Academic journal article Journal of Competitiveness Studies

The Competition of Mexican States: Attracting Foreign Direct Investment

Academic journal article Journal of Competitiveness Studies

The Competition of Mexican States: Attracting Foreign Direct Investment

Article excerpt

INTRODUCTION

Foreign Direct Investment (FDI) is defined as the investment made to serve the business interests of an investor in a company, which is in a different nation distinct from the investor's country of origin. FDI represents the primary means of private capital transfer (i.e. physical or financial), technology, personnel and access to brand names and marketing advantages.

FDI can be classified as inward or outward. The inward investment refers to the investment of foreign capital that occurs in local resources. Tax breaks, relaxation of existent regulations, loans at low rates of interest and specific grants are some of the propelling factors in the growth of inward FDI. The principle of this idea is that the long-term gains from such an investment will far outweigh the disadvantages of the income loss incurred in the short term. On the other hand, outward investment refers to the local capital that is invested in some foreign resource. Lower production costs, being closer to a regional market and government policies are some of the factors that encourage this kind of investment.

First of all, this paper identifies the most relevant and structural factors in the FDI in the Mexican states. These factors are related to the economic development of the country and each state, and these relationshipscan be explained by the Investment Development Path (IDP), a term coined by Dunning in 198 1 and modified in the following years. The IDP classifies countries in 5 stages according to their structural factors where the first three stages correspond to the developing countries and the last two stages correspond to the developed countries. In this path, Dunning considers the relationship between the development path of countries and their position in terms of inward and outward FDI.

Finally, a theoretical review of the IDP is presented along with the description of each one of the five stages. This paper also analyzes the evolution of the FDI in Mexico and proposes a methodology and its application and reaching relevant conclusions.

Investment Development Path (IDP)

In 1979, Dunning presented for the first time the concept of IDP in a conference about multinational enterprises in developing countries (Dunning & Narula, 1996). The IDP was integrated in its first approach by four stages divided in two different groups: the developing countries and the developed countries. At that time, these four stages were enough to explain the phenomenon. However, as multinational enterprises continued to expand their operations in foreign countries, the phenomenon became more complex and Dunning saw the need of adapting the IDP to explain those new trends.One of the most notable adaptations was the creation of a fifth stage by dividing the fourth stage in two different stages. The main difference in the countries in the fourth and fifth stage was the degree of development, where the countries in the fifth stage had a larger amount of intangible assets and knowledge than those in the fourth stage.

The IDP model associates the degree of development of a country with its inward and outward FDI. The economic development of a country has a large influence on the competitive advantage of local firms. The more developed a country is, the more encouraging it is for local enterprises to explore foreign markets. This same fact creates an attraction effect of FDI that improves the competitive advantage of a country in a specific area. In other words, structural changes of a country according to its economic development are related to multinationalization in such a way that it promotes the improvement of competitiveness in order to create inward and outward FDI. This is how the dynamicsof the economic structure of the country are related to its respective flows of FDI. These are the main factors for the economic development of a country.

The IDP in an integrated cycle made up of 5 stages. The first three stages comprehend the developing countries in their different levels of development and they are characterized mainly by inward FDI and low levels of outward FDI. …

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