The Role of FDI in Structural Change: Evidence from Mexico

29 Pages Posted: 7 Jun 2020

See all articles by Henning Mühlen

Henning Mühlen

University of Hohenheim

Octavio Escobar

Paris School of Business

Date Written: March 2020

Abstract

Foreign direct investment (FDI) flows to Mexico are substantial and play an important role in the Mexican economy since the mid‐1990s. These investments reflect the activities of multinational firms that shape to some extent the economic landscape and sectoral structure in this host country. We illustrate that there is considerable variation in the amounts of FDI and structural change within the country and across time. Based on this, the paper's main purpose is to analyse whether there is a significant impact of FDI on structural change. We conduct an empirical analysis covering the period 2006–16. We use the fixed‐effects estimator where the unit of observation is a Mexican state for which we calculate structural change from the reallocation of labour between sectors. The results suggest that (if any) there is a positive effect from FDI on growth‐enhancing structural change. This effect depends critically on the lag structure of FDI. Moreover, there is some evidence that the positive effect (a) arises from FDI flows in the industry sector and (b) is present for medium and low‐skilled labour reallocation.

Suggested Citation

Mühlen, Henning and Escobar, Octavio, The Role of FDI in Structural Change: Evidence from Mexico (March 2020). The World Economy, Vol. 43, Issue 3, pp. 557-585, 2020, Available at SSRN: https://ssrn.com/abstract=3621023 or http://dx.doi.org/10.1111/twec.12879

Henning Mühlen (Contact Author)

University of Hohenheim ( email )

Institute of Economics (520E)
Schloss Hohenheim
Stuttgart, 70593
Germany

Octavio Escobar

Paris School of Business ( email )

59 rue Nationale
Paris, 75013
France

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