(UNTITLED)

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP86T01017R000707450001-7
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 6
• Document Creation Date: January 12, 2017
• Document Release Date: March 21, 2011
• Sequence Number: 1
• Publication Date: October 27, 1986
• Content Type: MEMO

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DIRECTORATE OF INTELLIGENCE
DATE ~o Z/ b' / , rl Lt~
DOC NO S ~O~ 53
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DIM PROSPECTS FOR MEXICAN HIGH TECHNOLOGY
Mexico City has expressed a desire to obtain and develop high technology, but its
overall policies do not bode well for attaining the level of competitiveness needed to
move swiftly into the ranks of LDC competitors. Mexico's electronic and computer plans
are essentially nationalistic, protectionist, and interventionist and aim to foster the
growth of local industries by promoting import substitution. Measures designed to
push Mexican industries to substitute domestic components for foreign inputs are likely
to make Mexican products less attractive because Mexican component quality is
generally poor. Restrictive investment guidelines, unprotected intellectual property
rights, and cumbersome bureaucratic procedures will, in general, hold foreign
investment down and deter foreign firms from transferring technology that Mexico
lacks.
Mexico City has expressed a desire to obtain and develop high technology, but its
nuerall nolicies tend to discourage foreign investment and technology transfer.
This memorandum was prepared by Mexico Branch, Middle
America-Caribbean Division, Office of African and Latin American Analysis, at the
request of Ann Hughes, Deputy Assistant Secretary for the Western Hemisphere at the
Department of Commerce. Questions and comments may be directed to the Chief,
Mexico Branch
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To date, the only specific programs the Mexicans have drawn up and
implemented have been for computers, electronics, and alternative energy.
Mexico's electronic and computer plans are essentially nationalistic, protectionist, and
interventionist and aim to foster the growth of local industries by promoting import
substitution. While the government will allow some foreign majority-owned projects in
these fields, foreign investors are subject to a number of restrictions to limit foreign
domination of the domestic market, a recurring Mexican concern. Restrictive investment
guidelines, unprotected intellectual property rights, and cumbersome bureaucratic procedures
will, in general, hold foreign investment down and deter foreign firms from transferring
technology Mexico needs to attain international competitiveness.
Budgetary and credit constraints are likely to limit expenditures on research and
development and new investments. Mexico currently spends 0.6 percent of its GDP on
research and development, well below world leaders who spend 2 to 5 percent of their GDP.
We see little chance that Mexico could increase its R&D effort in the near term given the
fact that collapsing oil prices have cut Mexico's tax revenues. At the same time,
government borrowing to finance the swelling budget deficit probably will continue to crowd
out any significant investment-originated R&D.
Mexico's Infrastructure
Mexico's high technology sector is essentially limited to a small electronics sector that
is still highly dependent on imported technology and inputs. The industry is comprised of
747 firms employing more than 48,000 workers--only 0.9 percent of industrial employment.
According to press reports, 90 percent of these firms are assembly plants. The other 10
percent are mainly majority Mexican-owned manufacturers. Low labor costs and an
exemption from foreign investment laws limiting foreign ownership to 49 percent elsewhere
have prompted a number of multinationals to establish assembly plants in Mexico, inch
Honeywell, Apple, Hewlett-Packard, IBM, Sperry, Zenith, Ericsson, Tandy, and Sony.
Within the electronics sector, telecommunications and informatics sales have grown
about 30 percent per year during the last five years, according to Mexican estimates. These
firms together represent one-third of the total number of firms in this sector in Mexico and
similar percentages of electronics production and exports. The boom probably reflects the
dynamism multinational firms which dominate the telecommunications and informatics
markets.
in
addition to lacking technological know-how, Mexican industries su er fro oduction
costs associated with imported electronic components. Without protective trade barriers,
many of Mexico's small and inefficient firms probably could not stay afloat.
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al education and shortages of skilled labor
i
l
c
og
Mexico's current deficiencies in techno
sion o F
pose additional constraints on the expan
d unskilled workers because of difficulties in matching
hi
re
manufacturing firms have
dications that skilled, middle class workers are
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r needs to available workers.
n
h
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.
ei
t
roblem will not be solved anytime soo
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emigrating suggest that th
Weak Intellectual Property Rights
Mexico has revised a 1976 patent and trademark law specifically
Mex Mexico ding ma et umber of s not US
products from patent rights.
demands for adequate patent protection within two years. The new law calls for a 10-year
waiting period before providing product patent protection to pharmaceuticals, alloys, and
technology.)
bi
o
rotection to
nt
t
p
e
d process pa
chemicals an
Tech transfer regulations are still a source of friction with the United States and other
industrialized countries. In contrast to the US practice of allowing companies to determine a royalty payments freely, Mexican law specifies that foreign c upt nies sm ub t n gr e cn o o mote
than 6 percent of sales in royalty payments. In return, they incur al sts echnical
rtherm re,
. Fu
provide scholarships, high quality technology support dtsimproved
hat enhatnce Mexican R&D and that
these companies are expected to supp po1ec
promote import substitution and exports. Mexican law stipulates trade secrets will be kept
's interest to extend that period. F_~
i
co
ex
M
less it is in
un
for only ten years,
Key Programs
The Computer Plan. The objectives of the plan, put into place in 1981, are to c eate
import substituting industries, hike local content up to 70 percent by 1987 for the indus
as a whole, and increase employment, exports, and R&D. The plan provides a number of
protective measures and benefits to majority Mexican-owned firms, including:
-- import quotas based on expected market share
-- 15- to 30-percent tariffs
-- 15-to 20-percent tax credits for expanding plant capacity,
creating new jobs, and buying Mexican-made components and
-- a 30-percent discount on energy costs. asse Several regulations introduced tplan tlpearst the 75 percent activities
of pod 9 ction-ownedn, meet localbly
plants. These plants are required to export at
by the government, and show a
content requirements, sell in Mexico only products approved
ort receipts.
n im
h
p
a
h ties greater t
net trade balance at least treem
The Electronics Program. This program, established in 1985, is an offshoot of the
computer plan. Like its predecessor, the electronics program is designed to spur exports
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and create jobs. The primary areas approved for foreign investment include VCRs,
macrocomputers, audio and video equipment, semiconductors, and automated electronic
equipment. Incentives to electronics development available to majority Mexican-owned
firms include project financing through the Industrial Equipment Fund, access to the National
Council on Science and Technology's shared risk program, tax breaks on R&D costs,
preferential import tariffs, loans at preferential interest rates, and special deals for buying
priority electronic goods produced in Mexico.
The electronics program, nevertheless, contains a number of protective measures that
could hamper the development of a competitive domestic industry. Domestic content
requirements and import licensing requirements and tariffs ranging from 5 to 59 percent will
shield infant industries and push Mexican industries to substitute domestic components for
foreign imports. These measures are likely to make Mexican products less attractive
because Mexican component quality is generally poor.
Overall, Mexico intends to maintain restrictions on foreign investment to ensure it will
focus on exports and not drive domestic firms out of the Mexican market. The Mexicans will
limit the establishment of majority foreign-owned companies primarily to sectors of no
strategic importance, where local firms have little chance of competing on the world market,
and where locals firms lack the necessary technology. Majority foreign ownership will be
permitted in other sectors, but only on a case-by-case basis after an assessment is made
that it will not distort the domestic market or displace domestic firms without offering gains
in jobs, exports, or technology. Mexico's flip-flopping on IBM's application to establish a
wholly-owned subsidiary suggests that political factors and domestic business groups will
also play an important role in government approvals of foreign investment.
Alternative Energy. The National Energy Plan unveiled in 1984 calls for the
diversification of energy resources away from hydrocarbons, increased ability to design and
construct power plants based on alternative sources, and the development of thermoelectric
facilities that can operate on alternative fuels. The alternative sources of energy cited in the
plan are hydroenergy, coal, and nuclear, geothermal, solar, wind and biomass power. The
Embassy reports that Mexico added seven electric plants in 1984, of which two were
geothermal plants, four were steam plants fueled with oil, and one was a gas plant.
Mexico's plan called for opening another 23 plants during 1985 and 1986, including nine
hydroelectric plants, two geothermal plants, two coal plants, nine steam plants fueled with
oil, and one gas plant. One major roadblock is that petroleum products are more abundant
and less expensive, making the development of alternative energy impractical. Another
obstacle is the weak financial position of the Federal Electricity Commission, which is
operating in the red and has built up a large debt.
Developments in Other Sectors
Telecommunications. Two Mexican satellites manufactured by a US company were
launched in 1985 by NASA. The lli es are to be used for domestic television, telephone,
telex, and telefax transmissions.
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We see little chance that the Mexicans will acquire sufficient expertise or capital to
propel their industry into high technology in the near term. Mexico's gains from promoting
electronics assembly operations probably will remain largely confined to new job creation
and foreign exchange earnings. The assembly plants import components from the US and
export semi-finished products back to the US market, without a noticeable transfer of
technology to Mexico. The current environment for foreign investment and intellectual
property rights does not bode well for obtaining foreign know-how and the swift movement
of Mexico into the ranks of LDC competitors.
We judge the electronics sector to be too small and inefficient to pick up the slack
from other sectors, either in providing employment for some of the 800,000 jobseekers who
enter the labor market each year or in diversifying Mexican exports away from petroleum
products. In fact, the computer and telecommunications sectors' shares of the US
market--their most important export outlet--have eroded. Mexico's share of US imports of
computers shrank from 10.5 percent to 0.1 percent during 1975-85 while its share of US
telecommunications imports declined from 22.9 percent to 9.6 percent.
Implications for the United States
Mexican producers are unlikely to pose a significant challenge to US firms on the
world market in the foreseeable future. Mexican efforts to defend its own industry, however,
present important adverse trade effects. Mexico represents the third largest market for US
electronic manufactures, amounting to $2.8 billion, or 8.2 percent of total US exports of
these commodities. In the macrocomputer sector, steps to foster import substitution have
been particularly damaging to US firms, which are Mexico's only suppliers. Last year, Mexico
cancelled import permits for input/output equipment. Under the rules introduced last year,
equipment imports will not be authorized if there are local manufactures which can be
substituted. Because there are two Mexican producers of terminals and two Mexican
producers of printers, the new measure effectively shuts out foreign competitors.
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Distribution:
Original - A. Hughes (Commerce)
1 - D/DCI-DDCI Executive Staff
1 - DDI
1 - O/DDI
1
- LA/NIO
1
- A.
Vila, Commerce
1
- M.
Coile, Commerce
1
- C.
Klein, USTR
1
- T.
Bennet, USTR
1
- N.
Lee, Treasury
1
- NIC
/AG
1
- PDB
Staff
1
- C/D
DI/PES
1
- DDI
/CPAS/ISS
1
- D/A
LA
1
- ALA
/PS
1
- ALA
/Research Director
5
- CPA
S/IMC/CB
1
- D/O
GI
1
- C/S
RD/OGI
1
- C/P
RB/OGI
1
- C/M
CD
3 - C/MX
1 - MX Files
ALA/MCD/Mexico/F--- r27OCT86
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