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Missing Links: Foreign Investment and Industrial Development in Costa Rica and Mexico

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Abstract

This article offers an analytical framework for understanding the missing links between FDI and development, and applies it to the high technology sectors of Costa Rica and Mexico, the two countries in Latin America that have attracted the highest percentage of FDI in manufacturing. Since the advancement of knowledge-based assets in this sector is at the heart of structural change and development, we focus specifically on the conditions that enable or prevent positive knowledge spillovers from FDI. We identify two main reasons for the missing links between high-tech FDI and the development of indigenous knowledge-based assets in Costa Rica and Mexico. First, their governments did not have a coherent strategy, which would have spelled out the needed government policies to advance national capabilities, overcome market failures, and support the integration of national producers into TNCs’ global production networks. Second, there were limitations on the spillover potential from FDI. In Costa Rica and Mexico, technology or scale requirements for inputs made it difficult for large TNCs to source domestically beyond simple inputs like packaging materials. In Mexico, fundamental changes in the organization of global production chains in the computer industry led TNCs to rely on their global contract manufacturers rather than work with potential Mexican input suppliers.

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Notes

  1. We use the economic data for the Free Zones as an indication of TNC behavior. That is a reasonable approximation since nearly all FDI in manufacturing is in the Free Zones, though a few foreign companies operate outside the zones, and very few Costa Rican companies operate in the Free Zones. The import data in Table 4 include intermediate inputs as well as capital goods.

  2. Intel also contributed substantially to the increase in the country’s imports.

  3. Mortimore and Zamora (1999: 34) describe how the Arias Administration (1986–1990) articulated the intention of putting an industrial re-conversion program in place. It was not geared toward linkage development specifically, but more broadly toward increasing the competitiveness of the national manufacturing sector, as tariffs were reduced and import competition increased. Working groups in three sectors were to identify problems and propose solutions, but there never were any proposals for concrete actions, and the funds were eventually used for other purposes.

  4. For details see Paus (2005).

  5. Roberto Calvo from Costa Rica Provee kindly provided the data regarding CRP.

  6. For details on Ireland, see Paus (2005), on Singapore, Huff (1995), and on Thailand, Lauridsen (2004).

  7. Based on a comprehensive study on the learning levels of subcontractors in Jalisco during the peak period of 1996–1997, Dussel (1999) found similar results: he estimated that the value added by Mexican firms to total production is only about 5%.

  8. In 2002, US majority-owned foreign affiliates spent 1.3% of all R&D expenditures in Mexico; the percentage for Costa Rica was negligible. The percentage for China was the same as for all of Latin America and the Caribbean combined, 3.1% (UNCTAD 2005: 22).

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Acknowledgement

The authors acknowledge the helpful comments of the referees and the editors.

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Authors and Affiliations

  1. Department of Economics, Mount Holyoke College, South Hadley, MA, 01075, USA

    Eva A. Paus

  2. Department of International Relations, Boston University, Boston, MA, 02215, USA

    Kevin P. Gallagher

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  1. Eva A. Paus
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  2. Kevin P. Gallagher
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Correspondence to Eva A. Paus.

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Paus, E.A., Gallagher, K.P. Missing Links: Foreign Investment and Industrial Development in Costa Rica and Mexico. St Comp Int Dev 43, 53–80 (2008). https://doi.org/10.1007/s12116-007-9016-2

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