The Enclave Economy: Foreign Investment and Sustainable Development in Mexico’s Silicon Valley (review)

Foreign Direct Investment (FDI) has come to be seen as the savior of developing countries. Governments and international institutions often make claims about the merits of FDI in helping industrialize economies and generating new jobs and wealth. These contributions may materialize, as seen in many East Asian countries. Conversely, what Gallagher and Zarsky call “the enclave economy” may emerge. In such an economy, foreign companies invest in advanced manufacturing but fail to build a thriving manufacturer base because they contract out to other global companies who build their own factories and import inputs from overseas, not locally. Moreover, the enclave economy may not be environmentally beneficial.

In analyzing the enclave economy phenomenon, Gallagher and Zarsky begin with an intriguing puzzle. In the early 1990s, Mexico emerged as a fast-growing producer of electronics as foreign corporations such as HP and Lucent quickly moved in. Electronic-specific FDI expanded to US$ 1.5 billion a year by 1999. Production was centered in Mexico’s Silicon Valley, the city of Guadalajara. Yet only six years later, the Mexican electronics industry was imploding, as most foreign companies switched their manufacturing sites to China. Thousands of jobs were lost as plants were closed. The current global financial crisis can only have exacerbated this predicament. In short, Mexico is ostensibly a case of successful FDI-led development, yet the results did not endure.

Using an institutionalist framework, Gallagher and Zarsky investigate whether FDI can serve as an effective development strategy and can aid developing country industries to leapfrog to sustainable production systems. They focus on the development of national manufacturing capacity as an endogenous process of intersecting government policies and market forces. They conduct a useful literature analysis of the claims made for and against FDI. For example, FDI may be positively associated with knowledge spill-overs as multinational corporations (MNCs) force their local competitors to adopt new technology and MNC employees move into their own businesses. FDI may “crowd in” investment by encouraging new domestic investments, and may help diffuse more sustainable technologies and corporate practices into developing countries. The evidence, the authors conclude, is that FDI outcomes are highly variable: dependent on industry sector, country, and government policies.

Gallagher and Zarsky engage in a fascinating comparison of Asian country approaches to promoting and using FDI to expand high technology manufacturing. They look at the government policies and industrial developments of Taiwan, Korea, India, Malaysia, and China from the 1960s to the present. These Asian countries have been more or less successful in creating a domestic electronics industry; the degree of success correlates with how interventionist government is. For example, whereas Malaysia attracted much FDI but failed to build a thriving domestic sector, China is rapidly building a massive domestic sector through FDI. Gallagher and Zarsky conclude that government policies are central to whether FDI outcomes can be captured for domestic benefits. More specifically, governments need to develop institutions and policies that can efficiently take advantage of FDI spill-overs, such as improving national capabilities for innovation through education and training, and supporting domestic companies with credit. Governments also need to foster the expansion of a domestic electronics market to help propel demand for local supplier involvement and retain the interest of MNCs.

There is rich, if somewhat dated, discussion of global electronics industry trends, notably the dominance of contract manufacturing in global supply chains. Electronics companies tend to retain their research and development capabilities within their industrial country bases. The restructuring of global supply chains to favor only a few large contract suppliers likely had a larger effect than any other reason. The book has weaker insights into corporate sustainability, in part because the data are difficult to generate due to the secrecy of the global electronics industry. However, the discussion of the environmental performance of FDI is not fully integrated into the overall analysis. Additionally, a discussion of the role of NGOs in enforcing improved standards appears to...