Foreign Direct Investment in Mexico: A Cointegration Analysis

This article addresses the important question of whether foreign direct investment enhances economic growth and labour productivity in Mexico, both from a theoretical and empirical perspective. After briefly reviewing the Mexican experience with net FDI inflows during the 1990s, the article presents a simple endogenous growth model which explicitly incorporates any positive (negative) externalities generated by additions to the foreign capital stock. Using cointegration analysis, the article estimates a dynamic labour productivity function for the 1960-95 period that includes the impact of the growth rate in the stocks of both private and foreign capital (as opposed to the flows) and the economically active population (EAP) (rather than the rate of population growth). The error correction model (ECM) estimates suggest that increases in both private ad (lagged) foreign investment spending, as well as the rate of growth in exports, have a positive and economically significant effect on the rate of labour productivity growth. In addition, the results show that increases in the EAP have a negative and statistically significant effect on the rate of labour productivity growth, while changes in the government consumption variable have a negative but marginally significant impact. The error correction terms of the estimated models are negative and statistically significant, thus suggesting that deviations of actual labour productivity growth from its long-run value are corrected in subsequent periods. Finally the article generates historical simulations from the estimated ECM's and offers some policy recommendations to enhance the positive externalities associated with FDI inflows.