Why the Mexican Consumer Electronics Industry Failed
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World Development Vol. 27, No. 8, pp. 1427±1443, 1999 Ó 1999 Elsevier Science Ltd. All rights reserved. Printed in Great Britain www.elsevier.com/locate/worlddev 0305-750X/99/$-see front matter PII: S0305-750X(99)00064-9 Foreign Investment and the Global Geography of Production: Why the Mexican Consumer Electronics Industry Failed NICHOLA LOWE Massachusetts Institute of Technology, Cambridge, USA and MARTIN KENNEY * University of California, Davis, USA Summary. Ð Explanations of industrial development in late-developing countries have become narrowly focused on the capability of governments to promote, pressure, or punish nationally-owned ®rms. Often overlooked is the contribution of ®rms, both national and multinational, in propelling, coordinating, and determining the path and location of such development. This paper examines the conditions that led to the decline of Mexico's consumer electronics industry and presents new evidence to support a more complex account of the role of both industrial and state actors within this process. In contrast to the traditional market- or state-based theories, we argue that the decline of Mexico's consumer electronics industry largely resulted from its foreign investment regime, particularly the timing of investment and the geographical locations of local and foreign manufacturers, and the subsequent depth and quality of the rela- tionships between these ®rms. The dierences between Mexico's regime and that of Taiwan during the same period provide further evidence of the important role that foreign ®rms play in inserting local suppliers into the global production chain. We argue that Mexico's foreign investment regime and the resulting weak local-foreign ties, rather than inadequate state policy, sealed the fate of Mexico's once thriving domestic elec- tronics industry. Ó 1999 Elsevier Science Ltd. All rights reserved. 1. INTRODUCTION competitive status of that investor's national industry, can shape the learning environment During the last four decades the economic and industrial trajectory of ®rms in the host performances of East Asian and Latin Ameri- country. can countries have diverged dramatically. Most Industrial development is often viewed as a studies claimed that dierences in state policy process whereby a country's industries advance or the relationships between the state and on a broad front. This is rarely the case industry could account for the divergence (see, for example, Evans, 1995). Although these studies recognized the impact that foreign * The authors thank the Alfred P. Sloan Foundation for direct investment can have on a country's funding this research as part of a larger study on the industrial performance, they typically viewed globalization of the color television industry. We foreign investors as homogeneous entities. acknowledge Christopher Stokes and Takeyoshi Ohgai While this was probably a useful ®rst approxi- for their assistance. We also acknowledge the valuable mation, our research suggests that the nation- suggestions of the anonymous reviewers. Final revision ality of the foreign investor, as well as the accepted: 15 February 1999. 1427 1428 WORLD DEVELOPMENT however, rather, industrial development is an Building on earlier conclusions about East uneven process, whereby some industries grow Asian success, observers have blamed Mexico's rapidly, while others remain relatively stagnant industrial failures on inadequate state inter- or even decline (Storper and Walker, 1988; vention (Grunwald, 1985a; Wilson, 1992) or, as Jacobs, 1969). Moreover, certain industries an outcome of Mexico's subordinate insertion inherently oer greater potential for stimulat- within the international division of labor ing national growth and provide more oppor- (Sklair, 1993; Gere, 1994). In this paper, we tunities for the acquisition of new skills and examine the components of Mexico's technologies. Electronics has clearly established geographical and foreign investment situation itself as a dynamic, fast-growth industry in that account for the diculties it experienced in today's global economy. In contrast to other developing a consumer electronics industry. In industries, the broad spectrum of activities doing so, we are forced to reconsider many of covered by the electronics industry has provi- the theoretical insights and policy implications ded nascent ®rms and countries with multiple drawn from earlier studies of East Asia's points of entry into the industry, ranging from success. By opening the foreign investment routine, simple assembly to more sophisticated ``black box,'' we ®nd signi®cant dierences capital- and knowledge-intensive manufactur- between the foreign ®rms hosted by Asian ing (Perez, 1985). countries and Mexico. Furthermore, we suggest East Asia's rapid economic expansion and that there is a strong correlation between entry into the international economy can be certain characteristics of a nation's foreign attributed to its success in developing a globally investors and that country's economic and competitive electronics industry. Behind the industrial opportunity. Asian electronics miracle is a complex web of To understand better the factors that have international interdependence, including many contributed to the growth and decline of joint ventures and technology transfer agree- Mexico's indigenous consumer electronics ments that have provided local ®rms with industry, we also examine the industrial opportunities for borrowing and internalizing trajectory of Taiwan's domestic electronics new processes (see, for example, Ernst and industry during 1965±85. The comparison may O'Connor, 1992). Contemporary studies of not seem obviously appropriate, but in fact Asia tend to equate the rise of the more glam- both countries initially shared similar industrial orous, high-end sectors of the industry, policies and industrial characteristics. Both including computers and semiconductors, with countries were opened to foreign investment in Asia's rapid economic and industrial growth. 1965. At the time, both countries housed an Yet, at the heart of this success was Asia's indigenous consumer electronics industry, initial entry into the more prosaic consumer although Mexico's was far larger and more electronics industry during the late 1960s. advanced. Initially, neither country had an Production of computers and semiconductors explicit electronics policy or sector-speci®c came later and relied on the previously accu- foreign investment policy. Rather, their indus- mulated knowledge and capital base of consu- trial policies remained fairly general and did mer electronics ®rms. not target particular industries, as commonly In 1965, an observer of the global economy attributed to South Korea. Finally, both easily could have concluded that Mexico, and countries were seen as natural sites for foreign not Taiwan or South Korea, would become one direct investment from their larger industrial- of the most successful developing countries in ized neighbors, Taiwan for Japan and Mexico establishing a competitive, indigenous elec- for the United States. tronics and related parts industry. In 1970, the In the ®rst section, we present an overview of Mexican consumer electronics industry was Taiwan's experience in developing a viable, larger than that in either South Korea or ``global'' electronics industry. The second and Taiwan. At that time Mexico had 16 manu- third sections introduce the reader to Mexico's facturers of televisions, 30 manufacturers of interior and border consumer electronics radios and audio equipment, and 120 supplier industries. The remaining sections provide a ®rms, the majority of which were wholly chronological account of the investment deci- Mexican-owned. So why did Mexico fail, with sions of ®rms seeking to utilize Mexico's low- its advantages of greater wealth, a larger cost labor market and describe how variations internal market, an established indigenous among these ®rms, including their location industry, and a base of skilled personnel?1 decisions, aected the development trajectory FOREIGN INVESTMENT AND THE GLOBAL GEOGRAPHY OF PRODUCTION 1429 of Mexico's domestic electronics industry. In for local ®rms to gain access to global the concluding section, we review the implica- production chains and implement new tech- tions of this research for understanding the nologies, thereby strategically positioning local dierences in industrial development in East entrepreneurs within emerging international Asia and Latin America. markets (see, for example, Ernst, 1994). Taiwan's linkages with both Japanese and US multinational ®rms provided the initial catalyst 2. TAIWAN REVISITED for developing a successful indigenous industry. Japanese electronics ®rms chose to invest in East Asia's economic success has attracted Taiwan for several reasons. Some sought access the attention of many scholars and has provi- to Taiwan's growing consumer market; others, ded an opportunity for political science to speci®cally suppliers of labor-intensive parts reassert itself within a debate traditionally such as wire harnesses, were more interested in dominated by standard economic analyses. tapping into Taiwan's cheap labor markets. In Many analysts now credit an ``Asian develop- the case of transistor radio production, Japa- mental state'' with a singularly uncanny nese supplier ®rms opted to follow the lead set capacity to predict and choose industrial by their assembler customers in relocating to winners (Deyo, 1987; Wade, 1990; Wilson, lower-cost production sites in