Economies of scale in the Mexican automotive sector

Abstract

Recent growth of the Mexican motor vehicle industry has sparked a great deal of controversy on both sides of the U.S.-Mexico border regarding the potential effects of the North American Free Trade Agreement. One of the key factors affecting the future competitiveness of the Mexican motor vehicle industry relative to U.S. producers is whether the Mexican firms can exploit economies of scale as their output expands. This article investigates that possibility as well as the direct and cross-price elasticities of demand for the inputs by estimating translog cost functions for the Mexican motor vehicle and autoparts industries. The results are consistent with the hypotheses that substantial economies of scale remain to be exploited by the Mexican motor vehicle industry, but that the autoparts industry is operating with diseconomies of scale. However, the lack of investment in new technology and X-inefficiency on the part of the autoparts firms may have been partially responsible for the latter finding.