“Guadalajara: The Silicon Valley of Mexico?”
Gallagher in the
CLAS Conference Room on March 8.
Gallagher's Powerpoint presentation (warning: 3.8 MB
Gallagher's book page for Free Trade and the Environment
The Silicon Valley of Mexico? By Raymundo M. Campos-Vázquez)
The Silicon Valley of Mexico?
By Lifang Chiang
Guadalajara has been dubbed the “Silicon Valley of Mexico,” powered
by a decade-long wave of U.S.-led foreign direct investment (FDI)
in high technology production. In characterizing the effect of
this capital inflow both in Guadalajara and throughout Mexico,
Professor Kevin Gallagher, of Boston University, highlighted
two themes during his CLAS presentation: “globalization” and “concentration.”
The consolidation of oligopolistic practices
by such U.S.-based conglomerates as IBM and Hewlett Packard,
which together comprise
80 percent of foreign direct investment activity in Mexico, has
resulted in the “violation of basic conditions of the market” throughout
Mexico. Other barriers to sound investment include an overvalued
peso, the absence of effective policy response, and fierce competition
from other countries. Despite the promise, foreign direct investment
has to date yielded little positive spillover effects for the
broader Guadalajara community or for Mexico.
needs foreign direct investment
situation is paradoxical, given the promise that FDI holds
for countries seeking productivity
spillovers. Mexico, and
less developed countries (LDCs) in general, regard foreign
direct investment as a “real gem” because of its
ability to create productivity spillovers, spur innovation
and growth , and provide jobs. This desire is compounded by
the “absolute drought of investment,” hindering
overall economic growth and development. Mexico is still only
at the mean global income level. Meanwhile, more than half
the Mexican population lives in poverty as defined by the World
Bank, with sizable underemployment and informal sector participation.
FDI would provide a more stable form of foreign exchange to
allow the construction of plants, and would provide the “backward
linkages” and “forward linkages” needed to
stimulate the local economy. In other words, it could provide
inputs for emerging technologies, and could also contribute
to the spinning off of newer companies and products.
firms invest in Mexico
are many reasons why Mexico is attractive as a destination
for foreign direct investment.
These include the country’s
proximity to the U.S., its domestic markets, reduced tariffs
under NAFTA, treaty rules of origin which facilitate bilateral
trade, the maquila programs, favorable exchange rates and existing
infrastructure. These factors helped to drive investment demand.
For the nine-year period from 1994 through 2002, the overwhelming
majority of investment dollars in Mexico, some 97 percent,
was foreign in origin, primarily from the U.S. However, this
investment proved a mixed blessing, as local suppliers saw
an 80 percent decline in business and joint research. Moreover,
research and development projects resulting from such investment
was limited. One notable success story was the firm Electronica
Pantera, an R&D firm that assists with projects to improve
the efficiency of the low wage assembly process.
Geography of FDI
to regional trade agreements, 90 percent of printed circuit
boards must be manufactured in North America.
particular was deemed attractive for this type of manufacturing
because it has unique infrastructure and a long history of
electronics work, along with universities hosting a number
of engineering programs and hence, a skilled workforce. To
what extent has such foreign direct investment in Guadalajara “spilled
over” or translated into the well-being of the overall
regional community, with regards to both economic development
and the environment? To answer this question, Professor Kevin
Gallagher conducted fieldwork in Mexico from October 2003.
So far, he has conducted 70 interviews with plant managers.
Major U.S. companies such as IBM and HP outsource their equipment
manufacturing work to companies such as Selectron, Flextronics
and Samina-SCI, which in turn conduct much of their assembly
work in Mexico under FDI arrangements. Gallagher noted that FDI
peaked in 1995 and nosedived after 2000. The electronics clusters
in Mexico are centered in the following regions:
Mexico City: Products are made to sell to domestic markets in
a metropolitan region with 20 million people and a sizeable middle
The Northern Frontier: Audio-visual equipment is assembled for
quick export back to the United States
The Western Region: The state of Jalisco, especially the area
around Guadalajara, has emerged as an IT industry hub
capital spillovers from FDI?
of the manufacturing work which foreign direct investment has
brought into Mexico has
been at the lower end of the production
process. In this arena, little workforce training is provided
or needed, given the shift to short-term contract employees
and the small number of domestic firms positioned to take
advantage of spillover in manpower and employment training.
One of the
few success stories is IBM’s training center and the
spin-off activity in job training which it has created. Nonetheless,
in the FDI-led high technology production sector, two thirds
of workers in the sector are women under the age of 30, the
majority of whom have short term contracts from one to three
months in duration. Only 3 percent of these workers have employment
contracts longer than one year.
Under Mexican law, no foreign firm can own more
than 39 percent stake in a company based in Mexico. IBM tried
to negotiate a
100 percent control deal with the government; ultimately, an
agreement was reached where a certain percentage of the suppliers
had to be local. Meanwhile, slow progress has been made in moving
up the technology value chain. Microchip, a foreign-owned company
which conducts R&D and employs 64 workers, was recently bought
by Intel. Moreover, a group of Mexican engineers are working
with Hispanet, a counterpart group of Mexican-Americans from
Silicon Valley working to acquire the necessary venture capital
to start firms in their native country.
Environmental spillovers from FDI?
lack of contact with local suppliers by foreign firms stymies
what opportunity exists
to “green the supply chain.” Ideally,
foreign firms can help foster the transfer of cleaner technology
and better environmental management. For instance, the European
Market has strong regulations regarding pollution content and
will not purchase computers built with lead: production plants
in Ireland and Hungary are meeting these standards. However,
the United States does not have a comparable regulation, largely
because American consumers do not demand these stricter standards.
It is only by requiring that exports meet the demands of green
consumers, that foreign companies and countries can influence
environmental standards in the countries with which they do business.
Requirements for higher standards by local systems suppliers
would also enable the greening of the supply chain, but that
is not forthcoming in Mexico. For example, the number one driver
of environmental compliance lies in having an adequate volume
of inspections on site; however, the State of Jalisco employs
only three occupational health inspectors.
so few spillovers?
Gallagher discussed barriers to entry into global supplier
networks, which largely have to
do with the twin forces of
concentration and globalization. These include such factors
as the growing incentives for firms such as IBM and HP to
import inputs rather than to outsource to Mexico, compounded
slowdown in U.S. demand.
China’s accession to the WTO
was also cited as a growing challenge. Whereas Mexico has five
firms with the ability to
engage in contract manufacturing, China has 35 such firms. Meanwhile,
Chinese wages in this sector are little more than half those
The lack of effective political intervention has also stymied
investment. The macroeconomic uncertainty in Mexico, e.g., peso
overvaluation, is a prime example of insufficient policy response.
Other domestic challenges include the lack of local productive
capacities and lack of domestic and regional markets. Moreover,
trade agreements such as NAFTA and now, CAFTA, have proven insufficient
in providing the policy space for promoting FDI and positive
evidence indicates that foreign direct investment has yielded
little by way of domestic spillovers.
The spillovers that did
occur were not allocated by the market. Rather, foreign investment
has crowded out domestic investment. Despite the promise
of foreign direct investment, overall investment in Mexico
stagnated. Hence, Guadalajara has yet to emerge as the “Silicon
Valley of Mexico.”
Kevin P. Gallagher is Assistant Professor in the Department
of International Relations at Boston University. He spoke at
CLAS on March 8, 2005.
Lifang Chiang is a Doctoral Student in the Department of Geography.
Original Event Description
the fact that Foreign Direct Investment (FDI) has been
the cornerstone of Mexico’s economic policy, it has not generally
produced the “spillover” in technology and know-how
that policy-makers hoped for. Is Guadalajara the exception
to this lackluster record? To what extent has Guadalajara,
known as “Mexico’s Silicon Valley,” managed
to create domestic spillovers? Prof. Gallagher will discuss
what has been done in Guadalajara and what lessons other Latin
American countries might draw from that city’s experiences.
P. Gallagher is Assistant Professor in the Department of International
Relations at Boston University and a Research Associate at
the Global Development and Environment Institute (GDAE) at
Tufts University. His most recent books are Putting Development
First: The Importance of Policy Space in the WTO and IFIs (forthcoming,
Zed Books, 2005), Free Trade and the Environment: Mexico,
NAFTA, and Beyond (Stanford, 2004) and International
Trade and Sustainable Development (Earthscan, 2002).