What if everyone benefits from nearshoring in Mexico except Mexicans?
It was precisely this question that got me thinking and doing some research into the possibility of such a bold statement.
I am the first to admit that I am a big fan of measuring and celebrating foreign direct investment (FDI) in Mexico.
In the simplest terms, more FDI means more jobs, more jobs mean more people in the formal economy, more people in the formal economy means better benefits for workers and a bigger tax base for the government. The government having a bigger tax base means more money to improve schools, hospitals, infrastructure, etc. Although that is all true, it misses an important point.
Let’s take an example.
Mexico today has a thriving shoe industry owned by Mexican companies. Imagine for a moment that a Chinese shoe company decides to invest US $100 million in Mexico to build a state-of-the-art shoe factory. As mentioned earlier, there is a tendency to celebrate these kinds of new FDI announcements (especially by local governments who compete to get the investment by offering incentives). It is true that this Chinese investment would result in more temporary (construction workers building the factory) and permanent (factory workers) jobs.
That’s great. But let’s look at the bigger picture. That Chinese factory might be so competitive that it ultimately results in job losses at the Mexican-owned shoe companies — maybe even to the extent that they go out of business.
In this example, there might be a net zero of new jobs created, or even a net negative if the new Chinese factory comes with improved automation requiring less human labor. That Chinese factory might encourage its suppliers to come from China to Mexico — resulting in more FDI, but potentially resulting in even more job losses at Mexican shoe factories.
If the Mexican shoe company is able to compete and stay in business, Mexico is getting net job creation from the new Chinese factory. However, the profits generated by the Chinese plant most likely will go back to the parent company in China (versus staying in Mexico with a Mexican company). If Chinese companies invest in Mexico and ultimately displace the local industry, will Mexico and Mexicans be better off? Workers will now work for Chinese companies instead of Mexican companies. Profits will no longer stay in Mexico. How is Mexico truly benefiting beyond basic manufacturing jobs?
This argument has been made in terms of the FDI in the maquiladoras on the US-Mexico border. Companies from around the world poured investment into Mexico to take advantage of cheap, semi-skilled labor and proximity to the United States. Arguably, Mexico and most Mexicans did not benefit as much as they should have. There are lots of jobs there, but most are low-pay, low-skill assembly plants.
But the world is very different now.
The world has just witnessed a massive 30+ year-case study with China. Mexico now has an advantage not seen in decades as supply chain concerns force companies to look to move manufacturing closer to their home markets. Mexico can and should expect more than just low-skill job creation. It should expect higher value jobs to come with the manufacturing — jobs in engineering, research & development, information technology, marketing, etc.
Mexico should expect that a significant portion of profits are kept and reinvested in the country. Mexico should expect that management positions are filled with local Mexicans. Mexico should now know that simply moving low-skill assembly plants from China to Mexico alone will not make a significant impact over the medium and long term. The data on that is clear.
I see an increasing number of Mexican government officials understanding and talking about this — including several cabinet members recently named in President-elect Sheinbaum’s administration.
The Mexican government can and must do its part with the right mix of tax incentives, with tariffs where appropriate, and with coordination of policies between the Mexican, U.S. and Canadian governments.
But even if government officials do their part, ultimately Mexican business leaders have to step up and take advantage of the opportunity. Will they? Can they?
Stay tuned for my column next week about my interview of a young Mexican business leader stepping up to the challenge — creating a business that will help Mexicans maximize their benefits from nearshoring.
Travis Bembenek is the CEO of Mexico News Daily and has been living, working or playing in Mexico for over 27 years.
I read a piece about the Chinese taking over downtown Mexico City. Now they have moved into the artisan community Tonalá in Guadalajara where locals have always gone to buy things for their homes.
The water crisis is another way locals are losing out. Seems to be enough for businesses (for now) but shortages for the people. It will be very interesting to follow Lake Chapala the next ten years. Is the government going to do a massive infrastructure project to fix the broken pipes feeding Guadalajara? I’m sure that repair need is the same for every other lake and reservoir in Mexico.
As regards your interest in FDI and concerns of over the flows of profits, the USTR reports that the stock of US FDI in 2022 in Mexico was $130 billion and that of Mexico in the US was $34 billion. Mexican companies seize opportunities in the US market (US economy is 15 times larger that Mexico’s). These include Bimbo, Cinepolis, Lala. And Gruma.
I am curious about understanding how the difference in how Mexico developed its workforce would end up differing from how China developed its own. I would be curious if the author would write about how Mexico first handled the maquiladoras with a low skilled workforce and how it may differ now with Mexico’s current workforce. Especially noting the youth demographic compared to most other nations, how does this bode for the average Mexican in terms of the pay to cost of goods and housing. I would be curious if the owner’s of MND would transition into more of a more statistics heavy news site. That would be a great change that I haven’t seen any other Mexico news site provide.
I have way more confidence in the Mexican peoples ability to lead businesses in Mexico than imported Chinese managers. All the trend lines are in Mexico’s favor. FDI is an essential element for the labourers progress from agriculture to construction and manufacturing and onto high tech and ownership. This can take a generation but is already happening in Mexico. The government has a very important role to ensure that everyone plays fair and shares in the cost to develop the necessary infrastructure and supportive social programs. Mexico is blessed with geographic proximity to the US and Canada as well as serving as a gateway to Latin America. It is also blessed with friendly and hard working people, an abundance of natural resources, well developed tourism, amazing and abundant coastlines, the interoceanic corridor, improving health and educations systems, etc. I don’t mean to underestimate the challenges of poverty, crime, corruption and water shortages but these can all potentially be overcome with time, good will and good governance. Again the trend lines look favorable to me. Go Mexico, Carpe Diem!
Where do you get your optimism as regards health and education? Outcomes in both are trending down and the government dismantled the reforms that underpinned improvements in the past twenty years because they were labeled as “neoliberal”.
Hola Mark, I suspect my timelines are longer than yours. I first visited Mexico, Guadalajara, as a doctor 34 years ago. Since then, there have been dramatic improvements in health care access, capacity and quality. However, there remain opportunities for improvement. We probably agree that expansion of the government health care budget is required. I maintain that continuing FDI will lead to more money in federal and state coffers. Of course, money alone is not sufficient. Canada has one of the world’s most expensive health care systems and yet access to family doctors and wait times for both diagnostics and therapeutics including surgery are worsening. If Mexico is serious about accelerating healthcare system performance then I join with others in recommending improved monitoring and regular independent evaluation. As William Deming taught the only way to know if something is an improvement is to measure it.
. . . in other news, “compare and contrast” the FDI of China in nations of Africa, heck even our neighbor in South America – Peru . . . on a local note, Chinese imported “honey” is destroying the local beehive honey harvesting in Mexico . . . not all FDI is a good thing, ask those in Africa about their financial obligations out pacing the returns on investment that China made . . . this is also occuring within the northern neighbor of Mexico, USA . . . so it’s not just a “cheap labor” issue . . . just my opinion and observation . . .
Aye. Never as a capitalist country outsource your means of productions without due consideration in return.
Hear, hear…and to the detriment of workers at home.
I suggested such a discussion recently, and you have exceeded my expectations., thank you.
I agree. Good discussion.
I have a perspective of 59 years if visiting and living in Mexico starting in 1965. They are 2 different universes. I saw people eating dirt , having one set of clothes on and that was on their backs, and people dying on common infections from Machete cuts. Much of Mexico was living in the 18th century 60 years ago. Yes, there was always DF.
I listened to a lecture 2 years ago on what auto workers make in MX. $8 per hour USA and benefits. Today, the minimum wage is $15 per day, while 2 years ago factories, yes, Chevrolet, Ford, Etc were paying $65 USA per day and benefits. I don’t know what present wages are in Auto factories in MX.
I do know that The Mexican economy is number 11 in the world, that a Mexican passport will get you into most countries, that post secondary education is common and cars and trucks are owned by a large % of Mexicans. Mexicans have a rich diet even if too many calories from Coke and tortillas.
More prosperity is inevitable with all the factories moving out of China to Mexico..
There will be no prosperity until the salaries increase dramatically; right now they are abysmal, sometimes even for professionals.
I AM VERY WORRIED FOR MEXICO…I TRUST THE NEW PRESDIENT IS ON HER TOES
Excessive income inequality is corrosive of the social fabric and an economic development strategy that lifts all boats. Adequate taxation of corporations and individuals will enable needed development of social and physical infrastructure (e.g. desalinization plants and all things water related), and to calm the tendency of Government to borrow on great expectations of a robust future that may, in our increasingly uncertain world, fail to materialize.
Great article.
Hmm. Fine line .
Outside investment can be good and bad.
From a country like China, whose stated goal is world dominance and the spread of Communism, a very poor choice. Outside investment from US and Canada, partners in trade and democracy, a far better one. Will Mexico, like most governments, willing to accept growth
at any cost? Or will the government take a more thoughtful, considerate,, and longer term approach to prosperity?
Responding to John Galbraith above, you are actually a youngster compared to me. I have studied, worked and lived in Mexico for the past 50 years, so yes I have witnessed the improvements in health and education. These things are currently measured and the outcomes have deteriorated over the past six years. More poor people without access to health care and more students not achieving basic learning levels. The current administration has decimated programs and policies developed over the past twenty that bolstered improvements all in the name of politics. Hopefully the new president will reverse these short sighted acts of destroying and impoverishing evidence-based programs that have improved health, education and poverty outcomes in Mexico, including Seguro Popular, Opportunidades, and Escuelas de Cualidad.