Foreign Direct Investment and Competition in Mexico

Alejandro Faya, Dec 12, 2012

Under the old Mexican protectionist model the commercial barriers were aimed at substituting imports for domestic production and foreign investors were not supposed to distress local entrepreneurs. Moreover, the intervention of the Government in the economy through state-owned enterprises, direct financing, and subsidies was quite far-reaching. The model was very successful for a while-Mexico accomplished sustained growth from 1952 to 1970-but its improper prolongation began to deteriorate public finances as well as the productivity and competitiveness of the domestic industry. The first Foreign Investment Law, enacted in 1973, still reflected a restrictive approach towards internationalization, as foreign capital faced several entry and operational restrictions.

The strategy of economic opening and liberalization implemented in the early 1980s and intensified in the early 1990s changed things dramatically. Exports and Foreign Direct Investment (“FDI”) became major drivers of growth. The North America Free Trade Agreement (“NAFTA”) entered into force in January 1, 1994 only a week after the enactment of the new Foreign Investment Law that, as opposed to the 1973 Law, established-for that time-a quite liberal and promotional regime for foreign investors.

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