With the United States, Mexico, and Canada signing the North American Free Trade Agreement (NAFTA), the ground rules are set into place to allow Mexico to prosper from inflows of Foreign Direct Investment (FDI). The rules of NAFTA will protect the investments of foreign investors by locking Mexico into NAFTA regulations on direct investing (Krueger 2000). Domestic U.S. firms will be eager to invest in Mexico for a competitive advantage made possible by the NAFTA agreement and Mexico's economic conditions. This paper will discuss how NAFTA helped secure investment from the U.S. into Mexico. Additionally, why domestic U.S. firms would consider FDI into Mexico, and how U.S. FDI may have helped Mexico through its economic crisis in 1995.

As noted above, previous to1965, Mexico's FDI policy was one of the most restrictive. In 1972, Mexico began revisiting its policy on FDI. By 1994, Mexico's FDI policy had to meet the policy of the NAFTA. This would allow the U.S. and Canada the security to invest in Mexico (Graham, 2000).

Once a firm has decided it is ready to directly invest in a foreign market, the firm must decide where to invest. The decision to invest is made by locating markets that may have a comparative advantage, or a market imperfection that would allow the investor to prosper by entering the market. For example, motivating factors of investment include: profits attainable through lower tax rates, more lenient regulatory agencies, lower wages, cheaper raw materials, attracting new demand for a product, and avoiding trade restrictions. According to Sowinski (2000), Mexico meets many of these requirements of comparative advantage for the United States and other countries. Mexico especially meets these requirements for the U.S. under a preferential trade agreement. The agreement was started as far back as 1965; the same year Border Industrialization Program was started (Graham 2000).

NAFTA, along with FDI into Mexico, has helped the country prosper. Working conditions have improved for the country. FDI into the country has been linked to the same areas where demand for skilled labor has increased (Graham 2000). Additionally, during the "tequila crisis" of 1995, maquiladoras experienced growth, while other areas were cutting back (Roett 172-173). U.S. FDI made these same maquiladoras possible.

NAFTA agreement has undoubtedly increased trade between Mexico and the U.S. Mexico's exports to the U.S. increased dramatically. Krueger (20000) suggests this evidence shows NAFTA worked to create trade with Mexico, by allowing the U.S. to use the lower cost import country for production.

Since the crisis in 1995, the Mexican economy has continued to grow. Presently, there are higher incomes for the labor force in Mexico, as compared to the incomes before the NAFTA and liberalization of trade, both of which have resulted in increased FDI from the U.S. More workers are now working in the skilled manufacturing sectors. Overall, the increase in skilled workers has resulted in the increase of income by Mexican workers. FDI is associated with higher wages in the Mexican economy. Consequently, demand for the skilled labor is also directly associated with the increases in FDI. The exports that have come into demand from the Mexican economy needs this skilled labor in order to be produced. This FDI from the U.S. helps create Maquiladoras, which in turn give business to Mexico, helping to rebuild its economy after the crisis (Graham 2000).

Graham (2000) says GDP in Mexico during the 1980's is strongly correlated with oil prices. However, recently this has not been the case, as oil prices have risen and GDP has fallen. With the economic crisis of 1995, it is hard to tell if FDI into Mexico has had a positive correlation with GDP. In 1995, GDP figures go negative; the economy begins to recover the next years. Overall, in the 1990's GDP for Mexico is positive (Graham 2000).

After the economic crisis of 1995, Mexico's fastest growing area was sales to other markets. This is because of the devaluation of the peso. The second largest area of growth after the crisis is sales to the U.S. FDI is a driving force behind the emerging Mexican economy (Garten 1996). While the GDP did experience negative numbers in 1995, Mexico did recover, and overall, GDP for the 1990's is positive (Graham 2000).

With the NAFTA set into place the borders between Mexico and the United States are slowly dissolving. Goods are shipped semi-complete from the U.S. to Mexico tax-free where the remaining assembly/manufacture takes place in maquiladora plants. The completed goods are then sold in the domestic Mexican market, shipped back to the U.S. tax-f

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Approximate Word count = 3341
Approximate Pages = 13 (250 words per page double spaced)