
0
485
-1,564
-939
-1,283
-1,231
1,984
0
-93
2,716
2,360
1,580
714
66
0
-519
0
585
355
-732
0
-1,481
2,401
0
167
-1,189
3,529
768
428
2,333
0
-934
0
3,267
-4,718
47
-3,885
-2,531
2,635
0
-983
-1,163
-1,045
-1,059
-94
108
-693
1,389
0
-587
-118
1,380
-74
-2,928
2,880
0
-1,376
3,176
791
-299
1,677
-586
-56
-149
0
-381
2,385
980
-177
-1,157
3,176
493
-930
8,297
-865
4,810
-365
-5,310
-7,354
277
0
1,767
9,162
4,384
761
397
2,633
1,994
-1,007
In percentage of the external current account
Capital Account
109.0
163.8
169.7
-5.8
Consolidated Public Sector
34.7
112.6
152.2
-46.6
Development Banks
5.9
46.2
24.7
-6.0
Central Bank
-1.3
0.0
24.4
2.7
Nonfinancial Public Sector
30.1
66.4
103.1
-43.2
Guarantees
0.0
0.0
0.0
0.0
Titled Debt Issued Abroad
0.6
6.1
11.0
8.9
Money Market
0.0
0.0
0.0
0.0
Bank Loans Net of Deposits
29.5
60.3
92.1
-52.1
Private Sector
74.3
51.2
17.5
40.8
Commercial Banks
30.3
34.8
-38.5
-24.2
Net Variation in Bank Accounts Held Abroad by Nonbanks
-7.8
-23.1
5.4
53.9
Loans to Nonbank Agents
35.9
23.7
37.7
39.4
Foreign Direct Investment
20.0
18.9
32.3
-37.4
Investment in the Stock Exchange
0.0
0.0
0.0
0.0
-4.2
-3.1
-19.4
9.0
Other
-31.2
-91.9
-25.7
-29.4
-36.8
0.0
10.4
0.0
-47.2
60.6
9.9
38.4
42.1
-36.8
0.0
7.1
39.6
-156.0
-133.2
-36.6
13.9
0.0
74.5
0.0
-60.7
195.6
117.5
160.5
154.0
-248.1
0.0
11.6
197.7
171.9
115.0
52.0
4.8
0.0
-37.8
0.0
42.6
25.9
-53.3
0.0
-107.8
174.8
0.0
12.2
28.0
-83.3
-18.1
-10.1
-55.0
0.0
22.0
0.0
-77.1
111.3
-1.1
91.7
59.7
-62.2
0.0
23.2
-49.0
-44.0
-44.6
-4.0
4.5
-29.2
58.5
0.0
-24.7
-5.0
58.1
-3.1
-123.3
121.2
0.0
-57.9
54.6
13.6
-5.1
28.8
-10.1
-1.0
-2.6
0.0
-6.5
41.0
16.8
-3.0
-19.9
54.6
8.5
-16.0
111.4
-11.6
64.6
-4.9
-71.3
-98.7
3.7
0.0
23.7
123.0
58.8
10.2
5.3
35.3
26.8
-13.5
In millions of US dollars
Capital Account
11,377
26,597
Consolidated Public Sector
3,622
18,282
Development Banks
618
7,495
Central Bank
-132
0
Nonfinancial Public Sector
3,136
10,787
Guarantees
0
0
Titled Debt Issued Abroad
58
997
Money Market
0
0
Bank Loans Net of Deposits
3,078
9,790
Private Sector
7,755
8,315
Commercial Banks
3,160
5,647
Net Variation in Bank Accounts Held Abroad by Nonbanks
-809
-3,754
Loans to Nonbank Agents
3,750
3,851
Foreign Direct Investment
2,090
3,076
Investment in the Stock Exchange
0
0
-436
-506
Other
Composition
Capital Account
100.0
Consolidated Public Sector
31.8
Development Banks
5.4
Central Bank
-1.2
Nonfinancial Public Sector
27.6
Guarantees
0.0
Titled Debt Issued Abroad
0.5
Money Market
0.0
Bank Loans Net of Deposits
27.1
Private Sector
68.2
Commercial Banks
27.8
Net Variation in Bank Accounts Held Abroad by Nonbanks
-7.1
Loans to Nonbank Agents
33.0
Foreign Direct Investment
18.4
Investment in the Stock Exchange
0.0
-3.8
Other
Memorandum
External Current Account in millions of US dollars
External Current Account in percent of GDP
Source: Banco de México and World bank.
-10,434
-4.7
100.0
68.7
28.2
0.0
40.6
0.0
3.7
0.0
36.8
31.3
21.2
-14.1
14.5
11.6
0.0
-1.9
100.0
89.7
14.6
14.4
60.7
0.0
6.5
0.0
54.3
10.3
-22.7
3.2
22.2
19.0
0.0
-11.4
100.0
804.0
104.4
-46.7
746.2
0.0
-152.9
0.0
899.2
-704.0
417.1
-930.2
-680.7
646.0
0.0
-156.3
100.0
294.3
82.4
94.1
117.8
0.0
-33.3
0.0
151.1
-194.3
-31.8
-122.9
-134.8
118.0
0.0
-22.8
100.0
-394.1
-336.5
-92.6
35.0
0.0
188.3
0.0
-153.3
494.1
296.9
405.6
389.1
-626.9
0.0
29.4
100.0
86.9
58.2
26.3
2.4
0.0
-19.1
0.0
21.5
13.1
-26.9
0.0
-54.5
88.4
0.0
6.1
100.0
-296.9
-64.6
-36.0
-196.2
0.0
78.6
0.0
-274.8
396.9
-3.9
326.8
212.9
-221.6
0.0
82.6
100.0
89.9
91.1
8.1
-9.3
59.6
-119.4
0.0
50.5
10.1
-118.7
6.4
251.8
-247.6
0.0
118.3
100.0
24.9
-9.4
52.8
-18.5
-1.8
-4.7
0.0
-12.0
75.1
30.9
-5.6
-36.4
100.0
15.5
-29.3
100.0
-10.4
58.0
-4.4
-64.0
-88.6
3.3
0.0
21.3
110.4
52.8
9.2
4.8
31.7
24.0
-12.1
-16,241
-5.3
-5,890
-3.0
5,860
3.9
4,183
2.4
800
0.4
-1,374
-1.1
4,239
3.0
-2,376
-1.3
-5,821
-2.6
-7,451
-2.8
59
Mexico: Capital Account of the Balance of Payments 1980-2000 (cont.)
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
32,482
7,937
194
-1,175
8,918
-564
4,872
7,013
-2,402
24,545
3,328
-1,280
2,832
4,389
10,717
4,560
Capital Account
Consolidated Public Sector
Development Banks
Central Bank
Nonfinancial Public Sector
Guarantees
Titled Debt Issued Abroad
Money Market
Bank Loans Net of Deposits
Private Sector
Commercial Banks
Net Variation in Bank Accounts Held Abroad by Nonbanks
Loans to Nonbank Agents
Foreign Direct Investment
Investment in the Stock Exchange
Other
In millions of US dollars
24,507
26,419
4,336
6,874
1,651
1,175
-220
-460
2,906
6,159
-604
1,165
1,675
1,552
3,406
8,147
-1,571
-4,705
20,171
19,545
5,752
295
921
2,186
2,381
2,129
4,761
4,393
6,332
4,783
24
5,760
14,584
-142
1,329
-1,203
-268
-615
3,980
-1,942
-1,690
14,726
1,471
-3,714
1,193
10,973
4,084
720
15,406
13,326
959
13,333
-966
-662
2,994
-13,791
10,493
2,080
-4,982
-3,164
3,149
9,526
519
-2,969
4,069
-2,040
-1,246
-3,524
2,730
544
8,909
948
-7,672
6,109
-1,720
-6,055
1,968
9,185
2,801
-70
15,763
-11,420
-1,021
-3,487
-6,912
-708
-1,659
490
-5,036
27,183
-1,978
4,860
2,702
12,830
3,215
5,554
17,492
-2
240
-1,072
830
-769
198
130
1,270
17,494
-143
155
5,902
11,602
-666
643
13,537
-5,530
-765
-3,685
-1,080
-836
4,725
-942
-4,027
19,067
-1,546
-3,037
5,484
12,165
3,769
2,232
18,207
-8,651
920
-4,286
-5,285
1,290
-3,022
-25
-3,528
26,858
-2,087
3,565
8,420
13,951
447
2,563
Capital Account
Consolidated Public Sector
Development Banks
Central Bank
Nonfinancial Public Sector
Guarantees
Titled Debt Issued Abroad
Money Market
Bank Loans Net of Deposits
Private Sector
Commercial Banks
Net Variation in Bank Accounts Held Abroad by Nonbanks
Loans to Nonbank Agents
Foreign Direct Investment
Investment in the Stock Exchange
Other
In percentage of the external current account
167.3
108.1
138.8
49.2
29.6
28.1
33.9
-0.5
11.3
4.8
0.8
4.5
-1.5
-1.9
-5.0
-4.1
19.8
25.2
38.1
-0.9
-4.1
4.8
-2.4
-2.1
11.4
6.4
20.8
13.4
23.3
33.3
30.0
-6.5
-10.7
-19.3
-10.3
-5.7
137.7
80.0
104.9
49.6
39.3
1.2
14.2
5.0
6.3
8.9
-5.5
-12.5
16.3
8.7
12.1
4.0
32.5
18.0
18.8
37.0
43.2
19.6
45.8
13.8
0.2
23.6
19.5
2.4
977.1
845.2
60.8
845.6
-61.3
-42.0
189.9
-874.7
665.5
131.9
-316.0
-200.6
199.7
604.2
32.9
-188.3
174.6
-87.5
-53.5
-151.2
117.1
23.3
382.3
40.7
-329.2
262.2
-73.8
-259.8
84.5
394.2
120.2
-3.0
211.6
-153.3
-13.7
-46.8
-92.8
-9.5
-22.3
6.6
-67.6
364.9
-26.6
65.2
36.3
172.2
43.2
74.6
108.8
0.0
1.5
-6.7
5.2
-4.8
1.2
0.8
7.9
108.8
-0.9
1.0
36.7
72.2
-4.1
4.0
96.7
-39.5
-5.5
-26.3
-7.7
-6.0
33.8
-6.7
-28.8
136.2
-11.0
-21.7
39.2
86.9
26.9
15.9
102.1
-48.5
5.2
-24.0
-29.6
7.2
-17.0
-0.1
-19.8
150.6
-11.7
20.0
47.2
78.3
2.5
14.4
Capital Account
Consolidated Public Sector
Development Banks
Central Bank
Nonfinancial Public Sector
Guarantees
Titled Debt Issued Abroad
Money Market
Bank Loans Net of Deposits
Private Sector
Commercial Banks
Net Variation in Bank Accounts Held Abroad by Nonbanks
Loans to Nonbank Agents
Foreign Direct Investment
Investment in the Stock Exchange
Other
Composition
100.0
17.7
6.7
-0.9
11.9
-2.5
6.8
13.9
-6.4
82.3
23.5
3.8
9.7
19.4
25.8
0.1
Memorandum
External Current Account in millions of US dollars
External Current Account in percent of GDP
Source: Banco de México and World bank.
-14,647
-4.7
100.0
26.0
4.4
-1.7
23.3
4.4
5.9
30.8
-17.8
74.0
1.1
8.3
8.1
16.6
18.1
21.8
100.0
24.4
0.6
-3.6
27.5
-1.7
15.0
21.6
-7.4
75.6
10.2
-3.9
8.7
13.5
33.0
14.0
100.0
-1.0
9.1
-8.2
-1.8
-4.2
27.3
-13.3
-11.6
101.0
10.1
-25.5
8.2
75.2
28.0
4.9
100.0
86.5
6.2
86.5
-6.3
-4.3
19.4
-89.5
68.1
13.5
-32.3
-20.5
20.4
61.8
3.4
-19.3
100.0
-50.1
-30.6
-86.6
67.1
13.4
218.9
23.3
-188.5
150.1
-42.3
-148.8
48.4
225.7
68.8
-1.7
100.0
-72.4
-6.5
-22.1
-43.9
-4.5
-10.5
3.1
-31.9
172.4
-12.6
30.8
17.1
81.4
20.4
35.2
100.0
0.0
1.4
-6.1
4.7
-4.4
1.1
0.7
7.3
100.0
-0.8
0.9
33.7
66.3
-3.8
3.7
100.0
-40.8
-5.7
-27.2
-8.0
-6.2
34.9
-7.0
-29.8
140.8
-11.4
-22.4
40.5
89.9
27.8
16.5
100.0
-47.5
5.1
-23.5
-29.0
7.1
-16.6
-0.1
-19.4
147.5
-11.5
19.6
46.2
76.6
2.5
14.1
-24,438
-6.7
-23,399
-5.8
-29,662
-7.0
-1,577
-0.6
-2,330
-0.7
-7,448
-1.9
-16,072
-3.8
-13,995
-2.9
-17,828
60
Appendix 2. List of countries in the international panel data set.
Argentina
Australia
Austria
Belgium
Bolivia
Brazil
Canada
Colombia
Chile
China
Denmark
Ecuador
Egypt
Finland
France
Germany
Hungary
Iceland
India
Ireland
Israel
Italy
Japan
Korea (South)
Malaysia
Mexico
Netherlands
New Zealand
Norway
Paraguay
Peru
Poland
Portugal
Singapore
South Africa
Spain
Sweden
Switzerland
Thailand
Turkey
Uganda
United Kingdom
United States
Uruguay
Venezuela
61
Appendix 4. Estimates of the FDI regressions using different forms of the
FTA expectations variable.
Note: the model in boldface is the one that appears in column 2 of Table 6 in the text.
Expectation represented with dummy variable
2yr
1yr
coefficient t statistic
coefficient t statistic
Expectation FTA
RELGNIPH
GDPGROWTH
INFLATION
BUDGETBAL
CURRENT ACCT
WORLD GROWTH
US 1Y TBILL
EXPORTS
FDI WORLD
GDP
FTAGDP
INTEGRATION
CONSTANT
0.438
-1.793
0.032
0.000
-0.032
-0.041
-0.081
0.004
0.708
0.776
0.264
0.090
0.173
-15.637
R2 within
between
overall
1.726
-1.511
2.811
-1.425
-2.200
-3.718
-1.975
0.184
3.259
6.686
1.100
1.716
1.223
-8.393
0.406
-1.752
0.033
0.000
-0.031
-0.400
-0.081
0.006
0.690
0.770
0.280
0.102
0.173
-15.780
2.153
-1.477
2.881
-1.337
-2.159
-3.691
-1.967
0.287
3.174
6.629
1.170
1.920
1.230
-8.483
R2 within
between
overall
0.000
-1.809
0.032
0.000
-0.033
-0.040
-0.084
0.004
0.725
0.794
0.255
0.083
0.164
-15.703
1.564
-1.524
2.759
-1.397
-2.296
-3.676
-2.025
0.219
3.342
6.831
1.065
1.590
1.161
-8.429
0.471
0.673
0.586
0.420
-1.773
0.033
0.000
-0.030
-0.039
-0.083
0.009
0.690
0.772
0.279
0.117
0.166
-15.896
0.473
0.679
0.591
0.472
0.674
0.587
Expectation represented with leads of partner GDP
1yr
2yr
coefficient t statistic
coefficient
t statistic
Expectation FTA
RELGNIPH
GDPGROWTH
INFLATION
BUDGETBAL
CURRENT ACCT
WORLD GROWTH
US 1Y TBILL
EXPORTS
FDI WORLD
GDP
FTAGDP
INTEGRATION
CONSTANT
3yr
coefficient t statistic
0.000
-1.740
0.033
0.000
-0.033
-0.040
-0.080
0.008
0.723
0.791
0.249
0.091
0.171
-15.853
1.905
-1.465
2.842
-1.347
-2.328
-3.624
-1.953
0.387
3.339
6.822
1.038
1.734
1.209
-8.512
0.472
0.679
0.596
2.600
-1.499
2.924
-1.224
-2.077
-3.598
-2.024
0.450
3.183
6.663
1.168
2.156
1.181
-8.553
0.475
0.681
0.593
3yr
coefficient t statistic
0.000
-1.745
0.033
0.000
-0.033
-0.039
-0.080
0.010
0.727
0.799
0.242
0.097
0.165
-15.895
1.949
-1.470
2.892
-1.308
-2.326
-3.547
-1.936
0.474
3.354
6.874
1.010
1.821
1.167
-8.532
0.472
0.684
0.591
62
Appendix 4. Computing an upper estimate of NAFTA’s contribution to FDI
growth.
In the body of the paper we found that a conservative estimate of NAFTA’s
contribution to FDI growth was 94 percent, or roughly a doubling of this type of
investment relative to what would be observed in the absence of the trade agreement.
This estimate is conservative since it excludes any effects from the growth in exports,
which is lumped with other “size” effects. In the paper we also suggested that a more
reasonable estimate of our estimation of the “FTA effect” was an increase of about 70
percent of FDI over its counterfactual, NAFTA-less hypothetical level. In this appendix
we explain how we arrived at this back-of-the-envelope estimate.
The main idea is to assess the overestimation of the “size” effect, and then to transfer
this quantity to our estimation of the FTA effect. We assume that the effect of NAFTA
on exports has been to stimulate the growth of nonoil exports beyond its traditional rate
of growth. Thus, we take the rate of growth of real nonoil exports between 1980 and
1991 (9.6 percent), and use it to project a NAFTA-free level of exports in 1999 from the
starting point of 1991 –that is, just before we start measuring any anticipation effects of
NAFTA. The projected amount is US$ 35 billion less than the level of exports observed
in 1999. We then subtract this difference from total exports (US$127,774 million) to
obtain counterfactual exports (US$89,736 million).
With this counterfactual it is easy to calculate the overestimation of the size effect as the
product of the coefficient of Ln(exports) in the regression (0.6897 in the case of
regression 2, Table 6) and the difference between the logs of actual and counterfactual
exports. The resulting quantity is 0.22735, which we add to our estimate of FTA’s
contribution of 0.316. The sum, 0.543, yields the net increase of 72.1 percent upon
exponentiation.
63