Infrastructure and FDI Inflows into Mexico: A Panel Data Approach

In December 1993, restrictions to foreign ownership across major Mexican economic sectors were abolished. This paper studies output, industrialization intensity, ``international infrastructure", and government expenditures on infrastructure as determinants of FDI inflows into Mexican states over 1994-2001. We conduct a ``general to specific" estimation strategy across Mexican states. Telephone lines appear to be very important to FDI as their coefficients are around 2.0 in Random Effects Models. Industrialization is also important, with coefficients varying from 0.62 to 0.67. Allowing for endogeneity between FDI and real output, dynamic GMM panels confirm the robust effects of telephone lines on FDI. International infrastructure thus appears more conducive to FDI than domestic infrastructure, such as interstate and secondary roads. With international infrastructure being a major catalyst of FDI inflows into Mexico, we provide support to ongoing conventional wisdom promoting such type of investment.