A cost function analysis of the Mexican nonelectrical machinery industry

Abstract

This paper investigates the existence of economies of scale in the Mexican nonelectrical machinery industry as well as the direct and cross price elasticities of demand for its inputs (capital, labour, and intermediate goods) by estimating a translog cost function. There is evidence that the industry exhibits economies of scale but that technological change has not significantly affected cost. Direct demand elasticities for the inputs are negative and less than one, but capital displays a higher price elasticity of demand than does labour or intermediate goods. In general, the input cross price elasticities indicate that they are substitutes. The results suggest that in the early years of the North American Free Trade Agreement, expansion of the industry may increase its competitiveness and generate some employment. The best near-term prospects for growth in the industry appear to be through foreign investment or joint ventures oriented toward both exports and the procurement activities of government and government-related entities in Mexico.