PLEASE SCROLL DOWN FOR ARTICLE This article was downloaded by: [EBSCOHost EJS Content Distribution] On: 8 October 2009 Access details: Access Details: [subscription number 911724993] Publisher Routledge Informa Ltd Registered in England and Wales Registered Number: 1072954 Registered office: Mortimer House, 37-41 Mortimer Street, London W1T 3JH, UK International Journal of Public Administration Publication details, including instructions for authors and subscription information: http://www.informaworld.com/smpp/title~content=t713597261 Expanding the levels of analysis of fdi for improved understanding of policy issues: the case of mexico Eugene M. Salorio a; Thomas L. Brewer a a School of Business, Georgetown University, Washington, D.C. Online Publication Date: 01 January 2000 To cite this Article Salorio, Eugene M. and Brewer, Thomas L.(2000)'Expanding the levels of analysis of fdi for improved understanding of policy issues: the case of mexico',International Journal of Public Administration,23:5,791 ? 836 To link to this Article: DOI: 10.1080/01900690008525485 URL: http://dx.doi.org/10.1080/01900690008525485 Full terms and conditions of use: http://www.informaworld.com/terms-and-conditions-of-access.pdf This article may be used for research, teaching and private study purposes. Any substantial or systematic reproduction, re-distribution, re-selling, loan or sub-licensing, systematic supply or distribution in any form to anyone is expressly forbidden. The publisher does not give any warranty express or implied or make any representation that the contents will be complete or accurate or up to date. The accuracy of any instructions, formulae and drug doses should be independently verified with primary sources. The publisher shall not be liable for any loss, actions, claims, proceedings, demand or costs or damages whatsoever or howsoever caused arising directly or indirectly in connection with or arising out of the use of this material. INT'L. J. OF PUB. ADMIN., 23(5-8), 791-836 (2000) 11. FOCUS ON MEXICO EXPANDING THE LEVELS OF ANALYSIS OF FDI FOR IMPROVED UNDERSTANDING OF POLICY ISSUES: THE CASE OF MEXICO Eugene M. Salorio and Thomas L. Brewer School of Business Georgetown University Washington, D.C. 20057 ABSTRACT Foreign Direct Investment (FDI) inflows are a key component of the restructuring and external integration now underway in many Latin American national economies. This paper suggests that understanding of policy issues concerning FDI can be enriched by two complementary shifts in the levels of analysis of FDI, each of which entails more detailed attention to the strategies and operations of multinational corporations (MNCs). At the macro- level, we show why it is beneficial to expand beyond the normal analytic concern with aggregate total FDI flows to focus instead on the separate, disaggregated components of those flows--that is, 79 1 Copyright O 2000 by Marcel Dekker, Inc. Downloaded By: [EBSCOHost EJS Content Distribution] At: 17:51 8 October 2009 792 SALON0 AND BREWER equity, reinvested earnings and other long-term and short-term capital flows between parent firms and their affiliates, as recorded in the national balance of payments capital account. The micro- level shift emphasizes the importance of focusing on varieties of types of FDI, not only across different foreign investors but within individual companies as well. It demonstrates the significance of switching from the usual concentration on firms as a whole to instead accentuating examination of individual projects and products--especially the dichotomy between market-access projects producing for the host country domestic market and production- efficiency projects producing for export markets, including the home country market. These two shifts in the level of analysis complement one another, and they interact in the sense that the mix of component flows can depend in part on the type of FDI. These analytic themes are developed using evidence concerning FDI in Mexico, with special reference to the automotive industry. Such improved comprehension of FDI is particularly germane for Latin American countries that are contemplating liberalization of foreign direct investment rules or have already undertaken them and witnessed the ensuing increase of inbound FDI. INTRODUCTION The liberalization of national trade and investment policies and regional economic integration figure prominently in the new Latin American business environment. As governments throughout the region seek to generate stronger growth without inflation, low domestic savings rates have obliged them to rely increasingly on capital imports, especially private investment.(') A UNCTC study of 26 developing countries, including many from Latin America, for the 1977-1987 period found a trend toward significant relaxation in host country policies toward inward foreign direct investment (FDI).'~) More recent studies have identified similar Downloaded By: [EBSCOHost EJS Content Distribution] At: 17:51 8 October 2009 FOREIGN DIRECT INVESTMENT 793 and indeed accelerating trends.(3) This liberalization toward FDI tends to occur as part of a broader policy reorientation, often including structural reform and privatization as well as reduction of capital controls .(4) The result has been a surge in capital inflows throughout the region, fueled among other things by rising current account deficits .(5) An increasing proportion of this has been in the form of direct investment - FDI currently comprises more than 20 per cent of total capital inflows to Latin America versus less than half that level in the preceding decades.@) Moreover, while portfolio investments in Latin American stocks (both in local exchanges and in foreign stock markets via depository receipts) and short-term lending have also risen sharply, these flows have been especially ~olatile.'~) This volatility has led the International Monetary Fund (IMF) to sound a note of caution. For more than a decade emerging economies customarily have been advised to reduce capital controls, in part because of their diminishing effectiveness and the growing facility of multinational corporations (MNCs) to circumvent them.(8) More recently, however, in response to the negative effects of this volatility, the IMF has counselled developing nations to consider closer controls on capital inflows, in particular measures to influence the characteristics (i . e . , the form in which the flow takes place) of these inflows as well as their overall level .(9) In recognition of the growing importance of FDI in the new Latin American business environment, this paper proposes two complementary shifts in the levels of analysis of FDI--one shift at the macro-level and another shift at the micro-level. The macro- level shift emphasizes the need to focus more explicitly on the "components" of FDI flows, as recorded in the capital accounts of the balance of payments. The micro-level shift emphasizes the importance of focusing on varieties of types of FDI, not only Downloaded By: [EBSCOHost EJS Content Distribution] At: 17:51 8 October 2009 794 SALORIO AND BREWER across different foreign investors but within individual companies as well. FDI in Mexico is used to illustrate the analytic themes, as despite its recent problems the country continues to be a regional leader in FDI inflows. Data on the components of inward FDI provide evidence for the development of the first theme, i.e. the need to disaggregate total FDI flows into their component parts. The relative importance in total FDI flows of each component--initial equity flows, reinvested earnings and dividends, and short and long term capital flows--varies enormously on average across countries. Data for Mexico demonstrate that component flow patterns also vary over time, as both current and prospective inward investors adjust their capital flows. The automotive industry in Mexico is used to develop the second theme, i.e. the importance of an explicit within-company focus on types of FDI projects and their products. The automotive industry is not only the economically most significant manufacturing industry in world trade and investment, it is a major industry in Mexico, generating approximately 6 per cent of employment, 10 per cent of wages, and almost 13 per cent of sales revenue in the manufacturing sector.(lO) The industry's capacity to fuel growth and regional economic integration have been a consistent research theme for over two decades,(") and it has undergone major restructuring as a consequence of Mexican economic developments and evolving firm strategies, especially the advent of NAFTA."~) Within Mexico, the automotive industry is dominated by foreign firms, who vary across both products and projects in terms of the distribution of their sales between domestic (i.e., within Mexico) and export markets. It therefore offers important insights for other Latin America countries. These two themes are developed after a brief overview in the next section of the theoretical and empirical literature on FDI. Downloaded By: [EBSCOHost EJS Content Distribution] At: 17:51 8 October 2009 FOREIGN DIRECT INVESTMENT 795 THE FDI LITERATURE The literature on FDI has been reviewed many times. ~unning"~) is perhaps the most extensive. Two recent UNCTC monographs(14' summarize the empirical literature on the determinants of FDI, with some discussion of theoretical issues. Lizond~"~) and antw well''^) provide comprehensive reviews and categorizations of major theoretical approaches. Empirical FDI studies have consistently focused on total inward or outward FDI flows (or occasionally stocks) as the variable of interest, to the neglect of component fl~ws.''~) Meanwhile theoretical studies of FDI have mostly focused on the firm as a unit of analysis, to the neglect of projects. In the context of FDI component flows and project types, the FDI literature can usefully be organized into five groups: systemic international political economy studies, which focus on relationships between multinational corporations (MNCs) and host and home governments; studies of bargaining between corporations as direct investors and host governments, which are often case studies of FDI 'in developing countries; political risk studies, which include the effects of political instability on FDI flows; economic theories of the determinants of FDI, including the role of market imperfections; and business strategy studies, which view government policies as constraints on the strategic choices of firms.(18) Three systemic models of MNC-government relations have dominated the international political economy literature: the "sovereignty at bay" model, the "dependency " model (especially prominent in studies of Latin America), and the " neo-mercantilist" model.('9) They are all systemic models in the sense that they are based on the interactions of governments in a nation-state system and MNCs in an international economic system. Issues of protecting or, contrariwise, of projecting national economic Downloaded By: [EBSCOHost EJS Content Distribution] At: 17:51 8 October 2009 796 SALORIO AND BREWER sovereignty and interests are examined in the behavior of firms and governments. (20) Analytic models that focus on the bargaining relationships between multinational corporations and host governments are also prominent in the literature. Outcomes of firm-government bargaining depend on the relative stakes as well as the relative resources of the two, which are likely to vary across issues.(21) Furthermore, the ability of governments to play foreign MNCs off against each other can be an important element of negotiating strategy .(22) Similarly, the organization of the host government' s FDI regulatory institutions influences both bargaining capabilities and attractiveness to MNCS.'~~) AS for FDI in Mexico, ~eiss'~~) analyzed the negotiations between IBM and the Mexican government using an analytic framework incorporating MNC and host government participants on both sides of the negotiations. Bennett and Sharp(25) examined the case of the Mexican government's relations with multinational automotive firms in particular. A central focus of the political risk literature has been instability and its consequences for FDI. One of the themes of this literature has been the varying impact by type of instability on FDI.(~@ Nigh,(27) for instance, found that internal political conflicts, especially in developing countries, had significant effects on FDI flows. As in other empirical studies of the effects of politics on FDI flows, however, only total (net) flows are used as indicators. A second stream of the political risk literature incorporates a bargaining focus; the obsolescing bargain, whereby governments gain leverage and MNCs lose leverage over time, has been a topic of special interest.(28) By focusing on possible consequences of the transfer of technology and operating skills from foreign investor to host country following the initial FDI, the obsolescing bargain is uncommon in its concern with individual pro~ects. Expropriation has also been a central focus of much of the political risk literature Downloaded By: [EBSCOHost EJS Content Distribution] At: 17:51 8 October 2009 FOREIGN DIRECT INVESTMENT 797 concerned with developing countries,(29) but the decline of expropriation to the recent very low levels has been accompanied by less attention to this topic. Theoretical literature on the economics of FDI has emphasized the firm as an organization with firm-specific ownership advantages, and as the internalizer of international transactions that might otherwise transpire as market-based exchanges involving international trade and/or licensing. Hymer, Caves and others underscored FDI as an extension of market power enabling MNCs to overcome the disadvantages of being foreign in competition with local host country competitors.(30) Other studies of FDI have been particularly concerned with the economic and political characteristics of countries that affect their attractiveness as host countries--i.e. their location advantages. The emphasis on FDI as a way to internalize international transactions within the MNC has been developed by Buckley and Casson, Hennart, Rugman, Teece, and others who draw upon the work of Coase and Williamson on the nature and growth of firms.(31) This literature has been synthesized and extended by Dunning into the most comprehensive and structured FDI analytic framework, the eclectic paradigm.(32) The portion of the strategy literature of international management that is concerned with business-government relations also focuses on firms (and governments) as the units of analysis. Prahalad and Doz, for example, emphasize that host governments create a "political imperative" that firms be responsive to local host country interests, which is often at odds with the firm's economic imperative to subordinate local needs in accord with the benefits to be obtained via global integration of its strategy and operations.(33) Boddewyn incorporates political behavior more explicitly in terms of MNCs' efforts to use these to improve their firm and country advantages as opposed to simply responding to the local imperative .(34) Downloaded By: [EBSCOHost EJS Content Distribution] At: 17:51 8 October 2009 798 SALORIO AND BREWER SHIFTING THE LEVELS OF ANALYSIS Virtually all of the empirical studies referenced above have relied on (net) total inward or outward FDI flows as their indicators of FDI. They have ignored the "components" of those flows : equity, reinvested earnings, and long-term and short-term loans between affiliated firms. This is true of both the politically- oriented and economically-oriented literature. Three major exceptions to this tendency are Graham and Krugman, Kogut, and a 1991 UNCTC study.(35) However, only Kogut develops the theoretical or empirical implications of the analytic point that disaggregation of total flows into component flows can reveal more about the FDI decision-making of firms, and he focuses on strategic explanations of investment decisions made after the initial one for a given project.(36) The theoretical studies, on the other hand, have focused onfirms. This is true of the systemic international political economy models and bargaining models of MNC-government relations, as well as the economic models of the determinants of FDI and the business strategy literature. Although these traditional levels of analysis have provided enormous insights into the political economy of FDI, they also have important limitations. An exclusive focus on total FDI flows, to the neglect of component flows, can lead to erroneous interpretations of macro-level patterns in FDI and hence their economic and political implications. In Mexico, for instance, it has been the rapid escalation in private foreign borrowing that most recently has pushed up total national external indebtedne~s.'~~) Increases in intra-MNC investments in the form of loans and credits (as opposed to new equity flows or reinvested dividends), can therefore actually increase the debt service ratios that are so important for international credit ratings (e.g., the interest paymentslexport earnings ratio or the export earningsltotal external debt ratio). Thus, just as it is necessary to distinguish between direct and portfolio investment when examining international Downloaded By: [EBSCOHost EJS Content Distribution] At: 17:51 8 October 2009 FOREIGN DIRECT INVESTMENT 799 capital flows, so too it is beneficial to distinguish among FDI components when examining direct investment flows. Similarly, an emphasis on firms, to the neglect of projects and products at a micro level of analysis, can lead to narrow or misplaced emphases in the evaluation of the issues associated with FDI in business- government relations. The impact of the obsolescing bargain and consequent host government negotiating leverage, for instance, is much different for a project that seeks merely to produce for the local market (i.e., a "market-seeking FDI" project) versus a project whose output constitutes an important part of a parent company's globally integrated value-added chain (i. e., an "efficiency-seeking FDI" project). Components of FDI According to the definition of FDI of the Organization for Economic Cooperation and Development and according to the balance of payments (BOP) accounting procedures of the Interna- tional Monetary Fund, net total inward and outward FDI flows consist of the component flows represented in Table 1: equity, reinvested earnings, and long-term and short-term inter-company (i.e., intra-MNC) debt .(38) These are all balance of payments capital account items that reflect the investment transactions associated with FDI projects, as opposed to current account transactions that reflect FDI-related income transactions. Using this BOP data, it is possible to compile "National component flow profiles" comparing the relative sizes of the flows of equity, retained earnings, and long-term and short-term debt.(39) Such disaggregation is useful in general because the impact of different government policies varies across component flows.(40) For countries at different points on the investment development cycle,(41) the factors influencing the balance among FDI component flows also tend to vary. In emerging economies with large Downloaded By: [EBSCOHost EJS Content Distribution] At: 17:51 8 October 2009 TABLE 1 Components of Disaggregated FDI Flows In Balance of Payments Accounts Inward FDI Component Sisn in Bopa Outward FDI Com~onent Siqn in Bopa New Equity Disinvestment Net Equityb [Earnings] ' [Dividends] Reinvested Earningsb New Other Long-Term Capital Repayment of Other LT Capital Net Other LT Capitalb New Short-Term Capital Repayment of ST Capital Net ST Capitalb Net Total Inward FDIb (INE + INR + INL + INS) New Equity Disinvestment Net Equityb [Earnings] [Dividend] Reinvested ~arnings~ New Other Long-Term Capital Repayment of Other LT Capital Net Other LT Capitalb New Short-Term Capital Repayment of ST Capitalb Net ST Capital Net Total Outward FDIb (ONE + ONR + ONL + ONS) "Inflows are recorded as positive (+) figures and outflows as negative (-) figures in standard balance of payments accounting. Net U inward FDI is therefore typically, but not always, positive (+); net outward FDI is typically, but not always, negative (-). Usually, only these net figures are reported. E Reinvested earnings are reported as "net" figures, i.e. earnings net of dividends, which can be a negative number if dividends exceed G earnings. Also, note that if an inward FDI project is less than 100 percent foreign-owned, only dividends that are remitted abroad are recorded in the (current account) of the balance of payments. The treatment of outward FDl is analogous (opposite). Downloaded By: [EBSCOHost EJS Content Distribution] At: 17:51 8 October 2009 FOREIGN DIRECT INVESTMENT 80 1 privatization programs, the initial predominance of new equity inflows will likely rapidly diminish. Canada and increasingly the United States, in contrast, are characterized by high stock levels of FDI; hence, investment flows are very subject to switching activities by already established home and foreign MNCs in response to government policy shifts or macro-economic fluctuations. These switching activities show up quite differently in the different FDI flow components; for instance, in the United States effective tax rates have been shownto have a negative impact on total FDI and on transfers of funds (i.e., new equity or debt), but not on retained earnings .(42) Similarly, in 1990, relatively low U. S . interest rates and expectations of continued dollar depreciation, made the U.S. an attractive locale for borrowing, and led U.S. parents to increase substantially their outward loans to their already- existing overseas affiliates, reversing the earlier tendency for much smaller net debt outflows, or even net debt inflows, indicating foreign affiliates lending to their U. S. parents. (43) In Table 2, data are presented for Mexico, Brazil, Costa Rica, Taiwan and Malaysia to illustrate differences across countries in component flow profiles. The preponderance of equity flows for Mexico and Taiwan, in contrast to the preponderance of debt flows for Costa Rica and Malaysia, is obvious. Mexico's and Taiwan's much larger retained earnings flows are an obvious consequence of this; Taiwan's slightly negative debt flows imply that Taiwanese subsidiaries have increasingly borrowed in local markets rather than rely on loans from their parents. FDI inflows in Brazil, however, are more evenly spread across the three components. In toto the component flow profiles for the five countries reveal three quite distinct investment patterns. Overall, then, a simple focus on net aggregate FDI flows without closer examination of components gives an incomplete picture. Intrafirm flows, such as retained earnings and intra- company borrowing, tend to be more representative of parent- Downloaded By: [EBSCOHost EJS Content Distribution] At: 17:51 8 October 2009 SALORIO AND BREWER TABLE 2 Illustrative Component Flow Profiles: Inward FDIa Mexico (1978-91) Brazil (1970-90) Costa Rica (1970-90) Taiwan (1976-89) Malaysia (1970-88) Equity Retained Earnings Debt a Net inflow of each component as a percentage of total inward FDI. Source: Computed by the authors from United Nations Division on Transnational Corporations and Investment, World Investment Directory, Vol. 1: Asia and the Pacific, United Nations, New York, 1992, pp. 159,299; and Vol. ZV: Latin America and the Caribbean, United Nations, New York, 1994, pp. 155, 227, 331. subsidiary short-term financing tactics than of the overall level of FDI activities. For U.S. firms they may especially reflect the concerns of corporate treasurers, given the variation in foreign exchange translation rules governing different balance sheet items. In contrast, changes in infusions of new equity better represent the degree to which investors are changing their real ownership positions or stakes in foreign enterprise^.'^^) Similarly, closer examination of component flow profiles can provide clues regarding the shifting nature and strategic role of Downloaded By: [EBSCOHost EJS Content Distribution] At: 17:51 8 October 2009 FOREIGN DIRECT INVESTMENT 803 foreign affiliates. Foreign subsidiaries traditionally had a propensity to reinvest a higher proportion of their earnings than domestic firms.(45) Moreover, the historical record (at least for U.S. MNCs) indicates that they have generally extended the scope of operations as well as the size of their foreign ventures over time.(46) More recently, this has been incorporated as a normative element in the literature on international operations strategy: as subsidiaries mature they tend to adopt more technologically advanced functions and extend their span of activities within the MNC. As it ages, a local affiliate may move from simple assembly to components manu- facturing to (in some cases) product and/or process design and engineering.(47) There is a strong likelihood that such expansion-- really a deepening of investment--will be undertaken with a high portion of reinvested earnings (reducing dividends), implying that this form of inward FDI is especially likely to be used for upgrading and extending the local affiliate's span of activities. Types of FDI Just as examining FDI components adds a new perspective to the analysis of aggregate FDI figures, so examining FDI at the project level adds a new perspective to the analysis of firms' overall FDI activities. This project level analysis focuses attention at the type of activity to be located in the host country, and it has theoretical implications. Such a distinction among types of FDI was an important element in some early studies of FDI. An inter- temporal shift in project function is implied by the product cycle model, as the foreign facility shifts from production for the local market to production for export back to the home country.(48) The contrast is more explicit in the distinction between FDI as a means of horizontal extension versus as a form of vertical integrati~n.'~') A similar dichotomy is also evident in the argument that Japanese manufacturing FDI tended to have a greater trade-enhancing effect Downloaded By: [EBSCOHost EJS Content Distribution] At: 17:51 8 October 2009 804 SALORIO AND BREWER than did US manufacturing FDI, which was more often an extension of oligopoly power.(50) In recent years, particular attention has been paid in the literature to a range of types of FDI, classified according to their strategic objectives. Eden segregates FDI by one of two distinct motives: resource seeking investments and market access investments, and then subdivides the latter by type of production facility (importers, local servers, focussed factories, miniature replicas, lead factories, or outposts) .(51) The U. S. Office of Technology Assessment has a typology of six different types of multinational firms (not FDI per se), noting that "in the case of large diversified MNCs, different divisions or subsidiaries may fit into different categories. "(52) Often, FDI is divided along four lines in terms of the strategic objectives of firms.(53) Market-seeking FDI provides access to the host country market (including local affiliates of foreign MNCs); efficiency-seeking FDI provides low cost production, with export to the home country and/or other countries; raw materials-seeking FDI in mining and natural resource industries; and knowledge-seeking or technology-seeking FDI. Such differences in the types of FDI have different impacts on both host country component flow profiles andproject flow profiles, which include flows of traded goods and services, and remittances, in addition to capital account component flows associated with individual projects. Raw-materials FDI typically entails large initial capital flows, high levels of exports (and associated short-term trade credits) and substantial earnings remittances. Market-seeking FDI tends to involve relatively low levels of both imports and exports (and again trade-related short-term capital flows), while efficiency- seeking FDI tends to involve relatively high levels of both imports and exports (and short-term capital flows). Finally, knowledge- seeking FDI produces relatively high levels of technology flows (primarily outflows, but for some projects inflows as well), and these are reflected in services trade and remittances, and as Downloaded By: [EBSCOHost EJS Content Distribution] At: 17:51 8 October 2009 FOREIGN DIRECT INVESTMENT 805 TABLE 3 Effect of FDI Project Type on FDI Component Flows licensing fees, consulting fees, royalties and other "invisible " transactions between parent firms and their foreign affiliates. Such varying profiles are illustrated in Table 3. FDI projects directed at each of these strategic objectives respond to different locational features of the host country in question.(54) Although some FDI includes elements of more than one of these functions, the strategic objectives of most FDI projects are focused on only one. This paper is concerned specifically with the first two types, since its principal interest is FDI in manufacturing, especially in the automotive industry in Mexico. COMPONENTS OF FDI IN MEXICO Data Sources Three international organizations (IMF, OECD and UN) publish FDI data, but they vary in their presentation of component Downloaded By: [EBSCOHost EJS Content Distribution] At: 17:51 8 October 2009 806 SALON0 AND BREWER The IMF standard balance of payments format (in its "detailed transactions" tables) includes lines for four individual components for both inward and outward FDI, though data for only one or two components (if any) are actually available for some countries in that data set.(56) As for OECD data, they typically do not include component data at all. Further, because the OECD's FDI data are based on reports of outward FDI from only its industrial country members, they are inadequate for analysis of inward FDI in developing countries that have substantial FDI inflows from other developing countries (an increasingly important deficiency).(57) The UN Transnational Corporations and Management Division recently published the volume covering Latin America in its comprehensive compendium of FDI data;(58) however, while it provides detailed historical data, its coverage does not extend beyond 1991. Accordingly, FDI components data used in this paper are drawn from both UN and IMF sources. Inward FDI flows Over the past two and a half decades, Mexico consistently has been a leading recipient of FDI inflows. It was second among all developing economies in total FDI inflows for both the 1970-1980 and 1981-1991 periods, and as of 1992 its FDI stock comprised over 30% of the total for Latin America, second only to Bra~il."~' Data for Mexico's inward FDI for the 1978-94 period are presented in Table 4, in order to illustrate differences among component flows during this important and volatile era of Mexico's recent economic history. In that table, each FDI component's absolute amount and its percentage of the total (net) inward FDI for each year are indicated. The different patterns and trends that can occur in each of three components(60) and in the total flows are evident. For instance, the FDI response to the external debt crisis (which began in the summer of 1982) and the FDI response to the subsequent period of austerity, is quite different depending on whether one observes the total flows or each of the individual components. Downloaded By: [EBSCOHost EJS Content Distribution] At: 17:51 8 October 2009 FOREIGN DIRECT INVESTMENT 807 TABLE 4 Components of Inward FDI in Mexico, 1978-1994 Equity Reinvested Intra-Firm Total Earnings Debta US$- US$ - US$- Year mil % mil -- - - % mil % - - - a Net intra-firm debt figures are negative in some years, indicating Mexican affiliates' repayment of principal to parent firms exceeded new credit from the parent firms. Data for 1992-94 are not directly comparable with earlier years because 1992-94 conform to the IMF's most recent revision of its BOP presentation, which computes FDI components differently (especially for flows between foreign financial institutions and their local affiliates) than the presentation used for the earlier years (1978-91). For details see IMF, Balance of Payments Statistics Yearbook, Vol. 46, Part 1, 1995, pp. x(5), xxvi(177), or IMF, Balance of Payments Manual, 5th edition, IMF, Washington, DC, September 1993. Source: 1978-91 data, United Nations Division of Transnational Corporations and Investment, World Investment Directory, Vol. IV: Latin America and the Caribbean, United Nations, New York, 1994, p. 331; 1992-94 data, International Monetary Fund, Balance of Payments Statistics Yearbook, Volume 46, Part 1, International Monetary Fund, Washington, DC, 1995, p. 514. Downloaded By: [EBSCOHost EJS Content Distribution] At: 17:51 8 October 2009 808 SALORIO AND BREWER Not surprisingly, debt flows are the most volatile in terms of year to year changes, as they are the most subject to exchange rate and interest rate fluctuations and cross-national differences in interest rates and inflation rates. Note the changes in the levels of flows from 1983 to 1984. Total flows continued their downward trend begun in 1982, decreasing by 15.1 per cent (from US$460.5 million in 1983 to US$39 1.1 million in 1984). However, the level of new equity investments actually increased dramatically--by 674.1 percent, from US$ 70.2 million in 1983 to US$ 543.4 million in 1984. The following year (1985), while the total flow increased by US$99.4 million, new equity decreased by US$273.8 million. The contradictory changes were, of course, a result of the changes in intra-firm debt, which went from a positive net inflow of US$ 193.0 million in 1983, to a net negative US$367.6 million in 1984 (i.e. net outflow), and then to a negative US$ 10.9 million net inflow (i.e. outflow) in 1985. In contrast, reinvested earnings as a percent of total inward FDI is relatively constant even while the dollar value of reinvested earnings fluctuates. More recently, FDI inflows in response to economic recovery and restructuring during the late 1980s and early 1990s demonstrate a different pattern. During the 1980s Mexico gradually relaxed its restrictions on capital account transactions, including foreign exchange controls, although the regulations on FDI itself did not start to loosen until 1989.@') Equity inflows surged, a function in part of both privatization and debt-for-equity conversions. The latter is reflected in 1991's large drop in intra-firm debt in a year when FDI "new" equity inflows doubled--in effect, much of this was not new capital at all, but simply an balance sheet adjustment. In contrast, while equity inflows doubled in 1994, intra-firm debt also increased, implying a more substantial increase in foreign investor confidence in Mexico. Reinvested earnings on the other hand, while growing substantially in US$ terms, again remained relatively stable as a proportion (albeit a lower one) of total FDI inflows. Downloaded By: [EBSCOHost EJS Content Distribution] At: 17:51 8 October 2009 FOREIGN DIRECT INVESTMENT 809 TABLE 5 Relationships Among Components of Inward FDI in Mexico Correlation Coefficientsa Equity vs. Retained Earnings .217 Equity vs. Debt -.521 Debt vs. Retained Earnings .23 1 Coefficient of Variation Equity 0.833 Retained Earnings 0.390 Debt 47.971 a None are statistically significant at the 0.05 level. Source: Computed from 1978-1991 data in International Monetary Fund, Balance of Payments Statistics (various years), after conversion to Mexican pesos and adjustment for inflation using the period average exchange rate and the wholesale price index (lines sb and 63) in the IMF International Financial Stan'stics series. Correlation coefficients of the relationships over the 1978-91 period among component flows are presented in Table 5.(62) Not only are the correlations weak, none are statistically significant at the .05 level. These component flows, therefore, exhibit different time series profiles and respond in some degree to unrelated causes. Similarly, the relative degree of volatility over time also exhibits variability across components, as recorded in the coefficients of variation. As would be expected, debt flows are the most unstable since they are most affected by the factors noted above, while retained earnings are the least variable. The absence of either positive or negative significant correlations among the variables, plus their very different variability, lends credence to the notion that the component flows are unrelated; that is, to an important extent, they are neither Downloaded By: [EBSCOHost EJS Content Distribution] At: 17:51 8 October 2009 8 10 SALORIO AND BREWER complements to nor substitutes for each other but rather respond separately and independently to economic, political and competitive stimuli. The inference, then, is that component flows must be treated as substantially separate phenomena--with different political and economic implications, as discussed below in the conclusion. Most importantly, the interpretation of Mexican inward FDI during this period depends on whether one focuses on total flows or components. This disaggregation of macro level total inward FDI flows into their component parts represents one shift in the level of analysis. A second shift in the level of analysis of FDI can be achieved by focusing on projects and products, which is illustrated by examining the automotive industry in Mexico. FDI AND THE AUTOMOTIVE INDUSTRY IN MEXICO The automotive industry has for decades been the focus of numerous studies of economic development and business- government relations in developing countries, both in Latin America(63) and in Mexico in particular.(64) The Latin American automotive industry continues to attract substantial FDI inflows, especially in Mexico and Brazil by firms anxious to pursue "regional" strategies in the NAFTA and MERCOSUR trade blocs and throughout the Western Hemisphere in general.@') Moreover, many of the practices now common in developed country automotive production, such as out-sourcing and contract manufacturing, are becoming equally prominent in Latin American manufacturing facilities, and Volkswagen in fact has chosen Brazil for the global launch of its "fractal concept," in which subcontractors and outside suppliers actually work on the assembly line within VW' s plant. (66' Government policy in Mexico toward the industry has passed through three stages: a period of import-substitution industrialization (roughly 1962-69), a period of export promotion Downloaded By: [EBSCOHost EJS Content Distribution] At: 17:51 8 October 2009 FOREIGN DIRECT INVESTMENT 81 1 (1969-89, and especially from 1976 on), and a period of increasing liberalization from 1989 to the present.(67) We focus on the past decade through the end of 1994, as complete data for 1995-- including information for Honda, BMW and Mercedes-Benz, all of which initiated local car assembly during that year--are not yet available. Moreover, 1995 results arguably are non-representative; Mexico's economic difficulties led to respective 72 and 63 per cent declines in domestic automobile and truck sales during that year, a roughly 400,000 unit drop that led local producers to export enormous amounts of Mexican production originally intended for local sales .@) Automotive industry production Basic information on automobile and truck production in Mexico is presented in Table 6. The dominance of the "big five" foreign-controlled Mexican firms in the assembly of passenger cars and light trucks is clear. These data cover only the assembly facilities of the terminal manufacturers, and exclude the independent parts supply industry. The latter is quite large and important in its own right. As of 1990, the parts industry, which was only 49 per cent foreign owned, employed about 41,000 persons; in contrast, the assembly portion, which was 81 per cent foreign owned, employed 39,000.'~~' Bodywork, with a very low 27 per cent foreign ownership, employed only 9,000; engines, 92 per cent foreign owned and with a very high export intensity, employed 19,000. Parts also figure prominently in the composition of the industry's exports, although less so in proportional terms in recent years, as can be seen in Table 7. In 1987, of the US$3.2 billion in total auto industry exports, US$ 1.3 billion was for assembled vehicles; the other US$ 1.9 billion was for engines, engine parts, chassis, springs, and other parts, totalling nearly 60 percent of the Downloaded By: [EBSCOHost EJS Content Distribution] At: 17:51 8 October 2009 TABLE 6 Motor Vehicle Industry Production in Mexico Nationality of Parent Firma us Germany Japan Mexico Vehicle Tme Passenger cars Trucksb Buses Firms (all vehicles) Chrysler Diesel Nac/Dina Fabrica de Auto Transportes Fab Nac de Bus Ford GM Kenworth/Pacca rMercedes-Benz Mex Autobuses Nissan Omnibuses Integ Osnmex Trailers de Monterey Victor Patron Volkswagen Units 402,360 108,374 121,880 10,192 438,782 202,350 6 74 161,446 6,255 3,795 126,271 112,786 1,857 121,880 12 0 2 2 108,374 % of total 62.6 16.9 19.0 1.6 68.4 31.5 0.1 25.1 1.0 0.6 19.6 17.5 0.3 19.0 . . . . . . . . 16.9 Units 646,883 265,613 193,591 16,023 855,973 265,362 7 7 5 243,701 11,008 6 242,083 161,099 3,675 9,296 540 193,591 229 3 2 6 224 15 256,317 % of total 57.6 23.7 17.3 1.4 76.3 23.6 0.1 21.7 1.0 . . . . 21.6 14.4 0.3 0.8 17.3 .... .... .... .... 22.8 a Based on location of parent firm. Does not reflect partial ownership by firms of other nationalities, or nationalities of stockholders. Trucks and truck tractors combined from original source. Source: 1989 data: Motor Vehicle Manufacturers Association, World Motor Vehicle Duia, 1991 Edition, MVAM, Washington, DC, 1991, pp. 312-313, 316. 1994 data: American Automobile Manufacturers Association, Motor Vehicle Facts and Figures, 1995 edition, AAMA, Washington, D.C., 1995, p. 15. Downloaded By: [EBSCOHost EJS Content Distribution] At: 17:51 8 October 2009 FOREIGN DIRECT INVESTMENT TABLE 7 Composition of Mexican Motor Vehicle Industry Exports (in US$ millions) 1989 % USS - Passenger Cars 13 01 40.6 Trucksa 2 4 0.7 Engines 1290 40.3 Engine Parts 9 8 3.1 Chassis 0 - Springs 45 1.4 Other Parts 4 4 4 13.9 Total 3204 100.0 a Including truck tractors. Source: 1989 data, Wilson Peres Nunez, Foreign Direct Investment and Industrial Development in Mexico, OECD, Paris, 1990, p. 112, Table 6.2.; 1993 data, INEGI, La Industria Automotriz en Mexico, INEGI, Aguascalientes, Mexico, Cuadro 3.2.3., p. 107. value of the entire industry's exports. The value of engine exports alone approximately equalled the value of assembled vehicles. The implication of these figures is that a substantial proportion of the FDI in Mexico in the automotive industry reflects the adoption of efficiency-seeking strategies leading to the establishment of engine production plants. More recently, while the combined value of engine and engine parts exports has risen, it has not kept pace with the rapid swell in finished auto exports (although the latter stems in part from stagnant Mexican demand as well as the desire of the Big 5 to use Mexico as an export platform). This pattern of high engine exports holds true at the company level for Ford, Chrysler and General Motors: each tended to export Downloaded By: [EBSCOHost EJS Content Distribution] At: 17:51 8 October 2009 SALORIO AND BREWER TABLE 8 Variability in Export Intensity: Mexican Motor Vehicle Exports by Firm and Typea Comvan~ Overall Engines Assembly Chrysler 0.61 1 0.80 0.643 Ford 0.604 0.85 0.758 Gen Motors 0.441 0.90 0.696 Nissan 0.187 n.a. 0.174 Volkswagen 0.85 n.a. a Exports as Proportion of Production. All data are based on units (i.e., numbers of vehicles), not value. Source: Computed by the authors from raw data in Wilson Peres Nunez. Foreign Direct Investment and Industrial Development in Mexico, OECD, Paris, 1990, Tables 6.3, 6.5., pp. 113, 119, 120. over 80 per cent of its Mexican engine production according to Table 8. Finished vehicle exports for the three firms were much lower until very recently, between 45 and 60 per cent of overall vehicle production. Nissan, in contrast, devoted a much higher proportion of its production to local sales, while Volkswagen had a high per cent only of final vehicle exports. Although there are some missing data, the overall pattern is clear: engine plants tend to be producing predominantly for export. Economies of scale dictate that engine plants manufacture on the order of 300,000 to 500,000 units per year, while vehicle assembly plants can be smaller, producing on the order of 100,000 to 250,000 units per year. Thus, in the Mexican market, where to this day the Big 5 produce only 150,000 to 250,000 vehicles per year, the excess production of the engine plants will inevitably be exported. Downloaded By: [EBSCOHost EJS Content Distribution] At: 17:51 8 October 2009 FOREIGN DIRECT INVESTMENT 815 To a greater extent than other local operations, this engine production must fit more closely with the firm's activities elsewhere as part of a globally integrated production network along the automotive industry's value-chain. Not surprisingly, given the dependence of foreign (principally U. S .) assembly operations on this output, the engine segment of the Mexican automotive industry had a higher level of foreign ownership than even auto assembly plants. Because these engine plants are already "too large" for their host country markets, their prospects for expansion are limited by the propensity of the foreign firms to export assembled vehicles from Mexico. If this is low, the engine plant projects are likely to be characterized by low reinvested earnings offset by either higher dividends or other outflows, such as short-term credits to assembly operations in other countries. Assembly plants, in contrast, are likely to engender a more significant flow of reinvested earnings, as they expand to match demand growth in the host country market or in neighboring export markets. Changes in the Mexican motor vehicle trade balance over the past 15 years reflect this shifting export (as well as import) mix. At the start of the 1980s Mexico ran auto industry trade deficits as high as US$ 2.9 billion.(70) Exports were low, less than US$ 500 million, while imports, including a substantial proportion of finished vehicles, peaked at over US$ 3 billion in 1981. Imports dropped sharply by 1983 with the onset of La Crise, but rose gradually again to slightly over US$ 2 billion by the end of the decade.(71) Relatively little of this increase, however, was in finished vehicles.(72) Instead, most was either parts for further processing or assembly in maquiladora operations, or components that were used with Mexican produced engines (and other parts) and assembled in Mexico for sale there or for re-export as finished vehicles, a trend that continues to the present. The rising export figures, reaching US$ 9 billion in 1992 and 1993, confirm this.(73) With the advent of NAFTA there was a shortlived spurt in finished automobile imports-- from 10,000 units in 1992 to 75,000 in 1994-- Downloaded By: [EBSCOHost EJS Content Distribution] At: 17:51 8 October 2009 816 SALORIO AND BREWER and the automotive trade deficit turned negative in 1993 for the first time since 1982.'~~) Automotive firm strategy and project orientation These data indicate that for the three US auto firms, and to a lesser degree for Nissan and Volkswagen, Mexican operations and strategy require balancing the demands of efficiency-based components manufacture andlor finished auto assembly FDI for export with market-access automobile FDI for purposes of production for local consumption. Table 9 demonstrates that the domestic-versus-export market orientation not only varies across firms, it also varies across product lines. In particular, the proportion of the production for the domestic market increases (and the proportion for the export market decreases) across product lines, from passenger cars to light trucks to heavy trucks. This pattern of variability across product lines is consistent for all of the "big five " producers in Mexico. This illustrates two important trends. First, while distinctions exist, all five firms can be categorized as "transnationals" in the sense of Bartlett and Ghoshal, responding both to the demands of local responsiveness and adaptation as well as to the pull of global integration and coordination, rather than sacrificing one or the other.(75) Second, all five clearly are pursuing investments in Mexico as part of a larger "regional strategy. "(76) Indeed, in the broadest sense, the strategies pursued in Mexico by all five are converging - differences in home country conditions appear to play a diminishing role in determining their approach to FDI in Mexico. Thus, their conduct in Mexico seems consistent with a more general tendency: as mature firms in an international oligopoly with significant (although not symmetric) cross-penetration of markets, firm-specific characteristics rather than country of origin factors increasingly determine FDI behavior.(77) Downloaded By: [EBSCOHost EJS Content Distribution] At: 17:51 8 October 2009 TABLE 9 Production for Domestic and Export Markets By Firm and Product Linea Chrysler Ford GM Nissan VW Subtotal OtherC Cars Trucksb - - Cars 54/46% 61/39% 28/72% 84/71 49/31 47/117 34/66% 100/0% 14/86% 68/130 59/0 27/165 39/61% 100/0% 38/62% 50/79 72/0 42/70 79/21% 75/25% 64/36% 96/26 38/13 92/51 75/25% 100/0% 60/40% 132/43 13/0 145/99 55/45% 84/16% 41/59% 429/349 231/44 352/503 O/O% 100/0% O/O% 30/od Total 55/45% 86/14% 41/59% 73/27% 429/349 261/44 352/503 194/71 a Percent, domestic/export; and thousands of units, domestidexport. Light trucks and vans, plus motor homes chassis for the domestic market and motor homes for export in the case of Ford. Principally Dina, Kenworth, Mercedes-Benz, Mexicana de Autobuses, Omnibuses Integrales, Victor Patron and Trailers de Monterrey. * Includes heavy trucks, tractor trailers, and buses. Source: 1992 data computed from Automotive News, February 8, 1993, p. 104; 1994 data calculated from Motor Vehicle Manufacturers Association. Motor Vehicle Facts and Figures, MVMA, Detroit, 1995, p. 15, and Ward's Automotive Yearbook, 1995, Ward's Communications, Southfield, MI, 1995 pp. 96- 100. Downloaded By: [EBSCOHost EJS Content Distribution] At: 17:51 8 October 2009 818 SALORIO AND BREWEi, These trends are significant when examined in conjunction with two other, broader patterns. One concerns the narrowing gap between the export propensities of U.S. and Japanese manufacturing affiliates in Latin America, as U.S. firms over the 1980s markedly cut the difference.(78) The second concerns the bunching of FDI in many emerging economies, in which in-bound FDI tends to be dominated by a particular source country.(79) The principal policy issue concerning this bunching is whether it is more advantageous for countries to host a collection of MNCs from the same country, especially from the country recognized as the leader in the product area, or from different countries. When examined simply at firm level, data for the Mexican automotive industry suggest that it may not make much difference. Table 10 provides more refined data at the level of individual products (models of cars) and assembly projects of the three U.S. producers, each of which has two assembly plants in Mexico, and for Volkswagen and Nissan, which have only one. Looking at 1992 (a more typical year, given the downturn in Mexican automotive demand between 1992 and 1994), the pattern differs across the three U.S. firms. For Chrysler, product-level data is needed to depict the variability in the domestic-versus-export market orientation; 100 percent of some passenger car models are produced for the export market, while 100 percent of other models are produced for the domestic market, with yet other models being produced for both markets, all within the same assembly facility. A separate light truck assembly facility produces mostly for the domestic market, but with about one-fourth of its production for the export market. At General Motors, like Chrysler, one plant produces several different models of passenger cars for varying mixes of the domestic and export markets, while another plant produces 100 percent of the light truck output at another plant for the domestic market. At the Ford facilities, the pattern is simpler: one plant produces 100 percent of two models for the export market, while the other plant produces 100 percent of six passenger car models and all light trucks for local sales. Downloaded By: [EBSCOHost EJS Content Distribution] At: 17:51 8 October 2009 TABLE 10 Production for Domestic and Export Markets by ~lant''') Percent Unitsa Dom/Exp Dom/Exp Chrvsler Toluca Plant (cars) Acclaim 0/100 0/15 Sundance 0/100 0/7 LeBaron 8/92 2/24 Shadow 62/38 26/16 Spirit 70/30 31/13 Neon Other 100/0 5/0 Lago Alberta Plant Trucks 77/23 48/14 Ford Hermosillo Plant (cars) Escort 0/100 0/72 Tracer 0/100 0/40 Cuautitlan Plantb Cars 100/0 55/0 Trucks 100/0 56/0 General Motors Ramos Arzipe Plant Century 9/91 4/40 Cavalier 27/73 17/46 Cutlass 100/0 18/0 Other (3 models) Mexico City Plant Trucks 100/0 67/0 Nissan Cars 79/21 96/26 Trucks 75/25 38/13 Volkswaqen Beetle 10 0 / 0 87/0 Golf 72/28 26/10 Jetta 37/63 20/34 Trucks 100/0 13/0 "n thousands of units Percent Dom/Exp 0/100 25/75 100/0 32/68 28/72 100/0 44/56 0 / 10 0 0 / 10 0 10 0 / 0 71/29 15/85 31/69 100/0 100/0 64/36 73/27 100/0 43/57 38/62 100/0 Six different models of cars; 1994 exports are motor homes. Downloaded By: [EBSCOHost EJS Content Distribution] At: 17:51 8 October 2009 820 SALORIO AND BREWER Thus, the market orientation (domestic or export) and hence the strategic orientation (market-access or production-efficiency) can be determined for Chrysler and General Motors only at the product (model) level of analysis, while for Ford it is evident at the project level of analysis. A product level analysis is also required for Volkswagen. One model of passenger car (the "Beetle") and light trucks are produced solely for the domestic market, while two other models of passenger cars are produced for both the domestic and export markets, all in a single plant.(') An exclusive focus on firms would not fully reveal the strategic orientations of FDI in assembly facilities in the automotive industry in Mexico. In terms of the strategic orientations of FDI (and in terms of its economic and political implications), therefore, it is important to adopt project and product levels of analysis. In particular, at least in terms of the five firms' operations in Mexico, there does not appear to exist a clear distinction between "insiders" and "outsiders." Given the extensive efforts of North American auto firms to present themselves as the former and foreign transplants as the latter,@2) the strong similarity in FDI project mix across the five firms suggests that the U.S. firms are less likely to receive preferential treatment by the Mexican government. The discussion thus far has emphasized the variability across FDI projects and their products in the domestic-versus-export market orientations, and hence trade patterns. In terms of the balance of payments, the emphasis has thus been on the implications for the current account; however, such project and product differences are also relevant to variability in the effects on capital account flows in the balance of payments. The relative sizes and the variability of the FDI components are a function of the type of FDI project--whether market-access oriented or production-efficiency oriented--a relationship which is discussed further in the conclusion. Downloaded By: [EBSCOHost EJS Content Distribution] At: 17:51 8 October 2009 FOREIGN DIRECT INVESTMENT 82 1 CONCLUSION The two foci--FDI component flows at the macro level, and projects and products at the micro level--provide different and more accurate interpretations of the patterns in FDI than do the traditional foci on total flows at the macro level and firms at the micro level. There are important implications to be drawn from this expansion of both the micro and macro levels of analysis for public policy in the new Latin American business environment and in emerging and/or liberalizing economies in general. At the macro level, equity FDI component flows are more "lumpy" than the other types of flows. Equity investments reflect the establishment or acquisition of large assembly facilities, or other large manufacturing facilities such as engine plants, that cost on the order of hundreds of millions of dollars. Such equity investments are thus made relatively infrequently and in large amounts. Retained earnings decisions, by contrast, are made on a regular quarterly basis in association with the preparation of quarterly financial statements and decisions about dividend payments. Short- term debt decisions are also made relatively frequently and in smaller amounts, particularly in regard to trade credits and other working capital decisions. Long-term capital decisions, in terms of both size and frequency, tend to be between the extremes of the equity flows and the short-term debt and retained earnings flows. A macro-level focus on the disaggregated component flows of FDI refines our understanding of the role of government economic policy variables in firms' decision-making because different government policies are pertinent to different kinds of component flows. Interest rates, exchange rates and inflation rates are, of course, dependent on government monetary policies. Thus, those government policies tend to have the greatest effects on the short- term capital component flows--and to a lesser extent the retained earnings and the long-term capital flows. The effects of monetary Downloaded By: [EBSCOHost EJS Content Distribution] At: 17:51 8 October 2009 822 SALORIO AND BREWER policy are probably the least strong on the equity component flows, though even those are not negligible. On the other hand, tax holidays and other host government incentives have relatively strong effects on equity flows--and lesser effects on the other component flows. The disaggregation of FDI flows into components and the focus on project type thus complement one another. The "components profile" of disaggregated national level FDI flows depends on the type of project. Projects involving production processes with high proportions of imported inputs from the parent firm (e.g . export platform projects) typically have a relatively high proportion of trade credits from the parent so that the short-term capital component tends to be relatively large. In light of the increasing importance of regional trade integration for the Latin American automotive industry (in parts and components as well as in finished products), and the shift in emphasis of some Mexican automotive facilities from a "market-seeking" orientation for local sales to a greater "efficiency-seeking " orientation for exports (most recently to the U.S. in particular), short term credits and intracompany debt are likely to loom larger in the financing decisions of local affiliates. This, in turn, means that there is relatively great volatility over time in the total flows indicator, as well as the short-term capital indicator. The short-term capital component is the most volatile component inasmuch as it is influenced by short-term fluctuations in production, sales volume, and short-term variability in exchange rates and cross-national differences in interest rates and inflation rates. Thus, firms' decisions about production process technology and inventory levels, for instance, as well as financial decisions about short-term international funds flows, are key determinants of this component of FDI. These distinctions should be weighed by policy-makers in their FDI negotiations with foreign MNCs. Where the underlying Downloaded By: [EBSCOHost EJS Content Distribution] At: 17:51 8 October 2009 FOREIGN DIRECT INVESTMENT 823 technology--as opposed to the firm or the industry--is global in the sense of its natural economic area extending beyond political boundaries,@3) it may well make sense for Latin American governments to concentrate on gaining access for local MNC I affiliates in the parent company's global network rather than attempting to squeeze MNCs' local operation^.'^^) Engine manufacturing plants are a clear case in point--the policy emphasis (in terms of FDI components) should arguably operate at the margin with the objective of smoothing year-to-year capital flows. On the other hand, market access projects should confer greater leeway for efforts to utilize capital controls to influence the characteristics and components of FDI inflows along the lines suggested by the IMF. ACKNOWLEDGMENTS Portions of this paper were originally presented at the International Studies Association Annual Meeting in Acapulco, Mexico, March 1993. We thank Vicki Golich, Johny Johansson, Dennis Quinn and Pietra Rivoli for their comments. Georgetown Business School and its Center for International Business Education and Research provided research support. REFERENCES 1. Economic Commission for Latin America and the Caribbean. Economic Panorama of Latin America, 1994, Publication LClG.1837, Santiago, Chile, United NationsIECLAC, September 1994, p . 6; Inter-American Development Bank. Economic and Social Progress in Latin America, 1993 Report: Investing in Human Resources, Washington, D . C . , Johns Hopkins University Press, 1993, p. 16. 2. United Nations Centre on Transnational Corporations. Downloaded By: [EBSCOHost EJS Content Distribution] At: 17:51 8 October 2009 SALORIO AND BREWER Government Policies and Foreign Direct Investment, United Nations, New York, 1991. 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Moreover, the type of data they use, while obtainable for the U.S., is less available for other countries. In addition to explicit host country FDI policies, there are also diverse other host government policies that affect FDI flows: monetary and fiscal policies, capital controls, transfer pricing regulations, anti-trust policy, labor relations policies, intellectual property rights enforcement. Gilpin, Robert. The Political Economy of International Relations, Princeton University Press, Princeton, New Jersey, 1987. Bergsten, C. Fred, Horst, Thomas, and Moran, Theodore. American Multinationals and American Interests, Brookings Institute, Washington, D.C., 1978. Behrman, Jack N., and Grosse, Robert E. International Business and Governments: Issues and Institutions, University of South Carolina Press, Columbia, South Downloaded By: [EBSCOHost EJS Content Distribution] At: 17:51 8 October 2009 FOREIGN DIRECT INVESTMENT 827 Carolina, 1990; Gladwin, Thomas N., and Walter, Ingo. 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Graham and Krugman, ibid., note it only in passing in the context of a description of a change in FDI flows in one year for inward U. S . FDI. The UNCTC study, ibid. , merely presents separate findings of the effects of host government policies on different components, without comment. Economic and Business Report. Americas Review, 14th edition, Kogan Page, London, 1995, p. 70. Of course, not all countries provide FDI and BOP data in precisely this form. These could be more strictly referred to as capital account component flow profiles. One can also imagine current account profiles (including remittance profiles) but such data are not so readily available in the FDI balance of payments statistics for most countries. Brewer, Thomas L. "Government Policies, Market Imperfections, and Foreign Direct Investment. " Journal of International Business Studies 24 (April 1993) : 10 1 - 120. Dunning, John. Explaining International Production, Allen and Unwin, London, 1988; Ozawa, Terutomo. "Foreign Direct Investment and Economic Development. " Transnational Corporations 1 (February 1992): 27-54. Slemrod, Joel. "Tax Effects on Foreign Direct Investment in Downloaded By: [EBSCOHost EJS Content Distribution] At: 17:51 8 October 2009 SALORIO AND BREWER the U. S. : Evidence from a Cross-Country Comparison, " NBER Working Paper No. 3042, National Bureau of Economic Research, Cambridge, Massachusetts, 1989. Graham, Edward M. "Direct Investment in the United States and The European Community Post-1 986 and Pre- 1992, " in John Cantwell (ed .) . Multinational Investment in Modem Europe, Edward Elgar, Aldershot, U.K., 1992, p. 50. Graham, op. cit. Caves, op. cit. Wilkins , Mira. The Maturing of Multinational Enterprise: American Business Abroad from 1914 to 1970, Harvard University Press, Cambridge, Massachusetts, 1974. Ferdows, Kasra. "Charting Strategic Roles for International Factories, " in D. E. Hussey (ed.). International Review of Strategic Management, Wiley , New York, 1992. Consider the Texas Instruments semiconductor plant in Baguio, Philippines, which started as a simple "screwdriver" type assembly facility. Over time, the plant has shifted to making more complex products as well as adding design of parts of some chips elements and production processes ["Texas Instruments Sees Value in Baguio." Wall Street Journal, (June 20 1994)l. Vernon, Raymond. "International Investment and International Trade in the Product Cycle. " Quarterly Journal of Economics 80 (May 1966): 190-207. Caves, 1971, op. cit. Kojima, Kiyoshi. Direct Foreign Investment: A Japanese Model of Multinational Business Operations, Croon Helm, London, 1978. Downloaded By: [EBSCOHost EJS Content Distribution] At: 17:51 8 October 2009 FOREIGN DIRECT INVESTMENT 83 1 Eden, Lorraine. "Bringing the Firm Back In: Multinationals in IPE. " Millennium Journal of International Studies 20 (1991): 197-224. Office of Technology Assessment. Multinationals and the National Interest: Playing by Different Rules, OTA-ITE-569, U.S. GPO, Washington, D.C., 1993. Dunning, 1993, op. cit; Grosse, Robert, and Behrman, Jack N. "Theory in International Business. " Transnational Corporations 1 (February 1992): 93 - 126. Lecraw, Donald J. "Transnational Corporations in Host Developing Countries, " in Buckley , Peter J. and Clegg , J., (eds . ) . Multinational Enterprises in Less Developed Countries, Macmillan, London, 199 1. Brewer, 1993, op. cit., pp. 116-177. International Monetary Fund. Balance of Payments Statistics Yearbook, 1991, Volume 42, Part 1, IMF, Washington, D . C . , 199 1 ; International Monetary Fund. Balance of Payments Statistics Yearbook, 1995, Volume 46, Part 1, IMF, Washington, D.C., 19%. Organization for Economic Cooperation and Development. Benchmark Definition of Foreign Direct Investment, OECD, Paris, 1983. United Nations Centre on Transnational Corporations. World Investment Directory: Volume 4: Latin America and the Caribbean, United Nations, New York, 1994. UNCTAD, 1993, op. cit., pp. 250, 253; UNCTAD, 1994, op. cit., p. 416. Downloaded By: [EBSCOHost EJS Content Distribution] At: 17:51 8 October 2009 832 SALORIO AND BREWER 60. The data sources do not separate out short-term and long-term FDI debt flows for Mexico. 6 1. Mathieson and Rojas-Suarez, op. cit., p. 25. 62. Because of periodic changes in the format and content of the component flows included in the capital account items in the IMF balance of payments statistics presentation, 1978 was the first year for which there were data consistent with data for the 1980s. The years subsequent to 1991 in Table 4 were drawn from the 1995 IMF 1995 Balance of Payments Yearbook, which uses a new format; therefore, while the 1992-94 data are useful for comparison with earlier years, they are not sufficiently consistent in statistical terms with the earlier data for use in correlation analysis. 63. Behrman, op. cit. ; Karmokolias , Yannis. Automotive Industry Trends and Prospects for Investment in Developing Countries, International Finance Corporation Discussion Paper No. 7, The World Bank, Washington, D.C., 1990; Kronish, Richard, and Mericle, Kenneth S. The Political Economy of the Latin American Motor Vehicle Industry, MIT Press, Cambridge, Massachusetts, 1984; Jenkins, Rhys. Transnational Corporations and the Latin American Automobile Industry, University of Pittsburgh Press, Pittsburgh, Pennsylvania, 1987; Jenkins, Rhys. "The Political Economy of Industrial Policy: Automobile Manufacture in the Newly Industrialising Countries. " Cambridge Journal of Economics 19 (1995): 625-645; Organization of American States. Sectoral Study of Transnational Enterprises in Latin America: The Automotive Industry, OAS, Washington, D.C., 1974; Shapiro, op. cit. 64. Bennett and Sharpe, 1979 and 1985, op. cit. ; Samuels, Barbara. Managing Risk in Developing Countries: National Downloaded By: [EBSCOHost EJS Content Distribution] At: 17:51 8 October 2009 FOREIGN DIRECT INVESTMENT 833 Demands and Multinational Responses, Princeton University Press, Princeton, New Jersey, 1990; Truett, Dale B., and Truett, Lila J. "Government Policy and the Export Performance of the Mexican Automobile Industry. " Growth and Change 25 (Summer 1994): 301 -324; Additional information on the motor vehicle industry in Mexico is in Mercado, Alfonso. "Trade and Competition Between Mexican and Canadian Auto Firms in the Face of NAFTA," Paper presented at the International Studies Association conference, Acapulco, Mexico, March, 1993 ; Morales, Rebecca. "Product Development and Production Networks Across Mexico and the United States," Paper presented at the International Studies Association conference, Acapulco, Mexico, March, 1993; Hufbauer, Gary Clyde, and Schott, Jeffrey J. North American Free Trade: Issues and Recommendations, Institute for International Economics, Washington, D . C . , 1992, esp. pp. 37-43; Lustig, Nora, Bosworth, Barry P., and Robert Z. Lawrence. Assessing the Impact of North American Free Trade, Brookings Institute, Washington, D.C., 1992, esp. pp. 84-85, 123-126; and Dunn, James A. "Automobiles in International Trade: Regime Change or Persistence? " International Organization 4 1 (Spring 1987): 225-252. UNCTAD, 1993, op. cit., p. 54; Katz, Ian and Naughton, Keith. "The Flag Drops on the Great Brazilian Auto Race. " Business Week (international edition) (March 25 1996); Rebella, Jorge. "Road Warriors." Business Latin America (February 27 1995): 6-7. Kisiel, Ralph. "Navistar Makes Arrangements to Assemble Trucks in Mexico. " Automotive News (February 26 1996): 19; Friedland, Jonathan. "VW Puts Suppliers on Production Line." The Wall Street Journal (February 15 1996); Posthuma, Anne, and Arbix, Glauco. "Lopez Hits ' Plateau' at Plant in Brazil. " Automotive News (February 26 1996): 1. Downloaded By: [EBSCOHost EJS Content Distribution] At: 17:51 8 October 2009 SALORIO AND BREWER Jenkins, 1995, op. cit., p. 627; for a broad overview, see United Nations Centre on Transnational Corporations. Foreign Direct Investment and Industrial Restructuring in Mexico: Government Policy, Corporate Strategies and Regional Integration, UNCTC Current Studies, Series A, No. 18, United Nations, New York, 1992. Chappell, Lindsay. " Chrysler Tops as Mexico's Market Continues to Fall." Automotive News (March 18 1996): 29; Reed, Stanley and Malkin, Elisabeth. "NAFTA Eases the Way. " Business Week (November 13 1995): 1 10-1 14; Walzer, Robert. "Car Makers Speed Up Export Production." Business Mexico (April 1995): 32-33. Nunez, Wilson Peres. Foreign Direct Investment and Industrial Development in Mexico, OECD, Paris, 1990. Truett and Truett, op. cit. , p. 308. Instituto Nacional de Estadistica, Geografia e Informatics. La Industria Automotriz en Mexico, 1994, INEGI , Aguascalientes, Mexico, 1994, p. 107. Eden, Lorraine, and Molot, Maureen Appel. "Insiders and Outsiders: Defining 'Who Is Us' in the North American Automobile Industry. " Transnational Corporations 3 (December 1993) : 3 1-64. INEGI, op. cit. Wards Automotive Yearbook, Ward's Communications, Southfield, MI, 1995, p. 89. Bartlett, Christopher A., and Ghoshal, Sumantra Ghoshal. Managing Across Borders: The Transnational Solution, Harvard Business School Press, Boston, 1989. On the other Downloaded By: [EBSCOHost EJS Content Distribution] At: 17:51 8 October 2009 FOREIGN DIRECT INVESTMENT 835 hand, the new Mexican producers--Honda, BMW and Mercedes in automobiles--are focussed exclusively on the local market. Morrison, Allen J., and Roth, Kendall. "The Regional Solution: An Alternative to Globalization. " Transnational Corporations 1 (August 1992): 37-55. Chesnais, F. "Multinational Enterprises and the International Diffusion of Technology, " in Giovanni Dosi (ed.). Technical Change and Economic Theory, Pinter , London, 1988; Dunning, 1988 op. cit.; Vernon, Raymond. "Transnational Corporations: Where Are They Coming from, Where Are They Headed? " Transnational Corporations 1 (August 1992) : 7-35. UNCTC, 1993, op. cit., p. 201. UNCTC, 1991, op. cit., pp. 63-65. Source: 1992 data, Ward's Automotive Yearbook, 1992, Ward Communications, Southfield, Michigan, 1992, pp. 1 12, 114; Automotive News, February 22, 1993, p. 4; Motor Vehicle Manufacturers Association. World Motor Vehicle Data, MVMA, Detroit, 1993, pp. 264-266; 1994 data, calculated from Ward's Automotive Yearbook, 1995, Ward Communications, Southfield, Michigan, 1995, pp. 96-1 00. There is another project level story to the VW case: the closing of the VW assembly plant in Pennsylvania meant that the Mexican plant would become the production facility for the Golf and Jetta models to be exported to the U.S. The advent of NAFTA has increased the opportunities for production efficiency FDI in the motor vehicle industry in Mexico, as a result of a series of reductions in Mexican government restrictions--including the phased reduction and Downloaded By: [EBSCOHost EJS Content Distribution] At: 17:51 8 October 2009 SALORIO AND BREWER eventual elimination of tariffs on cars and light trucks, domestic content requirements, trade balancing requirements, as well as the immediate elimination of new car import quotas. Eden and Molot, op. cit. Kobrin, Stephen J. "An Empirical Analysis of the Determinants of Global Integration. " Strategic Management Journal 12 (1991): 17-31. Lenway, Stefanie, and Murtha, Thomas P. "The State as Strategist in International Business Research." Journal of International Business Studies 25 (Fall 1994) : 5 13-535. Downloaded By: [EBSCOHost EJS Content Distribution] At: 17:51 8 October 2009
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