How long can the growth of the maquiladora industry continue? Both the number of maquilas and the size of maquiladora employment increased in 1999 and 2000 (to date). While there is some discussion in San Diego and Tijuana that the limits to growth in the maquiladora sector may be at hand, Mexican statistics show no tendencies toward tapering off. The discussion has centered on the scarcity of qualified employees, the rise in wages for skilled workers and worries that technological advances in the electronics industry may make local production facilities obsolete.

After a review of recent growth in Baja California's maquiladora sector, this Cross-Border Economic Bulletin looks at two fundamentally different approaches to understanding its growth. Both approaches may be partially valid, but their policy implications differ significantly. The key points are:

• Both employment and the number of companies continued to grow at a rapid pace in 1999 and 2000 (to date).

• Implicitly, many observers have understood the maquiladora sector as an example of economic development based on Mexico's comparative advantage in labor-intensive industries.

• Newer theories of trade and regional industrial concentration provide an alternative framework for analyzing the maquila sector.

• Both theories emphasize the availability of labor, but the newer theories place greater emphasis on labor skills, trade infrastructure and market access.

Maquila growth continues at a rapid pace

Figures 1 and 2 show the average growth in the number of establishments and employees. Establishment growth in all three border cities -- Tijuana, Mexicali and Tecate -- has held between 7 and 16 percent per year since 1995, while employment growth usually exceeded 10 percent per year in Tijuana and Mexicali.

Data for 2000 are based on January through May and extrapolated for the full year. Clearly, 1999 and the first few months of 2000 show no sign of a slowdown, except perhaps in Tecate, where year-to-year variation has been much greater.

Comparative advantage and the maquiladora sector

The traditional way to understand growth in the maquiladora sector is within the framework of comparative-advantage-based trade. Comparative advantage is the idea that nations trade in order to take advantage of their differences. For example, Mexico is relatively well endowed with unskilled and semi-skilled labor, while the United States is abundant in physical capital, scientists, engineers and other skilled workers. Consequently, Mexico has an advantage in the production of goods that intensively use its unskilled labor, and the United States an advantage in the production of goods that are intensive in science and engineering inputs. In the context of the maquiladora sector, the United States or Japan (or Korea or Taiwan) supply the R&D inputs along with the machinery, while Mexico provides low-cost unskilled or semi-skilled labor for assembly.

If the maquiladora sector represents purely comparative-advantage-based development and trade, then it is simple to predict the progression of the industry. As Mexican workers gain skills, incomes will rise and unskilled assembly production will move to a lower-cost environment. In other words, we should expect to see a movement in the location of production from Tijuana to the interior of Mexico, and perhaps to Guatemala or Haiti or some other business-friendly low-cost environment.

An alternative view of the maquiladora sector

The fastest growth in the maquiladora sector over the last few years has been in Mexico's interior, away from the border. In particular, textiles and apparel have shifted toward more depressed, lower-cost regions such as the Yucatan. Yet electronics, software and car parts remain concentrated around a few centers: Tijuana, Guadalajara and Ciudad Juarez. As shown in the above figures, Tijuana's growth has not fallen but has continued unabated. Why do new establishments continue to settle there? Why don't they seek out lower-cost environments?

One possible explanation is that wages continue to be very low. The evidence, however, indicates that wages for skilled workers have fully recovered the purchasing power they lost during the crisis of 1994-95. Wages for other workers are rising but are still below their 1994 level. Anecdotal evidence indicates shortages of skilled workers and rising wages all around. In any case, wages are certainly lower in the interior of Mexico than at the border, and lower still in Guatemala or Haiti.

Recent developments in trade theory have taken note of the fact that the production of many goods is geographically concentrated. There are the obvious examples (Silicon Valley for software and specialized semiconductors, San Diego for biotechnology, London and New York for financial services) and many lesser known examples (Dalton, Georgia, for carpets, and Elkhart, Indiana, for wind musical instruments). There are many advantages of geographical concentration -- from the ability to attract a specialized labor pool and specialized parts suppliers to the intangible benefits of knowledge flows between companies.

When these advantages are present, companies benefit from economies of scale -- in other words, the average cost of production declines as the volume of production increases. The economies may be internal to the company, thus leading to larger and larger companies, or external to companies but internal to the industry, in which case companies do not grow in size but all companies benefit as the industry grows.

Data on the maquiladoras indicate that there is a consistent tendency toward larger companies. The average company size in 1993 was 147 employees in both Tijuana and Mexicali. By May 2000, the figure had grown to 236 in Tijuana and 298 in Mexicali. In addition to larger companies, there is also a continued deepening along a few lines of production. For example, between 1995 and 2000, the number of cathode-ray-tube manufacturers increased from 2 to 5, television manufacturers grew from 8 to 12, and glass manufacturers from 0 to 2. In addition, computer monitor manufacturers and parts suppliers grew in number, and several more companies are actively considering related projects.

Growth in the size of companies and in the number of companies devoted to related lines of production are indicative of an industry that benefits from both internal and external economies of scale. Cheap labor may be important, but so are direct access to the U.S. market, an increasingly deeper milieu of parts suppliers and the technological and market knowledge that stems from industrial agglomeration. All these elements are to a degree self-reinforcing, and as they develop, the industry becomes more rooted in the region.

This alternative view of Baja California's maquiladora is not entirely at odds with the traditional "cheap labor" explanation for industrial location. However, the implications for policy are different, as it stresses the availability of a skilled labor pool, trade infrastructure, specialized parts manufacturing and the informal social networks of businesspeople, instead of the maintenance of a pool of cheap, unskilled labor. The alternative model also provides a reason to believe that the industrial development of the region is a long-term phenomenon and not likely to disappear as soon as wages rise above subsistence.

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.