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Global value chains drive Mexico’s economy

Integration into global value chains (GVCs) has contributed to productivity growth in Mexico, a World Bank report concluded.

However, there is room to increase this integration and boost productivity in sectors and locations that have been largely left out.

The report finds that Mexican companies that are integrated into GVCs are twice as productive as companies not integrated into GVCs, controlling for other characteristics of the company.

Mexico’s participation in global value chains for manufacturing and advanced services has been driven by the country’s low-cost labor supply, its large domestic market for manufactured goods, proximity to the United States, and high inflows. foreign direct investment (FDI).

But the economy has made little progress in upgrading technology and increasing local value added, which could amplify productivity gains throughout the economy.

According to the document, this is manifested in the scarce use of national intermediate inputs, the high concentration in manufacturing and the complete exclusion of many national companies, sectors and regions in the GVCs.

The foreign value added incorporated into Mexico’s gross exports remains relatively high in all sectors.

Global value chains

National indirect intermediate inputs represent only 25% of the total value of the country’s exports, compared to a foreign contribution of 36 percent.

This is more marked in the manufacturing industry, where national inputs represent 28% of the value of exports compared to a 47% share of foreign inputs.

The report also shows that anticompetitive regulation and de facto barriers to FDI in initial or upstream services (such as transportation or construction) inhibit competitiveness in later or downstream phases, limiting integration in the GVC.

The report highlights that Mexico should review the existing vertical and horizontal limitations in key GVCs, such as those in the electronics and aerospace industry, and reduce them in collaboration with the private sector:

  • Emphasize innovation and upskilling. The sectors that are more integrated in the GVCs invest more in R&D, which is positively correlated with labor productivity. Mexico lags behind other countries in R&D intensity, skilled labor, and quality of education. This calls for improved access and quality of education and greater collaboration between industry and vocational training institutions.
  • Liberalize trade in services and increase technical standards. Mexico’s transport and telecommunications trade is more restrictive than that of comparison countries. Measures are required to reduce non-tariff barriers and trade restrictions in transportation, logistics, and telecommunications, and to remove barriers to competition in goods markets, with a focus on non-tariff barriers.

 

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