Democracy, Human Capital, and Foreign Direct Investment in the Mexican States

• In Event: Free market, economic crisis and social impact

Abstract

This paper examines the effects of electoral competition and levels of education on foreign direct investment (FDI) to Mexican states from 1994-2010. One of the major justifications for economic liberalization in Latin America was that its policies would attract capital which would create wealth and employment. But what has been the effect on FDI of the process of political opening that occurred over this same period, and how does variation in education quality affect investors’ locational decisions? Significant scholarship has taken a cross-national approach to understanding the determinants of FDI. Analysis of sub-national Mexico, however, provides an opportunity to reduce the bias associated with comparing countries with substantially different characteristics. Yet, in a broadly similar context, Mexican states have seen wide variation in electoral competition and education quality over the last decades. At the same time, Mexican investment data is rare in its systematic disaggregation of FDI by sector. This allows me to explore whether different kinds of investment are attracted to states that are more or less electorally competitive or with higher or lower levels of education. For example, I can test whether investors in low-skilled, low-wage maquila industries, actually prefer states with a less-educated workforce, as the “race to the bottom” argument suggests. The results will have implications for policymakers as they consider how to attract investment that will best complement their strategies for broadly-shared development.

Author

• R Douglas Hecock, Bucknell University