Setback in Foreign Investment in Border States Amid Nearshoring Push
The northern states of Mexico, such as Baja California, Chihuahua, Coahuila, Nuevo León, Sonora, and Tamaulipas, were positioned as the most suitable for taking advantage of nearshoring opportunities. However, the latest figures from the Ministry of Economy indicate that Foreign Direct Investment (FDI) has encountered more obstacles than successes. In the first half of 2024, total FDI in these states was $6,028 million, representing a 37% drop compared to the same period in 2023. The most drastic case is Sonora, which experienced a staggering 96% decline, going from $2,577 million in the first half of 2023 to just $105 million in the same timeframe of 2024.
Coahuila also saw its FDI suffer, decreasing from $1,201 million to $392 million, a decrease of 67.4%. Nuevo León, deemed by its governor Samuel García as the most attractive, also joined the list of declining states, with a 15.4% drop, falling from $2,725 million to $2,304 million. The only states to record an increase in foreign investment were Baja California and Tamaulipas. Baja California reported an FDI of $1,809 million, an 18% increase compared to the $1,535 million in the first half of 2023. Tamaulipas, on the other hand, saw a slight rise of 2.7% to reach $342 million between January and June of 2024.
Despite the fact that northern states historically capture a significant portion of FDI thanks to their manufacturing sector and proximity to the United States, a greater development of nearshoring was anticipated following the COVID-19 pandemic. According to the Bank of Mexico, the cities with the most potential for relocation are mostly in the northern region, including Saltillo, Juárez, Tijuana, Reynosa, Monclova, Mexicali, Ensenada, Hermosillo, Chihuahua, Matamoros, Nogales, and Tampico, all located in border states. Additionally, the Mexican Institute for Competitiveness (IMCO) agrees that these entities are better prepared to attract investments due to their closeness to the U.S., which provides them with better labor conditions, greater trade openness, and diversification in their sectors. However, the Ministry of Economy revealed that among the 15 entities that account for 75% of investment announcements, only three are from the border: Nuevo León (9%), Coahuila (5%), and Baja California (4%).
Consulting firm Bain & Company has highlighted one of the main obstacles to harnessing nearshoring potential in Mexico: infrastructure. Despite the country's strategic location, its logistics and transportation infrastructure lags behind that of other nations and has even worsened since 2018. Highways, ports, and railways, particularly intermodal connectivity, require investment to support increased demands in the manufacturing sector, especially in the northern states. Overall, neither FDI nor exports have shown accelerated real growth, in contrast to other nearshoring destinations, especially in developing Asian economies. The president of the Business Coordinating Council (CCE) of Chihuahua has admitted that nearshoring has not taken off as expected, complicated further by a lack of electrical power, water scarcity, and labor shortages. “The golden opportunity to relocate supply chains closer to markets has not been seized, as companies cannot find the basics to operate, like electricity. Many investments are headed to Asia, particularly South Korea,” he commented a few months ago.
In Ciudad Juárez, there are six investment projects stalled due to these challenges, prompting industrial park developers to exercise caution, as nearshoring may not be what was once anticipated. Besides the infrastructural challenges, there are concerns over the political uncertainty regarding judicial reform; indeed, U.S. companies have decided to pause their investments until greater legal certainty is established. Forecasts for FDI from private sector analysts have been revised downward. Initially projected at $40,554 million for this year, it is now estimated to be $37,435 million.
It is clear that the challenges faced by nearshoring are significant, and the lack of adequate infrastructure limits Mexico's potential to attract foreign investments. If the country wants to seize the opportunities presented by the international context, it will be crucial to invest in improving its infrastructure and operating conditions, in addition to creating a reliable legal environment to foster sustainable long-term growth.
