Regional growth in Mexico under trade liberalisation: how important are agglomeration and FDI?

Abstract

The opening of the Mexican economy in the late 1980s has generated increasing levels of inward foreign direct investment (FDI) as well as substantial changes in the location pattern of economic activity within Mexico. Although these developments have coincided with marked changes in Mexico's regional growth regime, previous research has focused mainly on identifying growth effects from regional endowments of physical and human capital. In this paper, we extend on this research by conducting empirical analysis that centers explicitly on identifying the regional growth effects from agglomeration and FDI. The main findings of our analysis are threefold. First, we find that both agglomeration and FDI have acted as important drivers of regional growth in the last two decades. Second, both phenomena can be linked to the materialization of both positive and negative growth effects. The variety of growth effects that we identify is in line with the locational readjustments of economic activity that have taken place. Third, our estimations also identify clear spatial dimensions to the growth effects from agglomeration and FDI; furthermore, these spatial growth effects represent an important component of the overall spatiality of the regional growth process in Mexico. JEL Classification O47 · R11 · F23 · N96