Academic journal article European Research Studies

Central America Maquiladoras and Their Impact on Economic Growth and Employment

Academic journal article European Research Studies

Central America Maquiladoras and Their Impact on Economic Growth and Employment

Article excerpt

1. Introduction

The maquila (In bound industry) term etymologically comes from the Arabic term makila as a measurement for capacity used in milling to design the proportional share of grain, flour or oil (AVANCSO, 1994:2). Nowadays, the maquiladora industry is located within the geographical boundaries of a country with facilities in place for international transactions. These territories receive foreign-owned intermediate inputs, carry out some transformation processing, taking advantage of cross-border discontinuities, and later returned the final products to their country of origin. The maquila is a production system based on a form of contract under which, the intermediate inputs and raw materials imported are transformed through processes that add value. Afterwards, the added-value products are outbound and sent back as finished products to the country of origin for marketing. The maquiladora industry activities are possible in those areas that allow process segmentation. Developed countries tend to concentrate on those activities that require technology, innovation and design for sustained growth. On the other hand, the assembly routine, intensive in terms of manpower, tends to take place in developing countries with lower labor costs as their competitive advantage.

1.1. Theoretical Framework

Theoretical studies have determined that some of the benefits of Foreign Direct Investments (FDI) are ownership, location and internalization costs (Caves, 1996). Many of these benefits are provided by the Central American countries. Investors choose to invest in certain areas, mainly focusing on the availability of resources and markets. If foreign investment is seeking resources, it arrives to the locations which have abundant natural resources (Lipsey, 2006). Several analyses of the endogenous determinants of maquiladoras consider both the size of the enterprise and the intensity of research and technological development. The analysis of exogenous determinants of foreign direct investment in the maquiladora plants, takes into account the host country localization advantages, market size and labor costs (Campos, 2008).

Campos (2003) investigated classical factors such as market size, infrastructure, macro-economic environment and institutional factors. Campos inquired about whether the government's structural reforms of the host country play an important role in the attraction of foreign investors. A country's commitment to implement structural and financial reforms, as well as efforts to achieve trade liberalization and privatization, may encourage steady long run foreign direct investment (Forbes, 2006).

Regarding the institutional quality variables, the economic growth literature emphasizes the role of economic institutions in promoting investment and achieving better human development indicators. The institutions provide the local conditions for business operations, but they differ in support of physical and infrastructural factors, such as transport and telecommunications infrastructure. Institutional quality is an important factor to be considered for decision making by foreign investors, to enter directly or as outsourcing (Antras, 2003).

Bengoa and Sanchez-Robles (2003) find that economic freedom level, economic stability, and human capital level are important determinants in foreign direct investment. The determinants of location are the origins of the host country's comparative advantages. The maquiladora companies choose investment in locations which not only minimizes the cost of production but also the relative prices of factors such as natural resources, labor costs, human capital and proximity to market.

Countries that have more development in financial markets are capable of operating more efficiently the direct foreign investment. Foreign direct investment can be attracted by an economy that has more and better liberalized financial market, but at the same time, financial liberalization is encouraged by foreign direct investment. …

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