Cross-Border Economic Bulletin - June 2001
How Much Maquiladora Output is Made in Mexico?

The conventional view of the maquiladora industry is that it has little impact on the surrounding economy. This view is based on the very low share of industry inputs supplied by the domestic economy, and the belief that the absence of linkages between the maquiladora and small and medium sized Mexican enterprises limits the industry's impact on economic development. The maquiladora industry may function as a decent jobs program, but it cannot have an impact on economic development until its linkages to domestic suppliers become more extensive.

This issue of the Cross Border Economic Bulletin challenges the conventional view. In particular, it argues that the maquiladora industry uses 8 to 20 times more Mexican inputs than the 1-3% figure that is often quoted. Its main points are:
  • Mexico supplies only 3% of the industry's inputs of primary materials and packaging, but
  • Almost 25% of the value of the maquiladora industry's output is created in Mexico.
  • Linkages from the maquiladora to the domestic Mexican economy are important and varied;
  • About half of the value created in Mexico is direct labor input, while the other half is from a variety of other categories of inputs;
  • Both the direct labor and other categories of inputs can have a significant impact on long term growth and development.

Inputs, outputs, and value-added

The most useful concept for measuring the impact of the maquiladora on the domestic Mexican economy is value added. Value added is measured at each stage of production as the difference between the monetary value of an output and the cost of the purchased material inputs that went into its production. For a firm, it is measured as follows:

Value-added = output price - price of purchased intermediate goods.

For example, the value added by a garment manufacturer is the price of the finished garment minus the price of fabric, thread, and other purchased material inputs. In effect, value added measures the contribution of labor, capital, and natural resources at each stage of production.

In a closed economy with no trade, value added by the economy is equal to its total production. This follows from the fact that the price or value of a final good is the sum of the values added to the inputs at each stage of production. In the garment example, the price of a finished shirt is the sum of the value added by fiber producers, spinners, weavers, pattern makers, cutters, sewers, distributors, and retailers.

In an open economy with imported intermediate goods, value added is equal to the total value of output, minus the value of the imported inputs. Value added in this case measures the contribution of the domestic economy to the production of a good or service.

Imported inputs and value-added in the maquiladora industry

Figure 1 illustrates the share of material inputs and packaging (materias primas y empaques) that are domestically produced.

Figure 1: Percent of maquiladora material inputs made in Mexico

GRAPH GOES HERE

Figure 1 is what people usually have in mind when they talk about the need to increase Mexican inputs in the maquiladora industry. In the border states (the five states of Baja California, Sonora, Chihuahua, Coahuila, and Tamaulipas) only 1.6% of material inputs and packaging are produced in Mexico. The corresponding figure for non-border states is 11.9%, which is encouraging, but the overall figure for Mexico is only 3.2% since the largest share of production takes place in the border states.

Note, however, that material inputs are but one type of input. Others include labor, capital, and supporting services. Figure 1 can be read as Mexico's value added to material inputs and packaging used by the industry, but that is a far cry from Mexico's overall contribution to maquiladora output. Looked at in another way, Mexico's total value added measures the share of the value of maquiladora industry output that is produced inside the nation. Figure 2 illustrates this point.

Figure 2: Value-added in Mexico, percent of maquiladora total output

FIGURE 2 GOES HERE

Components of value-added

Figure 2 shows that in the year 2000, Mexico created 24.9% of the value of the maquiladora industry's output, while in the five border states, the figure was 22.2%, still considerably above the 1-3% figure for Mexico's share of material inputs used by the industry. Given that the maquiladora industry is labor intensive, it is not unreasonable to suspect that most of the value added is in the form of wages, salaries, and benefits paid to workers, technicians, and managers. Figure 3 decomposes value added into its two components of direct labor costs and other.

Figure 3: Value-added as a percent of total output

FIGURE 3 GOES HERE

As can be seen, about one-half of the total value added is direct labor costs, consisting of wages, salaries, and benefits for workers, technicians, and managers, and one-half falls into the "Other" category. Table 1 decomposes the other category into its constituent parts.

TABLE 1 GOES HERE

Linkages

The economic concept of linkages was developed by Albert O. Hirschman, who used his extensive experience in Latin America to show that "upstream" and "downstream" linkages between firms are a major catalyst of economic development. More recently, observers of Mexico's maquiladora sector have worried that the lack of linkages between maquiladora firms and the rest of the Mexican economy limit the ability of the maquiladora to foster growth and development. Hirschman's analysis is useful in this context, but the idea of linkages should not be limited to suppliers of intermediate inputs. Maquiladora firms in border states do not buy many material inputs produced in Mexico (measured as a share of their total output), but over 22% of the value of their output, or around $US13 billion in 2000, was produced in Mexico. Around $US 6.5 billion was paid out in wages in the border states, and an equal amount was spent on various support services.

In addition, another $US 4.7 billion was produced in the interior of Mexico. Together with the border states, the $17.7 billion in Mexican value added is the size of the net export earnings (gross exports minus imports). This is a significant contribution to the national economy, regardless of the industry's linkages to supplier firms. While the demand for intermediate inputs by the maquiladora industry is an opportunity awaiting further exploitation, we should not lose sight of the fact that linkages come in many forms, and intermediate inputs are just one kind.

Supplier services, for example, are intangibles that do not produce a physical product, but they do build experience, skills, and sophistication. In addition, the demand for workers at all levels of education and skills is a powerful incentive for individuals to acquire the training and knowledge they need in order to take advantage of the opportunities presented. These linkages may not fit into the category of material inputs, but they nevertheless have a profoundly positive impact on the economy.

The Cross-Border Economic Bulletin is prepared monthly by Dr. Jim Gerber, professor of economics at San Diego State University. It is underwritten by Concert, a global venture of AT&T and BT.