YALE DEPARTMENT OF ECONOMICS
WORKING PAPER NO. 49

ARE FOREIGN AND PUBLIC CAPITAL PRODUCTIVE
IN THE MEXICAN CASE?
A PANEL UNIT ROOT AND PANEL COINTEGRATION ANALYSIS

Miguel D. Ramirez

May 2008

Abstract....Using panel data, this paper tests whether foreign, public, and private capital have a positive and significant effect on aggregate output and labor productivity for Mexico during the 1960-2001 period. The richer information set made possible by the sectorial data enables this study to utilize the methodologically sound "group-mean" Fully Modified Ordinary Least Squares (FMOLS) procedure developed by Pedroni to generate consistent estimates of the relevant panel variables in the cointegrated production (labor productivity) function. The results suggest that, in the long run, changes in the stocks of public and private capital and the economically active population (EAP) have a positive and economically significant effect on output (and labor productivity) in all sectors. By contrast, changes in the stocks of foreign capital have a mixed effect, with a negative and statistically significant effect on output (and labor productivity) in the services sector; a positive and economically significant impact on output (labor productivity) in the industrial sector, and a positive but insignificant effect on output (labor productivity) in the primary sector. The period is also broken down into two sub-periods: 1960-81 (state-led industrialization) and 1982-2001 ("neoliberal" model). The estimate for the public capital variable clearly shows that it had a positive and relatively important economic effect during the earlier state-led period, while the private capital variable remains positive and significant in both periods. The foreign capital variable has a positive and highly significant effect during the ISI period, but, turns unexpectedly negative and economically significant in the neoliberal period

JEL Classification: O10, O54, C33, H54

Keywords: Augmented Dickey-Fuller (ADF) Fisher chi-square test, Complementarity hypothesis, Foreign direct investment, Import substitution industrialization (ISI), Mexico, Panel unit root, Panel cointegration test