The location pattern of FDI in Mexico after NAFTA

Abstract

This paper studies the location pattern of foreign direct investment (FDI) in Mexico for the period 1994-2004. An empirical gravity type model is specified based on recent FDI theories and empirical papers. It is then estimated using state-level data by FDI source country. An extended gravity-type model with elements of multinationals theory is specified, and a methodology is introduced to take into account the zero-flows observations. Results suggest that not taking into account these observations lead to biased results. In addition, they suggest the influence of geographical location and wages as major determinants on the FDI distribution across Mexican states