Foreign Investment and Productive Efficiency: The Case of Mexico

This paper examines whether the relative performance of firms within Mexican manufacturing industries varies systematically with the presence of foreign subsidiaries. It also analyzes how foreign entry influences the technological structure in host country industries. The findings suggest that (1) foreign presence in an industry is positively correlated with structural efficiency and (2) foreign entry is related to structural changes only in the modern part of the industries. The most important source of spillover efficiency is found to be in the competitive pressure induced by the foreign firms. I. INTRODUCTION A WIDELY held view among economists studying foreign investment is that one of the important contributions to the host country is likely to stem from external effects or spillovers. The spillovers can be of different kinds. The foreign firms may influence the productivity and growth of the domestically owned firm; they may change the nature and evolution of concentration; they may alter financing, marketing, and technological and managerial practices in the industries that they enter, et cetera. Because of great methodological difficulties in investigating these effects empirically in addition to lack of data, few empirical investigations appear in the literature. Three available econometric studies deal with the influence of foreign investment on the technical efficiency of host country firms. One focuses on Australia (Caves 1974), one on Canada (Globerman 1979), and one on Mexico (Blomstrom and Persson 1983). All three find some support for the spillover benefit hypothesis, but none of the studies analyzes the nature of spillover efficiency in depth. The present paper is an attempt to identify through what mechanisms the spillover efficiency of foreign investment takes place by analyzing the effects of foreign investment on the productive efficiency of the industrial structure in Mexico. We will examine whether the relative performance of firms within an industry varies systematically with the presence of foreign subsidiaries. We will also analyze the impact of foreign investment on structural change, that is how foreign entry influences the technological structure in host country industries.