Domestic reform, trade and investment liberalisation, financial crisis, and foreign direct investment into Mexico

Abstract

Foreign direct investment has received something of a blessing from the World Bank by virtue of its stability as an international financial flow during times of financial crisis. In the case of Mexico and the crisis of 1995, it is clear that FDI from the United States was indeed stable. During the crisis year, there was a slowdown in the rate of new entry of FDI into Mexico, but there was no exit of this form of investment. The important feature to realise is that flows of funds within a network of affiliates of multinational enterprises are not the same as flows of FDI as reported in balance of payments statistics. The evidence suggests in fact that there might have been a net outflow of funds from affiliates of US firms in Mexico in 1995 even though there was a small net inflow of FDI. This is neither surprising nor alarming. After all, if investors behave rationally in their own self-interests in the face of policy errors by national governments, it should be expected that foreign direct investors would behave similarly to other investors. It is clear that domestic investors and foreign holders of portfolio investment moved money out of Mexico in anticipation of the 1995 financial crisis and thus it should be no surprise that foreign direct investors might have done likewise.