The effect of trade liberalisation and foreign direct investment in Mexico

This thesis analyses how trade liberalisation and Foreign Direct Investment (FDI) have impacted on Mexico’s economy. Time series econometric estimations techniques and estimations of a dynamic simultaneous equations system were conducted using quarterly data (from 1980 to 2002). In a VAR framework, calculations showed that only exports do Granger cause GDP. Under NAFTA, it emerged that exports and GDP do Granger cause FDI. Variance decomposition and impulse response functions confirmed the relative importance of each variable in the system. 3SLS estimations including instruments of fiscal and monetary policies and inflation, demonstrated that the main determinants of GDP are capital accumulation, labour productivity and FDI. Other findings confirm that exports, differences in relative wages and currency depreciation are explicative of FDI. Exports are highly dependent on the world economy and exchange rate fluctuations. Labour productivity and FDI improve human capital. Similarly, GDP and human capital induce productivity gains and capital accumulation improves due to technology transfer, infrastructure, personal income and peso appreciation. Dynamic effects of government policies and exogenous variables were analysed via multiplier analysis. The real exchange rate and world economy exert the strongest acceleration on exports and FDI growth. Multiplier effects of the monetary base showed than an expansionary monetary policy has the capacity to decelerate the interest rate and thereby to enhance FDI and its spillovers