In a world more advanced in communication and transportation than ever before, driven by information technology, actors on one side of the globe can affect the societies and economies of countries thousands of miles away. Distance is an antiquated measure against the exchange of goods, ideas, and people, which provides a more accurate representation of interconnectedness in today’s globalized world. This is the case between Japan and Mexico, an unconventional but increasingly relevant partnership that has developed over the past two decades. Although they are separated by an ocean, Japan’s investment into Mexico’s automotive sector has brought the two countries much closer. To discuss this burgeoning relationship, SMU Tower Center’s Sun & Star Webinar Series invited Dr. Melba Falck Reyes and Dr. Leo Guzman, two economists from the University of Guadalajara, Mexico.
Over the past few years, the transport equipment sector has become an invaluable sector of Mexico’s economy. Since 2004, Japan’s accumulated investment has reached around 30 billion dollars, supporting Mexico’s role as a leading producer and exporter of intermediate transport equipment, creating thousands of jobs, and progressing Mexico’s economy dramatically. Looking to the international economy, this investment has made Mexico more competitive against production in China and has also strengthened global value chains (GVCs) in North America rather than those between the U.S. and China; which, according to Dr. Falck, can be tense and even disrupted by geopolitical issues and unexpected ones such as COVID-19. While it is clear that this investment benefits Mexico, the benefit to Japan is less clear.
Dr. Guzman shed light on Japan’s reasons for investment, explaining that Japan invests so heavily because Mexico presents a strategic location for exports to North and South America. Furthermore, Mexico provides adequate infrastructure, competitive costs, qualified labor, and a stable economic and fiscal system for corporations located there. Companies such as Hitachi, Honda, Nissan, and Toyota echo these sentiments and add that this investment has been productive, efficient, and profitable as their products see improvements in quality, innovation, and sales. Of course, there are downsides to the investment as well. Dr. Guzman proceeded to explain that increased competition, changed consumer demands, and human capital shortage are issues that Japanese companies face despite the advantages. According to his findings, the challenges extend to Mexican companies as well. As the industry grows, Mexico struggles to incorporate small-and-medium-sized enterprises into regional production networks. This may be impacted by the USMCA, which comes with increased regulations but also offers opportunities for further regional integration. On a larger scale, while Mexico is more competitive now, infiltrating existing GVCs has been difficult. Fortunately, this may become easier as GVCs are restructured and e-commerce increases.
Dr. Falck and Dr. Guzman concluded their webinar by looking to the short- and long-term goals for Mexico’s automotive sector. In the short term, the sector should work to increase information sharing for best production practices and should develop soft and hard skills for workers to fill the labor shortage. To do this, it should utilize internships, support job training programs, and collaborate with surrounding universities. In the long term, the industry should aim to transition from a manufacturing hub to higher value-added activities the way Japan has done in order to reap the most benefits from this sector. Mexico should also try to continue attracting foreign direct investment (FDI) to support its expanding industries.
While there is definitely room to improve, Japan’s investment into Mexico’s automotive sector has provided a springboard for the industry’s success thus far. This partnership highlights the importance of FDI and demonstrates the declining role of distance in economic growth and globalization. In the future, one can hope to see more FDI via multinational corporations in developing countries.
Watch the entire event below:
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This post was written by Saavni Desai ’23, a President’s Scholar and Tower Scholar. She is double majoring in Political Science and International Studies with a focus on the Middle East and North Africa and triple minoring in Arabic, Philosophy, and the Tower Scholars Public Policy and International Affairs minor. She also does research alongside Professor Takeuchi and is involved in Mock Trial, Indian Student Association, and the Alpha Chi Omega sorority.