Migration, Trade, and Foreign Direct Investment in Mexico

Abstract

Part of the rationale for NAFTA was that it would increase trade and foreign direct investment (FDI) flows, creating jobs and reducing migration to the U.S. Since poor data on illegal flows to the U.S. make direct measurement difficult, this paper instead evaluates the mechanism behind these predictions using data on migration within Mexico where the census data permit careful analysis. We offer the first specifications for migration within Mexico incorporating measures of cost of living, amenities and networks. Contrary to much of the literature, labor market variables enter very significantly and as predicted once we control for possible credit constraint effects. Greater exposure to FDI and trade deters out-migration with the effects working partly through the labor market. Finally, we generate some tentative inferences about the impact on increased FDI on Mexico-U.S. migration. On average, a doubling of FDI inflows leads to a 1.5-2% fall in migration.