More Money, More Problems? The Dark Side of FDI in Mexico
Foreign direct investment (FDI) in Mexico has surged due to various factors, including geopolitical shifts and economic stability. While FDI brings economic benefits, it also raises concerns about job quality and environmental impact.
It is difficult to think that foreign direct investment (FDI) in Mexico can stop abruptly; the trend will continue to be upward, although perhaps with less dynamism, but it will remain at high levels, said Moritz Cruz Blanco, researcher at the UNAM Institute of Economic Research.
The record growth reported recently is due to several factors, he explained in an interview. Since the crisis caused by the COVID-19 pandemic, some economies, and mainly the United States, made adjustments to relocate their production to closer places and put it near the main consumption centers.
The above, together with the signing of the Mexico-United States-Canada free trade agreement, and the macroeconomic stability of our country, have given certainty to investors; in this process, the geopolitical strategy of the United States and China must also be noted. All of this has added up to have historic levels of investment from other nations.
Most of it is the so-called reinvestment of profits; it is normal behavior of companies. When these companies have profits, the expert explained, they decide to take their profits and distribute them among the shareholders, or reinvest them in the country or elsewhere.
The Ministry of Economy reported that, in the second quarter of 2024, FDI in Mexico reached 31,096 million, an amount seven percent higher than the same period in 2023, presenting a new historical maximum in the period since records have been kept. Of that total, 30.3 billion were profits from foreign shareholders who remain in our country.
This, Cruz Blanco said, could be a sign of confidence in the Mexican nation; companies sell, make profits and have the expectation that this will continue and that demand will probably grow. So, in certain cases, they need to expand their productive capacity, or hire new employees.
Meanwhile, the fact that in this period there are not so many new investments (approximately 900 million dollars), "does not necessarily mean something negative." There are several reasons why companies may postpone or cancel investment projects. This is how business behaves, it is driven by hard data, but also by intuition and expectations; in this case, some uncertainty generated by the electoral process last June may have had an influence.
Moritz Cruz clarified that investment of any kind has the positive aspect of job creation; that is why, in this case, emphasis is placed on the record levels reached. However, that does not mean that they are the best sources of work.
The United States has always been the main investor in Mexico, now with 44 percent of the total FDI flows. For the reported period, Germany and Japan occupy the second and third places respectively. Added to these nations are: Canada, Belgium, Argentina, South Korea, the Netherlands, Switzerland or the United Kingdom.
In this regard, the university student argued: although China has gained ground, it does not stand out. This may be due to the way in which it views our country, that is, as a market in its own right (and that is why there are products manufactured in the Asian nation everywhere), and to the weight that trade agreements with our northern neighbors have.
Mexico can also be a “bridge” for its goods to the U.S. market. “If the United States closes the door on them, they look for other mechanisms to enter,” he said.
Along with the origin of investments from abroad, it is not surprising that 54 percent of FDI is concentrated in the manufacturing sector. According to the Ministry of Economy, the industries that stand out are transportation equipment, beverages and tobacco, chemicals, computer equipment, food, metals, and plastics and rubber, the university specialist added.
For Cruz Blanco, the current trend of foreign investments will continue because “business is business”; companies are interested in coming and taking advantage of the advantages offered here in terms of geographic proximity, labor, state prerogatives, and other resources, such as infrastructure. “There could be effects, but not fundamental ones.”
Regarding the elections in the United States, he considered that neither of the two candidates, upon reaching the White House, will be friendly with Mexico, neither commercially nor in other terms. He will defend the interests of his country, naturally, and he will make the decisions to achieve this, and Mexico must be prepared “for whatever comes. But I would not think of anything catastrophic regarding the upcoming elections for our most important commercial partner.”
Although FDI is an important indicator, it is small in relation to GDP, barely fluctuating at two percent, even with this recent historical record, he mentioned.
Additionally, we should not put too much emphasis on foreign investment, because its negative aspects include the jobs it generates often being precarious and not providing the highest salaries, and companies not bringing or sharing their technology.
We should not overlook the factors of resource exploitation and pollution generated by various foreign companies, issues that are generally not mentioned, but which are important because they have negative effects in the short, medium, and long term.
FDI “is good, but it is not the panacea either.” We should not say “let all investment come,” but rather select it. Overall, Moritz Cruz concluded that Mexico has lacked a more in-depth strategy in this area.
