Abstract
Identifying factors that explain the regional distribution patterns of Foreign Direct Investment (FDI) flows into an economy is no simple task, since they depend on a range of factors. In the case of Mexico, previous studies have documented the role of diverse characteristics in attracting FDI to the country’s states. This study shows that economic complexity - a variable that indicates the productive capabilities or productive knowledge that exist in a given economy’s economic structure - can explain the distribution of FDI among Mexican states. Similar to previous studies, we document the spillover effects of economic complexity, i.e., we show how states surrounded by states with a high level of economic complexity tend to receive more FDI. Moreover, we document how FDI flows to manufacturing industries are positively correlated with their level of economic complexity. This result, to the best of our knowledge, has not been documented before in this literature.
Highlights
A relatively recent strand of economic literature has shed new light on our understanding of the determinants of economic growth
Given the evidence of the relationship between economic growth and economic complexity, we investigate if the latter is correlated with the distribution of Foreign Direct Investment (FDI) flows geographically or by industry in the Mexican economy over the period 1999–2018.4 We believe that economic complexity is related to FDI given the empirical evidence of: i) the positive correlation between economic growth and economic complexity, as previously mentioned, and ii) the well-documented long-term relationship between economic growth and FDI
Since the economic complexity measure reflects the productive knowledge embedded in the productive structures of the states and the sophistication of economic activities, we expect FDI flows to be greater to those states or economic activities with higher levels of economic complexity
Summary
A relatively recent strand of economic literature has shed new light on our understanding of the determinants of economic growth. GO MEZ-ZALDIVAR ET AL: ECONOMIC COMPLEXITY AND FDI IN MEXICAN STATES is a proxy for economic growth, indicates the productive capabilities or productive knowledge that exists in a given economy’s economic structure (Hidalgo and Hausmann, 2009).1 These productive capabilities are measured indirectly by looking at the mix of products that countries export. In an economy with firms engaged in more diverse economic activities and producing more sophisticated products, it is easier to create upstream and downstream linkages Understanding these types of spillover effects matters for the design of public policy on FDI attraction, which should ideally consider the regional context and not just local factors.
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