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Science and Public Policy, 36(4), May 2009, pages 301315DOI : 10.3152/030234209X436518; http://www.ingentaconnect.com/content/beech/spp

Export growth, foreign direct investment andtechnological capability building under themaquilamodel:windingroads,fewintersections

Ramn Padilla-Prez and J orge Mario Martnez-Piva

In the 1980s and 1990s, Central American countries and Mexico moved towards a new growth modelbased upon the primacy of exports and foreign direct investment (FDI). The existing literatureacknowledges that the expansion of international trade and FDI may be an important factor fordeveloping local technological capabilities. However, in Central America and Mexico a fragilerelationship between international trade and FDI growth and the development of technologicalcapabilities has been observed, due to the low local content of exports, weak integration ofmultinational enterprises and local industry, the specialization of exports in the less knowledge-intensive activities of the value chain and weak absorption capacities. Science, technology andinnovation policies have been rather passive and followed a linear approach, undermining the potentialbenefits arising from FDI and international trade.

Economic development ultimately derives froma home-grown strategy, and not from the worldmarket.

Rodrik (2001: 45)

N THE 1980S AND 1990s, Central Americancountries1 and Mexico (CAM) implemented far-reaching economic reforms, opening up to for-

eign direct investment (FDI) and international trade.The central idea was to promote exports as an engine

of growth and the private sector (instead of the state)as the driver. Trade openness, through export growthand FDI flows, would bring higher economic growthand better social conditions. Accordingly, CAMsigned a wide array of multilateral and bilateral tradeagreements and were benefited by trade preferentialtreatment programs such as the Caribbean Basin Ini-tiative (CBI) and the General System of Preferences

(Schatan et al, 2007). CAM also liberalised FDI in-flows and launched various FDI attraction schemes,based mainly on tax incentives (Padillaet al, 2008).

Between 1990 and 2005, international trade inCAM expanded significantly: total exports in Cen-tral America grew at an annual average rate of15.3%, while in Mexico they grew at 16.8%. By2005, total exports in Central America amounted toUS$24,520 millions and to US$230,299 millions inMexico. Between 1990 and 2005, FDI in CentralAmerica amounted to US$18,175.5 millions and in

Mexico to US$205,738 millions, accounting for2.6% and 2.5% of gross domestic product (GDP) in2005, respectively. Export growth in this period wasled by manufactured goods, deeply transforming thestructure and composition of exports previouslydominated by natural resources and primary goodssuch as oil, coffee, bananas and sugar cane. In 2005,manufactured exports in CAM represented 64.4% oftotal exports in contrast to 36.7% in 1990.

The so-called maquiladora industry was at thecentre of that impressive export growth and struc-tural transformation. One universal concept that de-fines the maquiladora industry cannot be found inthe countries here studied, but for the purposes ofthis paper it is understood as export manufacturingindustry (EMI) operating under various investment

I

Ramn Padilla-Prez and Jorge Mario Martnez-Piva are eco-nomic affairs officers at the United Nations Economic Commis-

sion for Latin America and the Caribbean (ECLAC), PresidenteMasaryk 29, 12th Floor, Colonia Polanco, 11570, Mexico City,Mexico; Email: [email protected]; jorgemario.martinez@cepalorg


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attraction and export promotion schemes, such asfree trade zones and temporal admission.2 In 2005,exports of the maquiladora industry represented55.4% of total exports in CAM. As will be furtherdiscussed in this paper, the maquiladora industry ischaracterised by heavy imports of intermediategoods and components, and weak linkages with therest of the local economy.

International trade and FDI are recognised in theeconomic literature as engines of economic growth.Their impact may be particularly relevant in terms ofdeveloping technological capabilities. Developingcountries, which traditionally lack the capabilitiesneeded to generate new technologies, commonlyrely on international sources of knowledge to gener-ate technical change (Bell and Pavitt, 1993; Lall,1993). However, the effect of international trade andFDI on technological capabilities is neither auto-matic nor necessary. On the one hand, FDI may op-erate within enclave economies generating few

technological and economic spillovers (Gallagherand Zarsky, 2007); on the other, long and sustainedefforts to build capacity or undertake parallel in-vestment in physical, financial and human capital inthe local economy are frequently needed to take ad-vantage of new access to international sources ofknowledge (Moran, 1998; Radosevic, 1999; Agosnand Machado, 2005).

Several authors have pointed out the importanceof complementing trade openness with additionalefforts of local actors, and in particular the centralrole of an active public policy (Rodrik, 2001; Ma-chinea and Vera, 2006). However, industrial policies

in CAM in the 1990s and the first years of the 21stcentury, and in particular science, technology andinnovation (STI) policies followed mainly a

demand-side linear approach in which the privatesector was supposed to act as the main science andtechnology bargain hunter (Cimoli et al, 2005). Thereliance on market mechanisms resulted in neutraland horizontal policies oriented to minimise stateintervention (Casalet, 2003; Cimoli, 2002; ECLAC,2004).

This paper aims to answer the following three re-

search questions:

Is there a positive relationship between exportgrowth, inward FDI and technological capabilitybuilding in CAM between 1990 and 2005?

Did CAM countries undertake active STI policiesaimed to take advantage of international trade andFDI attraction? and

What underlying theoretical assumptions can befound in the economic reforms implemented inthe 1980s and 1990s in CAM?

Though different in size and economic structure,Central American countries and Mexico sharecommon characteristics regarding their economicinternationalisation, in particular an export manufac-turing industry which has been benefited from tax-incentive schemes and is dominated by foreign-owned firms: the so-called maquila model.

This paper is organised as follows. The secondsection reviews the existing literature on the rela-tionship between trade openness and technologicalcapabilities. The third section analyses this relation-ship in CAM, making use of quantitative and quali-tative information. STI policies in CAM are also

briefly examined. The fourth section concludes.

The relationship between in ternationaltrade and foreign direct investment, and

technological capabilities

There is a prolific existing literature on the relation-ship between technological capability building andtrade openness, through international trade and FDIattraction. This section discusses the extant literatureon the relationship between international trade and

FDI, and the development of technological capabili-ties, which are understood as knowledge and skillsneeded to acquire, use, adapt, improve and createtechnology (see Stewart, 1984; Lall, 1992; Bell andPavitt, 1993; Romijn, 1999).

Trade openness may have a positive effect ontechnological capabilities through three mecha-nisms: exports, imports and FDI. In terms of exportof goods, the access to new and bigger markets maygenerate economic incentives for increasing innova-tive efforts. Given the growing competition in inter-national markets characterised by high-qualityand differentiated goods, short times of response,

rapid technical change, among other factors com-panies that intend to compete successfully in thesemarkets and indeed to survive are obliged to

Ramon Padilla-Prez is an economic affairs officer at theUN Economic Commission for Latin America and the Carib-bean. He holds a PhD in science and technology researchstudies from SPRU, University of Sussex, and an MSc ineconomics from the London School of Economics. He hasconducted extensive research on science and technologypolicy, industrial policy and international trade in Latin Amer-ica. Dr Padilla-Prez has coordinated and participated indiverse technical assistance projects in Central America.Previously he worked for Deloitte Consulting, where he

participated in strategy and operations projects in manufac-turing firms in Latin America. His research interests coversystems of innovation, technological capabilities, multina-tional enterprises and regional development.

J orge Mario Martinez-Piva has extensively worked on inter-national trade matters. He has coordinated ECLACs diversecooperation activities on trade capacity building in LatinAmerica. He obtained a law degree at the Universidad deCosta Rica, a Masters degree in economics at the Univer-sidad Nacional (Costa Rica) and a PhD in economics at theUniversidad Autnoma de Madrid (Spain). He has recentlypublished a book on intellectual property rights, innovationand development. Dr Martinez-P ivas academic experienceincludes lectures and research at universities such as Uni-versidad Nacional (Costa Rica), Universidad Estatal a Dis-

tancia (Costa Rica), Universidad Autnoma de Madrid(Spain), and Universidad de Puerto Rico.


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innovate. Additionally, foreign buyers are an impor-tant potential source of new technologies, and expo-sure to international markets may keep exportersinformed of new products and processes. As for im-ports, local firms, to compete successfully in thedomestic and international markets, demand foreigncapital goods and intermediate components, whichimprove their competitive advantages and offer the

opportunity to acquire the technological knowledgeembodied in those goods (ECLAC, 2004; Machineaand Vera, 2006).

FDI may have also positive effects on local capa-bilities. Multinational enterprises (MNEs), which setup subsidiaries to supply the host country and/orproduce final and intermediate goods to be exportedto third countries, may benefit the host countrythrough three main mechanisms:

1. Backward linkages with the host economy. Whensupplying goods and services to foreign subsidi-aries, locally owned subcontracted firms receivetechnical assistance, and technical specificationsregarding product quality, delivery times, etc.Strengthening and deepening backward linkagesalso act as incentives to improve quality and re-duce costs and, due to the large volumes usuallydemanded by MNEs, offer the opportunity to reapeconomies of scale.

2. Local firms may imitate technologies or organiza-tional forms used by MNEs. This learning processoccurs through both informal channels and formalinter-firm collaboration.

3. FDI is a source of knowledge and skills acquisi-

tion for local human capital. The learning processranges from basic learning-by-doing to formalcourses. Moreover, once domestic workers havegained knowledge and skills in an MNE, they canmove to local firms or even set up their own busi-nesses and take advantage of their experience and

learning (see Grossman and Helpman, 1991; Dun-ning, 1993, 1994; Blomstrm and Kokko, 1998;Romo Murillo, 2005; and UNCTAD, 2005).

However, it is important to recognise that the exist-ing literature also discusses the potential negativeeffects of FDI, related to driving domestic producersout of businesses, repatriation of profits and tight

control on core technologies (Moran, 1998). Theattraction of FDI, without complementary policiesand efforts to strengthen the domestic industry, mayresult in crowding-out of local firms by FDI (Agosinand Machado, 2005). In addition, if MNEs operatein industries where there are substantial barriers toentry, their presence may even increase market con-centration (Cardoso and Dornbusch, 1989).

Three main streams of literature on the relation-ship between trade openness and technological ca-pability building are here examined (see Figure 1).

The first two streams adopt a linear approach,which, as will be analysed, presents some shortcom-ings to study the case of CAM. The first streamadopts a demand-led approach and states that open-ing the economy to free trade of goods, services andcapital generates the demand conditions needed forthe development of technological capabilities. Thesecond stream assumes a supply-led approach andexamines the effects of innovativeness and techno-logical dynamism on trade performance, pointingout that a superior innovative performance leads to abetter international trade performance, and that in-ternational trade patterns are technologically deter-mined. Finally, the third stream, in line with

evolutionary theories, recognises that the first twoare complementary approaches to analyse the rela-tionship between the development of technologicalcapabilities and trade openness, and holds that eco-nomic, technical, political and social factors are cru-cial to explain this relationship.

Demand-led Internationaltrade

Technological

capabilities

Supply-led Technologicalcapabilities

International

trade

Evolutionary Socio-economicfactorsInternational

trade

Technological

capabilities

Demand-led FDI,exports Technologicalcapabilities

Supply-led Technologicalcapabilities

Evolutionary Socio-economicfactorsTechnological

capabilities

FDI,exports

FDI,exports

Figure 1. Exports, foreign direct investment and technological capabilitiesSource: Authors' ownelaboration


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Thecentralideaofthedemand-ledapproachisthattoopenaneconomytointernationaltradecreatesthedemand conditions necessary, and in the most ex-tremeformsofthetheoryalsosufficient,todeveloplocaltechnologicalcapabilities.Thisisbasedonthealleged positive effects that opening up to interna-tionaltradehasontechnologicalcapabilitiesthroughexports of goods, imports of intermediate and capital

goods and FDI. One of the first contributions to thisstream is the catching-up theory in its simple form.Veblen (1915) and Gerschenkron (1962) examinedwhy countries such as Germany overtook the UnitedKingdom in terms of technological capabilities. Oneof their main conclusions was that relative back-wardness in productivity level carries a potential togrowth at higher rates than those of trade partnerswith higher productivity level.

The most widespread demand-led theory is themarket-friendly neoclassical approach, promoted bythe Washington Consensus, which emphasises therole of the market to achieve socially useful out-comes. It argues that external competition spurs in-novation, diffusion of technology and efficient useof resources, preaching the advantages of opennessto trade and foreign investment. Consequently, gov-ernment policies must be exclusively oriented toassure the correct functioning of the market, limitingits intervention to those cases of market imperfec-tions or market failures (Balassa, 1991; Dollar,1992; World Bank, 1991; Krueger, 1993; Kuczynskiand Williamson, 2003).

Another group of demand-led theories relates toFDI and technology transfer. The effects of MNEs

on host countries technological capabilities arestudied as spillovers. These are the positive externaleffects from FDI to the host economy arising fromforward and backward linkages, migration of trainedworkers, informal collaboration agreements, anddissemination of information on foreign markets,among others (e.g. Blomstrm and Persson, 1983;Blomstrm and Kokko, 1998; Kohpaiboon, 2006;Kugler, 2006; Mulenga Bwalya, 2006).

Supply-led theories have in common the assump-tion that international differences in technologicalcapabilities are a fundamental factor in explaining

the differences in both international trade patterns

and income among countries. The basic assumptionbehind the technology-gap theory is that technologyis a free good, although it is not instantaneously anduniversally available. In a seminal paper, Posner(1961) developed an economic model to explain thepatterns of international trade in manufacturedgoods, identifying the development of new productsand processes as the main cause of international

trade. Since particular innovations take place in onecountry:

comparative cost differences may induce tradein particular goods during the lapse of timetaken for the rest of the world to imitate onecountrys innovation. (Posner, 1961: 323)

The product life-cycle theory also explains interna-tional trade patterns on the basis of technologicalcapabilities. Vernon (1966) developed an interna-tional trade model based on the stages of productlife-cycle: entry, maturation and standardisation.

Thus the international trade patterns are defined byinnovative countries exporting new, knowledge-intensive products and importing standard, labour-intensive products, and vice versa. Similar conclu-sions regarding technical progress and global indus-trial leadership were made in Freeman (1963) andHufbauer (1966), and more recently in Soete (1990),Lall (1998), and Dudley and Moenius (2007).

Other authors, in line with the neo-Schumpeterianapproach, have recognised that the development oftechnological capabilities is a cumulative processand that the probability of technological advances by

firms, organisations and countries is, among otherthings, a function of the technological levels alreadyachieved by them. Therefore if technical progress iscumulative not only at the company level, but also atthe country level, the comparative advantage of onecountry does not originate in any pre-set endowmentof resources, but from disparities in knowledge andexperience (Dosi et al, 1990; Fagerberg andGodinho, 2005).

Both supply-led and demand-led theories statethat there is a linear and mechanistic relationshipbetween international trade and FDI, and the devel-

opment of technological capabilities. First, bothstreams assume that technology is freely available atlow cost for backward countries, and that it can beacquired effortlessly. Second, both streams do nottake into account potential feedback effects betweeninternational trade and FDI, and technological capa-bilities. They do not incorporate either the analysisof the effects that techno-economic and institutionalfactors have on the development of technologicalcapabilities. Third, the demand-led approach as-sumes that technology spills over freely to the hosteconomy and no clear distinction is made betweeninformation and knowledge.

Thethirdstream,incontrast,recognisesthattherelationshipbetween tradeopennessanddevelop-ment of technological capabilities is non-linear

Supply-led theories have in commonthe assumption that internationaldifferences in technologicalcapabilities are a fundamental factorin explaining the differences in bothinternational trade patterns and

income among countries


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i.e.itisnottheimmediateconsequenceofpotentialaccesstonewtechnologiesandsourcesoftechno-logicalknowledge.This third stream,aswillbeshowninthenextsectionsofthispaper,seemstobemoresuitableforanalysingthecaseofCAM.Thekeyideabehindevolutionarytheoriesisthattostudytherelationshipbetweentechnologicalcapa-bilitybuildingandtradeopennessthecomplexand

reciprocal interactionsamongscientific, technical,economicandsocialchangesmustbe taken intoaccount.Thesetheoriesrecognisethatfirmshaveacentralroleintechnicalchange,butsocio-economicand institutional factors matter in shaping whatthey do and how successfully they do it (Dosi,1999:36).Oneofthemainassumptionsofthesetheoriesisthattechnologyisnotafreelyavailablegood,whichcanbeacquiredimmediatelyandef-fortlessly. Incontrast, theprocess throughwhichtechnology is created or acquired is cumulative,dynamicandcostly.

Several authors have pointed out the importanceof complementing trade openness with additionalefforts carried out by local actors, highlighting therole of public sector. For instance, Rodrik (2001)holds that robust public institutions, as well as a sta-ble macroeconomic environment, are crucial to fos-ter economic growth and promote market efficiency.Similarly, Machinea and Vera (2006) state that ex-port growth and FDI attraction are a source of eco-nomic growth and development if they areaccompanied by macroeconomic stability, robustinstitutions, local efforts to develop technologicalcapabilities and strong production linkages.

There is a wide array of studies that indicate thenon-linearity of the relationship between technologi-cal capability building and trade openness. The de-velopment of local technological capabilities as aresult of international trade and FDI is not an auto-matic result of the simple availability of importedtechnical knowledge. Heavy imports of technologyhave to be combined with strong indigenous effortsdevoted to technical change (Bell and Pavitt, 1993;Lall, 1993; Radosevic, 1999; Lall and Narula, 2004).On the one hand, local firms must invest to take ad-vantage of having access to new technologies and to

strengthen their competitiveness through technicalchange (Enos and Park, 1988; Amsden, 1989, 2001;Hobday, 1995; Kim, 1997).

On the other hand, efforts carried out by domesticfirms have been complemented by improvements ininvestment in education and training activities, sci-ence and technology efforts, domestic infrastructure,strengthening of institutions, etc. (Pack and Saggi,1997; Radosevic, 1999; Cantwell and Iammarino,2003). Indigenous technological capability building,conducive to higher economic growth and develop-ment, is the result of joint efforts and interactionamong individuals and organisations, as asserted in

the literature on national innovation systems (Free-man, 1987; Lundvall, 1992; Nelson, 1993; OECD,2002;Edquist 2005)

Similarly, absorption of technological knowledgetransferred by FDI, as well as the development ofnew technologies using the knowledge previouslyabsorbed, demand coordinated and systemic efforts.The presence of MNEs and their interaction withfirms and other agents in the host country can createvirtuous or vicious cycles of technological capabilitybuilding in the host country (Ozawa, 1992; Dunning,

1993; Young et al, 1994; Pack and Saggi, 1997;UNCTAD, 2005). Finally, trade openness is neithera necessary nor a sufficient condition to attract FDI,and even less to attract FDI in knowledge-intensiveactivities, since removing barriers does not createassets that MNEs seek for when they invest in thirdcountries (Lall and Narula, 2004; UNCTAD, 2005).

The case of Central America and Mexico

From the 1950s to the end of 1970s, CAM followedan inward development strategy based on state inter-vention to foster industrialisation through importssubstitution. CAM governments promoted large-scale investments and protected national marketswith high import tariffs and restrictions to FDI. In-dustrial policy operated through sector-specific pro-grams aimed at building up a national manufacturingsector (Bulmer-Thomas, 2003; Moreno-Brid et al,2007). In the case of the Central American countries,regional integration was sought as an enlargement oftheir small local markets.3

In the 1970s, this import-substitution industriali-sation model (ISI) entered a declining phase in

which accumulated inefficiencies were no longersustainable: reduced production linkages, high de-pendency in foreign inputs and intermediate prod-ucts, and accelerated growth of public services basedon an inefficient and regressive fiscal structure. Ex-ternal shocks brought about critical disequilibria inthe regions balance of payments and fiscal accountsand the resumption of inflation that were correctedin extremis (Moreno-Brid et al, 2004). The crisisof the model coincided with an unprecedented inter-national consensus on the merits of free markets,trade and financial liberalisation and privatisation of

public enterprises (Bulmer-Thomas, 2003). The statereduced its size and expenditures, removed subsi-dies, reduced investment and privatised many publicenterprises. The new economic model that substi-tuted ISI aimed to generate growth and obtain finan-cial resources to face the state obligations (Sunkel,1991; Martnez Piva, 2001; Bulmer-Thomas, 2003;Moreno-Bridet al, 2004).

Industrial policies were also radically re-oriented,leaving behind sector-specific programmes, and in-stead favouring horizontal policies and emphasisingthe role of markets. CAM governments followed ademand-led approach, in line with the Washington

Consensus, arguing that openness to internationalmarkets would provide access to dynamic marketsand technological knowledge The main guideline of


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the new model, widespread in the early 1990s, was:the best industrial policy is no policy at all. In con-trast, special attention was given to achieve macro-economic stability.

The rest of this section analyses empirical evi-dence on Central America and Mexico to answer thethree questions posed in this paper. Macro-leveleconomic data, interviews conducted by the authors

in the six countries studied and existing empiricalliterature are the inputs for the analysis. The firstsubsection focuses on examining the economictransformation that took place in CAM in the 1980sand 1990s, and its results in terms of flows of inter-national trade and FDI. In the second subsection,those results are contrasted to the dynamics of tech-nological capabilities indicators. Lastly, a briefanalysis of STI policies in CAM is presented.

Trade openness, foreign direct investment attraction

and export growth

During the 1980s, CAM promoted trade opennessthrough diverse strategies, which were strengthenedduring the 1990s. In the 1980s, all CAM countriesinitiated a unilateral trade liberalization processthrough international trade tariffs reduction (see

Table 1). This process led CAM to become the mostopen subregion in Latin America. By 2005, the av-erage tariff in CAM was 5.2% in contrast to 6.2% inMERCOSUR (Mercado Comn del Sur, Southern[American] Common Market) and 8.4% in the An-dean Community. In addition, CAM reduced its tar-iff dispersion, though some tariff peaks remain in

place for sensitive sectors,4

and a series of comple-mentary trade liberalization initiatives were intro-duced: restrictions to FDI were lifted and MNEsrepatriation of earnings was facilitated through amore flexible financial system; import barriers permits, quotas, etc. were simplified according tointernational standards.

CAM also participated in the Uruguay Round andjoined the General Agreement on Tariffs and Trade(GATT). Mexico joined the GATT in 1986, CostaRica in 1990, El Salvador and Guatemala in 1991,and Honduras in 1994. Nicaragua has been a GATT

member since 1950. In 1994, all CAM subscribed tothe final Uruguay Round act, including the creationof the World Trade Organisation. They also signedthe Multilateral Agreements on Trade in Goods, theGeneral Agreement on Trade in Services, theAgreement on Trade Related Aspects of IntellectualProperty Rights and the Agreement on Trade-Related Investment Measures.

Moreover, CAM promoted a series of trade nego-tiations that ended in bilateral trade agreements andset up an ambitious tariff reduction schedule formost of its tradable goods and services. The first ofthese, and the most notorious, is the North AmericanFree Trade Agreement (NAFTA), by which Mexico

joined the largest trade area in the Americas com-prising Canada and the United States. All CentralAmerican countries signed free trade agreementswith Mexico, Chile, Dominican Republic, Panamaand the United States (DR-CAFTA).5

Trade preferences played an important role in theconsolidation of the new development model inCAM. The multilateral trade system allows unilat-eral and discriminatory trade concessions to devel-oping countries under the Generalised System ofPreferences. Under this framework, all CentralAmerican countries benefited from the US tradepreference program given in CBI.6 Through thisprogramme the USA fostered processing and assem-bling industries in the region by giving preferentialaccess to their exports to the USA, conditioned tothe incorporation of certain amounts of US inputs.

Under the new economic model, exports grew sig-nificantly from the mid-1980s, but it was in the

1990s that they soared. Between 1990 and 2005,total exports in Central America grew at an annualaverage rate of 15.3%, while in Mexico it was at16.8%, showing an export performance superior tothat of other countries in Latin America. For in-stance, MERCOSUR7 overall exports grew in thesame period at an annual average rate of 8.8%, whilefor Chile it was at 10.4% (UNCTAD, 2007). In Cen-tral America, exports amounted to US$5,928 millionin 1990, representing 24.8% of its GDP, while in2005 they had reached US$24,520 million, repre-senting 29% of GDP. In Mexico, exports climbed

from US$48,805 million in 1990 to US$230,299million in 2005. As a percentage of GDP, exports inMexico went from 18.6% in 1990 to 30% in 20058(see Figure 2). Latin Americas exports of goods andservices including CAM and Caribbean countries accounted for 25.1% GDP in 2005.9

The creation of export promotion and FDI attrac-tion schemes had a central role in explaining thisexport growth. Although those schemes can betraced back to the mid-1960s in Mexico and the1970s in Central America,10 they experienced a sig-nificant growth in the 1980s and 1990s (Buitelaar etal, 1999; Padilla et al, 2008). Free zones, maquila

programs and temporal admission schemes, whichaltogether are commonly known as maquiladora in-dustry offered attractive tax incentives to set up

Table 1. CAM: tariffs reducti on 19852005 (average tariffs)

1987 1995 2000 2005

Costa Rica 26 8.5 3.7 4.3

El Salvador 23 9.1 6.4 6.6

Guatemala 25 8.6 5.8 5.8

Honduras 20 8.9 8.3 6.1

Nicaragua 21 5.5 8.8 5.4

Mexico n.d. 5.6 15.2 3.0

Average* 23 8.1 7.1 5.2

Source: Own elaboration based on data from World Bank(2007b)

Note: * =weighted average tariffs


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export-oriented plants in CAM to supply third mar-kets, mainly the USA.

In 2005, maquila exports in CAM amounted toUS$162thousandmillion,representing55.4%oftotalexports(Padillaetal,2008).Themaquiladoraindus-

tryisnotanindustryinthesector-specificsenseoftheword,giventhe presence ofa largevarietyof firmsoperating indifferentsectors,suchasapparel,auto-motive, electronics and medical devices. Similarly,maquiladorafirmspossessawidearrayofproductionand technological characteristics. Although labour-intensiveactivitiesprevail,whicharecommonlyac-companied by automatised and capital-intensiveprocesses,therehasbeenagradual,butstillreduced,trend to participate in knowledge-intensive activi-ties, such as product design.

Imports also increased substantially over this pe-

riod. In 1985, CAM experienced a trade surplusequivalent to 3.1% of GDP. Ten years later, in 1994,trade balance was negative and equal to 5.3% ofGDP. In 2000 and 2005, CAM registered a tradedeficit that amounted to 2.4% and 2.8% of GDP,respectively. An important part of this trade deficit isdue to a high ratio of imported inputs, mainly in themaquiladora industry, which is characterised byweak industrial linkages and low local value added.CAM countries import most of the raw materials andintermediate goods needed to produce final goods orcomponents; backward linkages between the export-oriented manufacturing industry and the rest of the

local economy are weak (Gitli and Arce, 2001; Bairand Dussel, 2006; Snchez-Ancochea, 2006; Padillaetal 2008)

Before the enforcement of the CBI program, Cen-tral American exports were concentrated in a fewtraditional, agricultural goods: bananas, coffee andsugar cane. Bananas and coffee together accountedfor 31% of total regional exports to the USA in 1990

and their contribution decreased to 9% in 2005. Therise of the maquiladora industry helps explain therapid growth of non-traditional products. Apparelexports to the USA (chapters 61 and 62 of the Har-monised System) went from 28.9% of total CentralAmerican exports in 1990 to 54.3% in 2005(ECLAC, 2007b).

Table 2 illustrates the structural transformationthat CAM exports went through between 1990 and2005. In 1990, more than 50% of Central Americanexports were primary goods (natural resources), andin Honduras and Nicaragua the amount was higher

than 70%. In 2005, only in Honduras and Nicaraguadid exports of primary goods represent more than50% of total exports. The importance of low- andmedium-technology goods increased significantly inall Central American countries. In Costa Rica theimportance of exports of high-technology manufac-tures (mainly electronic goods and components)grew considerably in the period studied. Mexicowent also through a similar transformation: in 1990,59.6% of its total exports were primary goods andgoods intensive in natural resources, while in 2005,61.5% of its total exports were medium- and high-technology manufactures. In the same period, other

Latin American countries followed a different path:MERCOSUR exports of low-, medium- and high-technology manufactures remained around 40% of

0

50,000

100,000

150,000

200,000

250,000

300,000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Exportsofgoodsandservices(millio

nofdollars)

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

TotalE

xportsaspercentageofGDP

Central America, Goods and services exports (million of dollars) Mexico, Goods and services exports (million of dollars)

CAM, Goods and services exports (million of dollars) Central America, total exports/GDP

Mexico, total exports/GDP CAM, total exports / GDP

Figure 2. CAM: total exports, 19902005Source: Authors' own elaboration based on ECLAC (2007a)


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total exports between 1990 and 2005, while in Chilethey increased slightly from 5.9% in 1990 to 7.9% in2005.

It is important to note that exports of medium-and high-technology manufactures are not necess-arily associated with knowledge-intensive activities.In contrast to supply-led theories, which as men-tioned above argue that differences in technologicalcapabilities are a fundamental factor in explainingdifferences in international trade patterns, a country

can export high-technology manufactures even if itpossessesweaktechnologicalcapabilities.Theworldmanufacturing industry is dominated by global valuechains, which decompose different links of the valuechain and locate them in diverse countries, gainingaccess to resources and capabilities and also to im-portant markets.11 Exports of manufactured goods inCAM, in particular maquila, are strongly integratedinto global value chains, and are mainly specialisedin the less knowledge-intensive links of the globalvalue chain (manufacturing and assembling); activi-ties such as product design and R&D are not com-

mon in CAM (Gallagher and Zarsky, 2007; ECLAC,2008; Padillaet al, 2008).FDI attraction is another characteristic of the new

economic model. Between 1990 and 1999, FDI in-flows in Central America added up to US$13,331million (an annual average of US$1,333 million). In20002005, those inflows amounted to US$13,418million (annual average of US$2,683 million). Asfor Mexico, FDI inflows added up to US$84,629million between 1990 and 1999, corresponding to anannual average of US$8,463 million; FDI jumpedafter the enforcement of NAFTA. The annual aver-age FDI inflows in Mexico increased to US$20,185

million in 20002005. Although the privatization ofmany public enterprises (telecommunications, elec-tricity and financial) explains the peak experienced

in the years 19952005, a great amount of FDI flowswas directed towards the manufacturing sector,along with services, real estate and tourism.

FDI in the industrial sector is closely related toexports of manufactured goods. Foreign firms haveestablished subsidiaries in CAM as a platform toexport mainly to the USA, taking advantage of thepreferential market access, abundance of low-costlabour force and geographical proximity. Foreignmanufacturing firms have in general weak links with

the local economy, limiting potential economic andtechnological spillovers. In some cases, FDI oper-ates as a real enclave, importing most of its inputsand intermediate goods (Buitelaar et al, 1999; Dus-sel, 2004; Snchez-Ancochea, 2006; Gallagher andZarsky, 2007). Moreover, foreign subsidiaries un-dertake processes characterised by low-technologicalintensity, limiting even more the potential knowl-edge spillovers to the local economy. Even in sectorsof high- and medium-technological intensity, foreignsubsidiaries in general do not carry out knowledgeintensive activities locally.

Technological capabilities

This section aims to assess technological capabilitiesin CAM between 1990 and 2005. There is no singleor commonly accepted indicator that summarisestechnological capabilities at the country level.Hence, a set of indicators related to technologicalcapabilities are presented. In addition, in CAM thereis a shortage of science and technology indicators.12Tables below present the information available fromnational and international organizations for theperiod studied.

The indicators presented here are divided into twogroups: those that describe efforts and others thatsummarise outputs The first group assesses the

Table 2. CAM: export s by t echnological i ntensit y, 19902005 (percentage of total exports)

1990 Mexico Costa Rica El Salvador Guatemala Honduras Nicaragua

Natural resources (NR) 46.7 57.6 51.3 58.0 77.6 73.5

NR-based manufactures 12.9 11.4 12.9 20.8 16.2 16.1

Low-technology manufactures 7.0 12.7 22.0 9.5 4.5 3.8

Medium-tech manufactures 27.7 6.0 8.8 6.3 1.08 2.0

High-tech manufactures 4.4 3.1 4.6 5.1 0.1 0.0

Other 0.8 8.9 0.2 0.0 0.18 4.4

2005

Natural resources (NR) 17.0 23.5 13.8 28.9 55.6 63.8

NR-based manufactures 7.4 14.6 30.5 16.9 21.6 22.6

Low-technology manufactures 13.0 16.0 34.3 39.2 10.4 2.6

Medium-tech manufactures 36.5 16.5 13.0 10.6 6.9 4.8

High-tech manufactures 25.0 28.5 6.6 3.7 2.9 0.8

Other 0.9 0.57 1.3 0.3 2.3 5.3

Source: Authors' own elaboration based on ECLAC (2007c)


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The maquila model

efforts carried out in the country to strengthen capa-bilities needed to generate technical change. Threerepresentative effort-related indicators are here ex-amined: education expenditure, R&D expenditure,and science and technology personnel.13 In turn,output indicators show the results of investing andconducting activities conducive to improving andgenerating new technologies. Three output indica-tors are analysed: patent applications (residents andnon-residents), and total factor productivity. It isimportant to note that, given the lack of long andconsistent series, as well as a reduced availability ofscience and technology indicators in the countriesstudied, the indicators here discussed may not exam-ine all the activities related to technological capabil-ity building. However, it is a robust set of indicators,given the information available.

In 2005, education expenditure in CAM, as a per-centage of gross national income, was 3.35% on av-erage. In Mexico, this indicator was much higher

that the CAM average (5.25%). Only Guatemala andMexico increased their education expenditure be-tween 1990 and 2005 (see Table 3). Furthermore,the same indicator in other emerging economies withfast export growth, such as Malaysia and Thailand(5.77% and 4.75%, respectively), was higher than inall Central American countries.

Information on R&D expenditures and research-ers (science and technology personnel) is scarce inCAM. Only Mexico has a long and consistent series(see Table 4). The average R&D expenditure (as apercentage of gross domestic product) in Latin

America in 2004 was 0.52%. R&D expenditure in

CAM was below the Latin American average. Be-tween 1996 and 2004,14 Mexico increased its R&Dexpenditure from 0.31% to 0.41% of GDP, andCosta Rica from 0.3% to 0.38%. These twocountries were the biggest spenders within CAM.

The rest of CAM showed little progress in the periodstudied and their R&D expenditure was below theLatin American average. In addition, R&D in CAMis significantly lower than in Asian countries, withwhich they compete in international markets such asChina (1.44%), Korea (2.64%) and Malaysia(0.69%).15 By the same token, the number of re-searchers per million people did not show a signifi-cant increase in the period studied (but in Mexico,where it rose from 233 to 426 between 1998 and2005) and CAM lagged behind the Asian countriesmentioned above.

The first two output-related indicators are the totalnumber of patent applications, that is, patent applica-tions by residents and non-residents, and patent ap-

plications only by residents.16

The number of patentapplications per million people increased impor-tantly in all CAM between 1990 and 2005. Hondurasreported the highest growth (from 4.7 to 21.8 patentapplications per million people), and Nicaragua thelowest (from 9.1 to 15.8). On average, this indicatorgrew 225% in CAM between 1990 and 2005 (see

Table 4). In Latin America and the Caribbean, theaverage in 2005 was 100.1 patent applications permillion people. Only Costa Rica and Mexico wereabove this average. In comparison with some Asiancountries, in 2004 China and Thailand reported 79

patents per million people, below Costa Rica and

Table 3. CAM: education expenditure (percentage of gross national income), 19902005

Country 1990 1995 1998 1999 2000 2001 2002 2003 2004 2005

Costa Rica 4.34 4.45 5.25 5.48 4.75 4.83 4.20 4.12 4.04 4.04

El Salvador 3.02 2.18 2.28 2.32 2.54 2.67 2.80 2.78 2.78 2.78

Guatemala 1.25 1.61 1.57 1.57 1.57 1.57 1.57 1.57 1.57 1.57

Honduras 4.04 3.55 3.55 3.55 3.55 3.55 3.55 3.55 3.55 3.55

Nicaragua 3.59 3.71 3.28 3.28 3.28 3.28 2.91 2.91 2.91 2.91

Mexico 2.33 4.58 4.10 4.31 4.85 5.07 5.25 5.25 5.25 5.25

Source: World Bank (2007a)

Table 4. CAM: research and development expendi tures as a percentage of GDP, 19962004 (available data)

Country 1996 1997 1998 1999 2000 2001 2002 2003 2004

Costa Rica 0.30% 0.29% 0.26% 0.33% 0.39% n.d. n.d. 0.36% 0.38%

El Salvadora

n.d. n.d. 0.08% n.d. n.d. n.d. n.d. 0.15% 0.15%

Guatemalab

0.0012% 0.0012% 0.0043% 0.0064% 0.0040% 0.0010% 0.0015% 0.0023% n.d.

Honduras n.d. n.d. n.d. n.d. 0.06% 0.05% 0.06% 0.06% n.d.

Nicaragua n.d. 0.12% n.d. n.d. n.d. n.d. 0.09% n.d. n.d.

Mexico 0.31% 0.34% 0.38% 0.43% 0.37% 0.39% 0.44% 0.43% 0.41%

Source: RICYT (2007)Notes: a The source for El Salvador in 2004 is the National Council of Science and Technology

b Corresponds to science and technology expenditures carried out only by the National Council of Science and Technology


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The maquila model

Mexico, but above the rest of Central Americancountries. In Korea, the number was impressivelyhigher:2,914patentapplicationspermillionpeople.17

In contrast to total patent applications, the numberof patent applications by residents per million peopledecreased in Costa Rica, Guatemala and Mexicobetween 1990 and 2005; increased slightly in Hon-duras and Nicaragua, and soared in El Salvador (al-though starting from very low levels) (see Table 5).

The average in Latin America and the Caribbeanwas 23.5, much higher than the average in CAM.

The number of patent applications by residents permillion people in Thailand in 2004 was 10.8, higherthan in any CAM. In China, this indicator reached5.1, similar to El Salvador. Korea again presented anoutstanding number: 2,184.18

The comparison between the evolution of totalpatent applications and patent applications by resi-dents sheds light on a central phenomenon that has

taken place in CAM. The number of total patent ap-plications has risen as a result of more applicationsby non-residents, but the number of applications byresidents (per million people) has even declined. Ahigher presence of multinational enterprises in CAMand their greater concern to protect their intellectual

property explains greatly the increase in total patentapplications. However, weak links between multina-tional enterprises and the local economy, as well asunderdeveloped technological capabilities in the lo-cal economy, are associated with a poor performanceof applications by residents.

Lastly, Figure 3 shows total factor productivity(TFP) between 1990 and 2005. TFP is commonlyused as a proxy of technical change, since it reflectsthe incorporation of new technologies aimed to gen-erate new products and processes, improve qualityand increase efficiency, among others (OECD,2001). Between 1990 and 2005, TFP increased onlyin Costa Rica (see Figure 3), and did so at an annualaverage growth rate of 0.56%. In El Salvador, theannual average growth rate was 0.19%, 0.53% inGuatemala, 0.22% in Honduras, 0.52% in Nicara-gua and 0.64% in Mexico. In the United States, themain trade partner of CAM, TFP grew at 1.24% in

the same period.19

Therefore, no CAM country re-duced the productivity gap with the USA in the pe-riod studied.

The results presented in this section show that ingeneral the outstanding performance in terms ofinternational trade and FDI attraction that CAM

Table 5. CAM: patent appli cations (residents), per mill ion peopl e, 19902005

Country 1990a

1995 1998 1999 2000 2001 2002 2003 2004 2005

Costa Rica 9.4 n.d. n.d. n.d. n.d. n.d. 12.2 12.0 13.0 9.3

El Salvador 1.2 3.5 4.6 3.5 4.7 2.8 3.6 3.0 3.3 5.1

Guatemala 3.0 3.2 2.6 2.7 5.2 2.8 0.7 0.5 0.8 1.5

Honduras 1.2 1.1 n.d. 1.4 1.2 6.1 3.5 0.6 3.3 1.9

Nicaragua 0.5 n.d. 2.7 2.0 2.4 3.4 1.4 1.2 0.6 n.d.

Mexico 7.9 4.7 5.0 4.9 4.8 4.5 5.4 4.8 5.7 5.8

Source: RICYT (2007)Note: a The numbers for Costa Rica and Nicaragua are for 1993

80

90

100

110

120

1990 1995 2000 2003 2005

(1990=100)

Costa Rica El Salvador Guatemala Honduras

Nicaragua Mexico

Figure 3. CAM: total factor productiv ity, 19902005 (1990 = 100)Source: Authors' own elaboration based on ECLAC (2007a) andWorld Bank (2007a)


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The maquila model

experienced between 1990 and 2005 did not corre-spond to similar behaviour in terms of technologicalcapability building. Figure 4 draws the relationshipbetween export and FDI growth on the one hand,and TFP and patents growth on the other.20 Therewas a strong correlation between FDI and exportgrowth (0.97), since as said a large amount of FDIwas oriented to export-intensive manufacturing in-dustries. In contrast, patents granted to residents and

TFP, two output-related indicators of technologicalcapabilities, overall had negative growth in the pe-riod studied. The correlation between export growthand TFP and patent growth was 0.80 and 0.66,respectively, whereas the correlation between FDIgrowth and TFP and patent growth was 0.86 and0.63, respectively. Finding a one-to-one positiverelation between FDI and export growth, and tech-nological capabilities was not expected, but at least amove in the same direction.

However, there are differences among thecountries studied. Costa Rica and Mexico were

above the Latin American average, and experienceda significant growth in some indicators (for instance,productivity growth in Costa Rica and educationexpenditure in Mexico). Their better performancemay be associated with higher technological capa-bilities at the start of the period, and consequentlywith more capabilities to take advantage of FDI in-flows and international trade.

On the other hand, only in some indicators wereCosta Rica and Mexico above Asian countries withwhich they compete (China, Thailand and Malay-sia), and they were clearly behind Korea, which hasbeen widely studied as a successful case of indige-

nous technological capability building. The rest ofthe Central American countries (El Salvador, Gua-temala Honduras and Nicaragua) are below the

Latin American average and the Asian countries justmentioned in all indicators.

Science, technology and innovation policies in CAM

Fieldwork conducted by the authors in summer 2006in the countries studied leads to the following find-ings regarding STI policies.21 First, STI policies inCAM followed a demand-led approach from the

mid-1980s. These policies focused on tackling mar-ket failures, understanding technological learning asaccess to new information. State interference withmarket behaviour was minimised, and neutral andhorizontal policies were implemented. Economicpolicies focused on trade and financial liberalisationand attraction of FDI as the main sources of techno-logical learning. Imports of intermediate and capitalgoods, and technology licensing were seen as themain sources of technological knowledge.

Second, all CAM countries had science and tech-nology councils (and also ministries in Costa Rica

and Guatemala). Yet these organisations, in general,did not have economic and human resources tocoordinate and implement far-reaching policies. Of-ten, part of their personnel and projects was fundedby international loans and aid, and therefore their

0

100

200

300

400

500

600

700

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Exports FDI P atents TFP

Figure 4. CAM: exports and foreign direct investment versus technological capabilities,19902005 (1990 = 100)

Source: Own elaboration based on ECLAC (2007a), RICYT (2007) and World Bank (2007a)Note: FDI and patents growth correspond to a three-year moving average to smooth yearly

fluctuation, which is common in those indicators

Reaping the benefits frominternational trade and foreign directinvestment is not an automatic process

and depends as well on local efforts


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The maquila model

activities depended on the availability of such funds.In addition, these organisations lacked politicalpower to mobilise and manage resources from thenational budget, and to coordinate the activities ofall other public agencies regarding STI.

Third, only three CAM countries (Costa Rica,Guatemala and Mexico) had a Law and NationalPlan of Science and Technology in 2006. Yet those

laws and plans were not closely integrated into abroader national strategy of economic development.Consequently, export promotion and FDI attractionwere not coordinated with STI policies. In effect, themaquiladora industry was seen mainly as a mecha-nism of foreign exchange and employment genera-tion, and hardly as a source of technology transferand local industrial development (Buitelaar andPadilla-Prez, 2000). They were not coordinatedeither with initiatives administered by other minis-tries, such as support to small- and medium-sizedfirms or training programmes for the industry.

Since the mid-1980s, CAM countries have beenvery active in improving market access to their ex-ports and creating fiscal schemes to attract FDI.This, along with special access to the US market,spurred rapid growth of exports, mainly throughmaquila-type industries. However, complementarypolicies to strengthen local capabilities to exploit thebenefits arising from growing international trade andthe presence of MNEs were weak or even non-existent in some countries. Except for Costa Rica,CAM did not followed an active and selective FDIattraction policy, that is, they did not conduct fo-cused efforts to attract specific firms that offer

higher potential of development for the host region(e.g. in terms of technology transfer and backwardlinkages) (ECLAC, 2006). In addition, their effortsto strengthen the integration of MNEs into the rest ofthe local economy, through stronger backward link-ages and more technology transfer, were limited.

Fourth, financial resources to fund STI activitieswere channelled mainly through demand-drivenfunds. These funds followed a horizontal approachbased on the evaluation of proposals and applica-tions directly presented by prospective recipients(enterprises or research centres). This kind of system

benefits pro-active agents who already have sometechnological capabilities, while more technologi-cally backward agents face higher barriers to partici-pate (Cimoli et al, 2005). Initiatives to articulatedifferent components of the innovation system(firms, universities, research centres, public sector,etc.) were scant or non-existent.

Conclusions

Over the last 15 years, CAM exports and inwardFDI flows grew significantly. Manufacturing

exports, and in particular those from the maqui-ladora industry, were at the centre of this expansion.Yet technological capabilities werenot strengthened

in the same period. Finding a linear or one-to-onerelationship was not expected, but at least a move inthe same direction. The analysis of the empiricalevidence, in the light of the three streams of litera-ture presented in the second section of this paper,helps explain why there was no positive relationshipbetween international trade and FDI, and techno-logical capability building.

Following a demand-led approach, the impressiveexport and import growth, structural change in tradepatterns and inward FDI flows did not translate intomore advanced technological capabilities due to thefollowing factors:

Poor linkages between the export sector and therest of the local economy;

Participation in the less knowledge-intensive linksof the value chain (assembly and manufacturing);

Weak technological capabilities of CAM, previ-ously and during the implementation of the neweconomic model;

Reduced efforts of local actors to take advantageof the opportunities offered by international tradeand FDI, in particular a weak STI policy, amongothers.

Therefore, in contrast to the demand led-approach,technological capabilities are not built effortlesslyand immediately, and technology does not spill overfreely to the host economy.

As for the supply-led approach, in CAM exportsof medium- and high-technology manufacturinggoods are not explained by advanced technological

capabilities, that is, differences in technological ca-pabilities are not a fundamental factor in explainingthe differences in international trade patterns. CAMcountries, in general, participate in labour-intensivelinks of the value chain, therefore exports of me-dium- and high-technology goods have not beensupported by strong technological capabilities, butby MNEs that keep knowledge-intensive activities intheir home countries or in other developed countries.

According to the evolutionary approach, the rela-tionship between international trade and FDI, andtechnological capabilities, depends on several fac-

tors, such as indigenous technological capabilitiesprevious to opening up to international trade andFDI; national efforts to absorb foreign knowledgetransferred through imports, exports and FDI; andproduction and technological characteristics of theactivities undertaken by MNEs. International tradeand FDI may provide developing countries with anopportunity to engage in a virtuous circle of capabil-ity building.

However, to take advantage of that opportunity,countries must engage in long-term investments. Itwill be hard for CAM to attract large amounts ofFDI in knowledge-intensive activities without

increasing efforts to develop indigenous technologi-cal capabilities which are crucial for that type of for-eigninvestment


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The maquila model

Likewise, reaping the benefits from internationaltrade and FDI attraction is not an automatic processand depends as well on local efforts. In this line,Costa Rica and Mexico showed a better perform-ance, in terms of technological capabilities, than therest of CAM. These two countries have also beenable to attract FDI and export goods in high- andmedium-technology industries. Their technological

capabilities previous to the arrival of export-orientedFDI have been crucial to attract more complex in-dustries, but also to reap some benefits offered bytrade openness.

STI policies in CAM have followed a demand-ledapproach since the mid-1980s, focusing on tacklingmarket failures and considering economic liberalisa-tion and trade openness as the main sources of tech-nological learning. Public agencies responsible forSTI policies have reduced political power to mobi-lise and manage resources, and to coordinate the ac-tivities of all other public agencies. Their nationalplans of science and technology were not a centraland integrated component of a broader nationalstrategy of economic development. Moreover, tradeliberalisation and FDI attraction were not accompa-nied by active STI policies to strengthen localcapabilities.

In summary, the demand-led approach towardsthe relationship between international trade and FDI,and technological capabilities, has ruled STI policiesin CAM since the mid-1980s. FDI and internationaltrade were seen as sufficient elements, and even assubstitutes, to local efforts to develop technologicalcapabilities, and not as complements. The case of

CAM, dominated by the maquiladora industry,shows that technological capability building cannotbe derived exclusively from the world market.

Acknowledgments

The authors want to thank J uan Carlos Moreno-Brid, SarahGammage and Matthew Hammill for their valuable comments onearlier versions of this paper. We would like to thank J essSantamara for his support in the quantitative analysis. We aregrateful to the anonymous referees for their very valuable com-ments. The usual disclaimers apply.

Notes

1. The Central American countries are Costa Rica, El Salvador,Guatemala, Honduras and Nicaragua. Panama is not in-cluded in the analysis since it followed a different path, moreoriented towards services and a limited presence of maquila.

2. In Costa Rica, El Salvador and Nicaragua, it comprises freetrade zones and temporal admission; in Guatemala, freezones and maquila; in Honduras, free zones, temporal ad-mission and processing industrial zones; and in Mexico, themanufacturing, maquiladora and services export industry.See Padilla et al (2008) for a discussion of the concept ofmaquiladora industry.

3. For further details on regional integration, see Schatan et al(2007).

4. For instance, roasted coffee and sugar (from cane).5 Trade negotiations have continued after 2005 For instance

in 2008 Central American countries were negotiating an as-sociation agreement with the European Union.

6. CBI was initially launched in 1983 through the CaribbeanBasin Economic Recovery Act, and was expanded in 2000through the USCaribbean Basin Trade Partnership Act.

7. It includes Brazil, Argentina, Uruguay and Paraguay.8. Authors own elaboration based on World Bank (2007a).9. Mexicos share in total CAM trade is enormous, so it deter-

mines the shape of Figure 2 for CAM total exports and its cor-responding weight on GDP. For this reason, Figure 2presents Central America, Mexico and CAM data separately.

10. In Mexico, the maquiladora program was launched in 1965. InCentral America, the first free zones were established duringthe 1970s.

11. See Ernst and Kim (2001); Sturgeon (2002); and Ernst andLthje (2003) for further details on global value chains.

12. In CAM, only Mexico conducts a National Innovation Surveyand most countries do not undertake a periodic and system-atic effort to collect science and technology indicators. Forfurther details on the lack of indicators related to technicalchange in Latin America, see Lugones et al (2007).

13. See Patel and Pavitt (1995) and Lugones et al (2007) formore details on the difference between output and effortindicators.

14. Only this period is analysed due to lack of information for thewhole period studied.

15. The source of the data on Asia is World Bank (2007a).It corresponds to the most recent available information:2004 for China, 2003 for Korea and Thailand, and 2002 forMalaysia.

16. Patents, as an indicator of technical change, may have someshortcomings to assess technical change in developingcountries, since these carry out mainly incremental innova-tions on the one hand, and on the other patents are a costlyand time-consuming business. However, they are probablythe most commonly used indicator to assess technicalchange. See Patel and Pavitt (1995).

17. The source of the data on Asia is World Bank (2007a). Thereis no available information for Malaysia.

18. The source of the data on Asia is World Bank (2007a). Thereis no available information for Malaysia.

19. To estimate total factor productivity, the following methodol-ogy was followed:

TFP t/ TFPt1 =(YLt/ YLt1 KLt/KLt1);

where TFP is total factor productivity; Y is gross domesticproduct and K is gross capital formation (both at constantprices); and L is employment. Data on Y and K were obtainedfrom World Bank (2007a). Data on L were obtained fromECLAC (2007a). was estimated through ordinary leastsquares, where YL (outputlabour ratio) was a function of KL(capitallabour ratio).

20. As mentioned, there is a significant lack of long and consis-tent data on technical change, as well as a reduced availabil-ity of science and technology indicators in the countriesstudied. An exhaustive effort to collect long series was madeusing national and international sources, but it was not possi-ble to find data needed to carry out statistic analyses such ascointegration or econometric regressions.

21. All CAM countries were visited and interviews with represen-tatives from public and private sectors and with academiawere conducted.

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