The Enclave Economy
Foreign Investment and Sustainable
Development in Mexico’s Silicon Valley
Kevin P. Gallagher
Boston University
Lyuba Zarsky
Monterey Institute for International Studies
Global Development and Environment Institute
Tufts University
Sustainable Industrial Development
• Economic:
– Increasing the endogenous capacities of Mexican
firms and workers to learn, innovate and produce
for domestic and/or global markets;
• Social:
– Creating jobs with labor rights, especially for the
poor and middle classes;
• Environmental:
– Mitigating the environmental and health impacts of
industrial growth.
The Promise of Investment
Liberalization
• Attract FDI
– More stable form of foreign exchange
– Employment, tax revenue
• Productivity spillovers
– Backward linkages
– Human capital spillovers
– Forward linkages
• Environmental Spillovers
– Clean technology and management transfer
– Environmental “spillovers” to domestic firms
– Leapfrogging spurred by frontier environmental policy
Attract FDI?
Crowding Out Domestic Investment
450
400
350
FDI/GDP
1980=100
300
250
200
150
100
GFCF/GDP
50
0
1980
Source: World Bank WDI, 2007
1985
1990
1995
2000
2005
Jalisco: Electronics Exports and FDI
300
250
1995=100
200
Exports
150
100
FDI
50
0
1995
1996
1997
1998
1999
Source: Cadena Productiva de la Electronica (CADELEC), 2007
2000
2001
2002
2003
2004
2005
2006
Electronics Clusters in Mexico
Source: Gallagher and Zarsky, 2007
Why firms came
•
•
•
•
•
•
•
•
Proximity to U.S.
Markets (hi-tech boom)
NAFTA
PITEX and Maquila
Exchange rate
Infrastructure
Wages
Pollution haven?
Why firms left
•
•
•
•
•
Slowdown in
U.S. demand
China’s
accession to
WTO
Overvaluation
of the peso
(wages)
Lack of local
productive
capacities
Lack of
domestic and
regional
markets
High Tech Project Losses in Jalisco, 2001-2003
Investment
Employment
Destination
($US millions)
Hard Disk Drives
Components
Communication Systems
Cell Phones
Printers
Printing Systems
Electronic Equipment
Telecommunications
108
30
n.a.
n.a.
24
25
200
24
70
12
3
3
15
4,250
1,200
3,720
400
1,493
1,095
2,100
1,049
925
1,900
295
300
2,500
Total
514
21,227
Semiconductors
Electronic Cards
China
China
China
China
China
China
Phillipines
China
Malaysia
China
China
China
China
Source: Dussel Peters, Enrique. 2005. Economic Opportunities and Challenges posed by China
for Mexico and Central America: DIE (German Development Institute).
Hi-Tech Employment in Jalisco, 1995-2005
90,000
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
1995
1996
1997
1998
1999
Source: Cadena Productiva de la Electronica (CADELEC), 2007
2000
2001
2002
2003
2004
2005
China vs. Mexico in World IT Markets
Computers
Peripherals
Telecom
(country exports as a percent of world exports)
China
2000 Market Share
2005 Market Share
Percentage Point Change
6.0
28.8
22.8
4.0
15.7
11.7
5.7
18.3
12.6
4.5
3.5
-1.0
2.2
1.2
-1.0
5.2
3.5
-1.7
Mexico
2000 Market Share
2005 Market Share
Percentage Point Change
Source: United Nations Commodity Trade Statistics, 2006
China: Taking Away the Ladder?
1980
1985
1990
1995
Country
Share
Country
Share
Country
Share
Country
1
USA
27.0%
USA
25.3%
USA
22.3%
USA
2 Fmr Fed. Rep. of Germany 14.1%
Japan
17.3%
Japan
16.1%
Japan
3
Japan
11.8% Fmr Fed. Rep. of Germany 11.5% Fmr Fed. Rep. of Germany 11.6%
Germany
4
United Kingdom
10.5%
United Kingdom
8.5%
United Kingdom
7.5%
Singapore
5
France
7.7%
France
6.8%
France
6.6%
United Kingdom
6
Netherlands
4.1%
Italy
3.6%
Singapore
4.0%
France
7
Italy
3.8%
Netherlands
3.3%
Netherlands
3.6% China, Hong Kong SAR
8
Switzerland
3.0%
Canada
3.0%
Italy
3.5%
Rep. of Korea
9
Canada
2.5% China, Hong Kong SAR 2.3% China, Hong Kong SAR 2.9%
Netherlands
10 Belgium-Luxembourg 2.3%
Singapore
2.2%
Rep. of Korea
2.8%
Malaysia
11
Sweden
2.1%
Switzerland
2.2%
Switzerland
2.2%
Italy
12
Singapore
1.7%
Sweden
1.9%
Canada
2.2%
China
13 China, Hong Kong SAR 1.3%
Rep. of Korea
1.8%
Sweden
1.8%
Canada
14
Rep. of Korea
1.1% Belgium-Luxembourg 1.6% Belgium-Luxembourg 1.6%
Mexico
15
Poland
1.0%
Ireland
1.3%
Malaysia
1.6%
Switzerland
16
Austria
0.9%
Malaysia
1.1%
Ireland
1.4%
Sweden
17
Denmark
0.9%
Denmark
0.8%
Austria
1.1%
Ireland
18
Malaysia
0.8%
Austria
0.7%
Spain
1.0%
Thailand
19
Ireland
0.7%
Spain
0.7%
Denmark
0.9% Belgium-Luxembourg
20
Spain
0.6%
Poland
0.5%
Thailand
0.7%
Spain
21
Australia
0.4%
Israel
0.5%
China
0.7%
Finland
22
Finland
0.3%
Czechoslovakia
0.4%
Finland
0.5%
Denmark
23
Norway
0.3%
Brazil
0.4%
Israel
0.4%
Austria
24
Portugal
0.2%
Finland
0.4%
Australia
0.3%
Australia
25
Hungary
0.2%
Norway
0.3%
Norway
0.3%
Israel
26
India
0.1%
Australia
0.3%
Brazil
0.3%
Philippines
27
Argentina
0.1%
Portugal
0.2%
Czechoslovakia
0.3%
Norway
28So. African Customs Union 0.1%
Hungary
0.2%
Fmr Yugoslavia
0.2%
Czech Rep.
29
Indonesia
0.1%
China
0.1%
Mexico
0.2%
Indonesia
30
Philippines
0.1%
Philippines
0.1%
Poland
0.2%
Brazil
…
…
…
…
…
…
99
China
0.0%
Source: Gallagher and Porzecanski, 2007
2000
Share
Country
18.1%
USA
15.2%
Japan
8.8%
Germany
6.9%
Singapore
6.8%
United Kingdom
5.8%
France
4.2% China, Hong Kong SAR
4.2%
Rep. of Korea
3.5%
China
3.3%
Malaysia
2.5%
Netherlands
2.1%
Mexico
2.1%
Canada
1.8%
Ireland
1.8%
Italy
1.7%
Philippines
1.6%
Belgium
1.5%
Sweden
1.5%
Thailand
0.9%
Switzerland
0.8%
Finland
0.7%
Spain
0.6%
Israel
0.4%
Denmark
0.4%
Hungary
0.3%
Austria
0.2%
Indonesia
0.2%
Brazil
0.2%
Australia
0.2%
Czech Rep.
2005
Share
Country
18.7%
USA
10.8%
China
7.4%
Germany
5.8%
Japan
5.5% China, Hong Kong SAR
5.0%
Singapore
4.5%
Rep. of Korea
4.4%
France
4.0%
United Kingdom
3.7%
Netherlands
3.7%
Malaysia
3.4%
Belgium
2.5%
Mexico
2.3%
Ireland
2.0%
Italy
1.8%
Switzerland
1.5%
Canada
1.5%
Thailand
1.5%
Philippines
1.4%
Sweden
1.0%
Spain
0.8%
Hungary
0.7%
Finland
0.6%
Denmark
0.6%
Austria
0.6%
Czech Rep.
0.5%
Brazil
0.5%
Israel
0.3%
Indonesia
0.3%
Poland
Share
12.6%
12.4%
9.2%
6.9%
5.9%
5.6%
4.9%
4.5%
4.5%
4.1%
3.0%
2.7%
2.6%
2.1%
1.9%
1.8%
1.6%
1.4%
1.3%
1.3%
1.1%
0.9%
0.9%
0.9%
0.7%
0.6%
0.5%
0.4%
0.4%
0.3%
Generate Spillovers?
Domestic Share of Inputs in Foreign Firms
Sector
1990
2006
Thousands of Current Mexican pesos
All Industries
All inputs
National Inputs
National share
32,171,039
3,198,158
9.9%
719,826,926
82,038,088
11.4%
Electronics
All inputs
National Inputs
National share
4,272,927
51,339
1.2%
86,931,211
1,780,876
2.0%
Source: INEGI, 2007
IT Plant Closings--Whole or Partly Owned Mexican Firms
Firm
Cumex Electronics
Mitel
Phoenix International
Encitel
Info Spacio
Logix Computers
Mexel
Unisys
Electron
Scale Computers
Advanced Electronics
Compuworld
Microtron
Ownership (percent)
Activity
50/50 Mex-US
51/49 Mex-Canada
50/50 Mex-US
100 Mex
100 Mex
100 Mex
100 Mex
100 Mex
100 Mex
100 Mex
100 Mex
100 Mex
100 Mex
CM of PCBs
Telephone Components
Plastic Injection
CM of PCBs
CM of printers
Design and manufacturer of PCs
CM of PCBs
CM of computers and peripherals
Design and manufacturer of PCs
Design and manufacturer of PCs
Design and Manufacturer of PCBs
CM of hard drives
Buffers and Carton Packages
Source: Gallagher and Zarsky 2007
Backward Linkages
• 98 percent of inputs are
imported
• 80 percent decline in
local suppliers from
1985
• 97 percent of all
investment between
1994 and 2002 was
foreign
• Survival story:
– Electronica Pantera
Human Capital Spillovers
• Assembly work:
– Contract employees
– “basic” training
– Limited joint R&D
• Few domestic firms
to spill over to
• Success story:
– IBM training center
and spin-offs
Forward Linkages
• Hi-tech
diffusion
relatively low
• Limited
success of
“digital
divide”
projects
National Demand as a Percent of Total Production
IT Firms in Mexico
60%
50%
40%
30%
20%
10%
0%
1985
Source: INEGI, 2007, Peres, 1992
1995
1998
2001
Why so few spillovers?
• Market Failures
– Barriers to entry into global supplier
networks
– No access to credit and finance
– Environmental externalities
• Government Failures
–
–
–
–
Orientation of ISI
Incentive to import inputs
Macroeconomic uncertainty
Little R&D, human capital formation,
leveraging
• Firm failures
– Little R&D
– Weak capacity
– Scale
NAFIN Credit to SMEs in Jalisco
450
400
350
1991=100
300
Million Pesos
250
200
150
100
# of recipients
50
0
1991
1992
1993
1994
Source: Gobierno del Estado de Jalisco, 2001
1995
1996
1997
1998
1999
2000
China: Major Consumer Electronics Firms by Ownership Type
Sector
Foreign-Owned
Joint-Ventures
Domestic Firms and SOEs
Mobile Phones
Motorola
Motorola/Eastcom
Nokia/Capitel, Southern
Siemens/Mil Subsidiaries
Samsung/Kejian
Sagem/Bird
TLC
PCs
HP
Dell
IBM/Great Wall
Toshiba/Toshiba Shanghai
Epson/Start
Taiwan GVC/TCL
Lenovo
Founder
Tongfang
Sony/SVA
Philips/Suzhou CTV
Toshiba/Dalian Daxian
Great Wall Electronics/TCL
Changhong
Konka
Hisense
Skyworth
Haier
Panda
Xoceco
Samsung/Suzhou
Xianxuehai
Electrolux/Changsha
LG/Chunlan
Mitsubishi/Haier
Sanyo/Kelon
Sigma/Meiling
Hong Leong/Xinfei
Toshiba Carrier/Midea
Changling
Gree
"Brown Goods"
"White Goods"
Siemens
Source: Rodrik, Dani (2005), "Policies for Economic Diversification," CEPAL REVIEW, 87, December, 7-23 .
Environmental Spillovers?
IT Assembly and Environment
• Copper and soldering of
plates with lead and tin
– Formaldehyde and solder
drass
• Exposure and waste
water issues
• Adding brominated
flame retardants to
circuit boards to reduce
flammability
– Polybrominated diphenyl
ether PBDE
• Bioaccumulative
• E-waste
Environmental Spillovers
• Technology Transfer:
– Vintage effects vs. end-of-pipe
– Bringing EMS but not clear if in compliance
– SCI-Sanmina and Industria Limpia program
• Greening the supply chain:
– Little contact with local suppliers to begin with
– HP: workshops with locals, some ISO requirements
• Exporting to higher standards:
– Not in Guadalajara plants (but in plants closer to higher regulation
markets)
– Globalization of environmentalism
Lessons for Mexico and Beyond
• FDI is a means to development, not an end in
itself
• Complementary domestic policies are needed
to facilitate spillovers, growth and
environmental protection
• Trade and financial agreements must
preserve the ‘policy space’ for complementary
efforts on a national scale
Stanford University Press
www.sup.org
Available from MIT Press
www.mitpress.mit.org
Earthscan Publications
www.earthscan.co.uk
Available from MIT Press
www.mitpress.mit.org
What to do?
• Strategies:
– Build domestic capacities for production and innovation
(education, R&D, infrastructure)
– Reduce domestic cost of capital
– Build domestic and regional markets
– Establish ROHS-like environmental regulations for
Mexico
• Challenges:
– Fiscal crisis
– Government capacity
– Constraints of trade regimes
– Inflation
– Relative wage/productivity/policy space of China
Electronics Clusters in Mexico
Mexicali
Tijuana
 SANYO
 SONY
 HITACHI
 MATSUSHITA
 JVC
 SAMSUNG
 PIONNER
 MITSUBISHI
 SHARP
 SANYO ELECTRODOMÉSTICOS
 PHILIPS
 CASIO
 KODAK
 CANON
 KYOCERA
 INTERNACIONAL RECTIFIER
Guadalajara
 I.B.M
 H.P.
 TECHNICOLOR
 TELECT
 TYCO
 KODAK
 VOGT ELECTRONIC
 SIEMENS VDO




SONY
DAEWOO (SLRC)
MITSUBISHI
GOLDSTAR
Chihuahua




MOTOROLA
ALTEL
KIOCERA
JABIL
Juárez





TOSHIBA
PHILIPS
THOMSON
KENWOOD
ELECTROLUX
 ACER
 ELAMEX
 PLEXUS
Reynosa










DELCO (Automotriz)
PHILIPS
SONY
MATSUSHITA (Automotriz)
VITROMATIC
NOKIA
LUCENT TECHNOLOGIES
FUJITSU (Automotriz)
CONDURA (Automotriz)
DELNOSA (Automotriz)
State of Mexico
 PANASONIC
 ELECTROLUX
 FILTER QUEEN
 HOOVER
 IMAN
 KOBLENZ
 MABE
 PHILIPS
 SUNBEAM
 OLIVETTI
 OLIMPIA
 SOLECTRON DE MEXICO
 FLEXTRONICS
 JABIL CIRCUIT
 BENCHMARK
 SANMINA-SCI
 AUDIO & VIDEO
 ELECTRODOMESTIC
 COMPUTER EQUIPMENT
 TELECOM
 OTHER