Economic Reform In Mexico And Foreign Investment

Economic reform in Mexico and foreign investment- At a glance:

The role of foreign investment in the economic growth of Mexico cannot be denied.
The ratio between foreign direct investment and GDP (FDI:GDP) increased to 1.8% in the years 1986 to 1993 from 1.4% during the years 1980 to 1985. The ratio was 3.4 percent in the year 1994 to 2000.
During the period 1980 to 2000, contribution of foreign direct investment in capital formation increased from 3.2% to 9.1% and in 2000 it was 16.3%. These figures indicate that the economic reform in Mexico had a positive influence on foreign investment.

Economic reforms in Mexico together with liberalization reduced transaction costs. Simultaneously the security of the foreign investors also increased.
Just as assets owned by the state have contributed significantly in attracting foreign investment, buying private assets has also been instrumental in the same. A new trend with regard to foreign investment was observed during the period 1994 to 1996. More and more foreign investors showed affinity towards the purchase or creation of assets pertaining to big budget investment projects. These investors also expressed their desire to modernize those companies, which they had acquired during privatization.
Thereafter, foreign investment took the form of assets. In the year 1998 to 2001, 50 percent of foreign direct investment were effected by buying private banks in the country.
There was significant rise in the foreign direct investment in the manufacturing sector. It escalated to 63% in the year 1994 to 2000. Earlier it was 49% during 1981 to 1993. FDI or foreign direct investment mainly concentrated on machinery, automobiles and its parts, equipments, electrical appliances, electronic goods. Trends revealed that considerable investment was also made in production of tobacco, food and beverages.
With regard to the countries and regions, which have invested in Mexico, reports suggest that during the period 1981 to 2000, United States of America was the main foreign investors accounting for approximately 60% of the overall FDI value. The United States was followed by European Union, accounting for approximately 18% of the overall foreign direct investments in Mexico.
As part of the economic reform in Mexico and foreign investment, the NAFTA was instrumental in the same. With NAFTA being executed in the year 1994, the total share of United states of America increased their share to 86% in the year 2000. Canada’s share of the overall foreign direct investment was approximately 2%. Japan’s share contributed 2.3% of the total FDI whereas European Union’s contribution to the foreign investment accounted for 17% of the total foreign direct investment in Mexico during the years 1994 to 2000.

Owing to liberalization in the economy there was considerable effect on the macroeconomic indicators. Economic liberalization was aimed mainly to evoke the process of investment in the country. It can therefore be said that economic reform in Mexico and foreign investment impacted the investment process by means of trade liberalization.
Import Substitution and Industrialization:
Earlier the investment process in the country functioned as per the ISI or the Import Substitution Industrialization structure. Under the ISI or the Import Substitution industrialization, the state played a vital role in matters related to investment and the state also exercised control over the same. Economic reform in Mexico and foreign investment underwent few changes with restructuring of certain norms. With the introduction of the reforms, the role of the state changed and more stress was laid on investment pertaining to export of goods, which could be traded as compared to the goods, which could not be traded. With the execution of the economic reform in Mexico, it was anticipated that the various hindrances on the way would gradually be dissolved and eventually the free market economy would gain prominence. It was expected that the process of investment would now be controlled by market signals. This would in turn not only lead to a judicious usage of the production factors but would also serve as a factor for growth of the economy.

As a result of liberalization, more prominence was given to the private sector. All efforts were directed so that the private sector was sufficient enough to propel the economy ahead and take Mexico in the international arena. Essential characteristics of the reform comprised appealing to foreign investors, deregulation of the Mexican economy, introduction of NAFTA or North American Free Trade Agreement, public enterprises being privatized.

Even though the GDP and foreign investment increased manifold during the period 1996 to 2000. The Mexican economy became sluggish during 2001. This slow down can be attributed to the slowdown in the economy of United States of America. This resulted in global economic slowdown.

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Last Updated on : 26th June 2013

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