Mexico Between Two Architectures

Mexico already has many of the assets development policy is meant to create.

It exports advanced manufactured goods, hosts major automotive, aerospace, electronics and medical-device industries, attracts large volumes of foreign investment and operates inside one of the world’s deepest production systems. Its strongest industrial corridors compete at the technological frontier.

The scale is substantial. United States–Mexico goods trade reached an estimated $872.8 billion in 2025. Mexico also received $40.9 billion in foreign direct investment, its fifth consecutive annual record.

Yet this industrial strength has not translated into equally strong national growth.

Mexico’s economy expanded by about 0.7% in 2025. The OECD projected growth of 0.8% in 2026 and 1.8% in 2027, with investment recovering only gradually and public spending constrained by fiscal consolidation. These forecasts reflect current conditions, but the deeper problem is structural: productivity and income growth remain weak relative to the sophistication of Mexico’s industrial base.

Advanced production is concentrated in a limited number of firms, supply chains and regions. Many domestic businesses remain small, undercapitalised and informal. Foreign investment increases output and exports, but the knowledge, technology and capabilities generated inside leading industries do not spread widely enough across the wider economy.

This is Mexico’s industrial spillover bottleneck.

Mexico has built a strong external production architecture, linking its factories to American demand, multinational capital, international standards and continental logistics.

Its internal architecture is much weaker. The connections between advanced industry and domestic suppliers, smaller firms, workers, technical institutions, finance and less-developed regions remain incomplete.

Mexico’s external integration is accelerating. Its capacity to diffuse those gains domestically is not.

I. Industry Before Development

An economy should be judged not only by what it produces, but by whether production strengthens the capabilities needed for future growth.

A factory can create jobs, exports and tax revenue while remaining weakly connected to domestic suppliers, technology and management. Its developmental value depends on what spreads beyond the factory itself.

Mexico’s automotive industry illustrates the distinction. Between 1993 and 2023, its real GDP grew by an average of 5.1% a year, far faster than the economy as a whole. Mexico became a major centre for vehicle and component production, supported by multinational investment and dense cross-border supply chains.

Yet strong industrial growth has coexisted with weak economy-wide productivity. More factories do not automatically produce broader economic transformation.

Output can rise because an economy adds capital, machinery and workers. Productivity rises when firms and workers produce more value through better technology, skills, organisation and resource allocation.

This distinction is central to the Solow growth model. Capital investment can raise output, but its effects weaken unless productivity and technological capability also improve. An economy can accumulate advanced machinery without moving substantially closer to the productive frontier.

Mexico shows this divergence clearly.

The IMF’s 2025 analysis linked the widening income gap between Mexico and the United States to weaker relative total factor productivity. Export manufacturing performed far better than domestically oriented sectors, but those gains were offset by a prolonged decline in productivity across the wider economy.

Foreign investment can deepen Mexico’s most advanced industries while generating only limited gains for the domestic firms, workers and institutions weakly connected to them.

II. The Continental Function

Mexico’s growing importance reflects a wider shift in the structure of American production.

For decades, firms organised supply chains around cost efficiency, placing each stage of production wherever it was cheapest. That model depended on reliable transport, stable politics and predictable trade.

Pandemic disruption, geopolitical rivalry and tighter controls on strategic technologies exposed the risks of concentrating production across distant supply chains.

Globalisation is therefore being reorganised rather than reversed. Firms and governments are shortening selected supply chains, duplicating critical capacity and favouring locations that combine efficiency with geographic and political security.

Mexico is especially well positioned within this shift. It offers industrial experience, a large workforce, treaty-based access to the American market and the proximity required by production systems in which components may cross the border several times before completion.

Its role goes beyond nearshoring. Mexico is becoming part of the industrial infrastructure through which the United States can reduce exposure to distant suppliers while preserving cost competitiveness.

This system depends on close integration without full economic convergence. Mexico participates in a common production network while retaining differences in wages, regulation, access to capital and institutional capacity.

The border helps organise these differences. Goods, capital, components and technical specifications move across it, while labour systems, fiscal structures and political obligations remain national.

Mexico performs an increasingly important function within North American production. Its long-term position will depend on whether that role gives rise to greater domestic technological capacity, institutional strength and bargaining power.

III. Extension Without Transformation

Development theory assumes that capital should flow toward economies where it is scarce and generate faster growth. Trade integration should expand markets, increase competition and expose firms to new technologies.

These effects depend on the receiving economy’s capacity to absorb them.

Machinery requires skilled workers. Suppliers need finance, certification and reliable management. Technology must be understood, maintained and adapted. Infrastructure must connect advanced production to the wider domestic economy.

Where these capabilities are weak, foreign investment can create highly productive operations whose knowledge and technology remain concentrated within the firms and supply chains that introduced them.

Mexico’s challenge lies in strengthening the mechanisms through which investment is retained, transmitted and multiplied across the wider economy.

The distinction is between two forms of industrial expansion. Extensive growth adds factories, machinery and workers to existing production systems. Intensive growth raises productivity by improving skills, technology, management and the allocation of resources.

Mexico has achieved substantial extensive growth. Intensive growth has been far less consistent.

The pattern is visible across firms. Using Mexican economic-census data, the World Bank found large and persistent productivity gaps between companies, sectors and regions. Between 1993 and 2018, firms in the most productive decile were about 3.6 times as productive as those in the least productive decile, a wider gap than comparable estimates for the United States, the United Kingdom or Japan.

Productivity differences are not inherently evidence of economic dysfunction. Firms vary in technology, management, scale and market conditions. Their broader significance depends on whether more productive firms can attract capital, expand production and increase their share of employment and output.

In Mexico, this process appears uneven. Limited access to finance, informality, regulatory and tax burdens, and weak competitive pressures can restrict the expansion of productive firms while allowing less productive businesses to retain labour and capital.

The result is a productive system in which advanced firms coexist with a much larger field of less productive enterprises, while the reallocation of resources toward stronger firms proceeds only gradually.

IV. The Missing Translators

A central constraint on Mexico’s development lies in the weak connections between its most advanced firms and the much larger population of smaller, less productive enterprises.

Development requires firms and institutions that can convert advanced production into wider domestic capability. They help local suppliers meet international standards, workers acquire transferable skills, technology spread beyond individual plants and smaller businesses enter more complex supply chains.

This intermediary layer includes medium-sized manufacturers, engineering firms, testing laboratories, logistics and software providers, technical colleges, regional financiers and supplier-development organisations. These institutions sit between multinational plants, large domestic groups and Mexico’s vast base of small enterprises.

Mexico has abundant entrepreneurial activity. The harder transition is from small-scale enterprise to technically capable, professionally managed and financially credible industrial firm.

A business may know how to manufacture a component but lack the capital required for certified machinery. It may meet technical specifications while operating with informal accounts. It may win a contract but be unable to finance production until payment arrives. Its expertise may also remain concentrated in the founder rather than embedded in systems that allow the company to grow.

Demand alone does not solve these problems.

To enter advanced supply chains, firms must become legible to banks, large buyers and certification bodies. Their quality must be measurable, their accounts reliable, their processes repeatable and their management able to function beyond the direct control of the owner.

This is one of the most difficult stages of industrial development.

Albert O. Hirschman’s theory of backward and forward linkages helps explain why it matters. Large investments generate broader development when they create demand for domestic suppliers, services and downstream industries. One investment then raises the value of another, allowing growth to become cumulative.

These linkages do not emerge automatically. Multinational firms often arrive with established suppliers, financing arrangements, standards and certification systems. This can accelerate production, while reducing the immediate need to develop equivalent capabilities among surrounding domestic firms.

The more complete the investor’s existing ecosystem, the weaker the commercial pressure may be to build a local one.

This distinction also clarifies the role of knowledge. Endogenous-growth theory treats knowledge differently from ordinary capital. A machine can generally be used by only one producer at a time and depreciates through use. Knowledge can be repeated, adapted and combined. Once acquired, it can improve many future processes.

Yet knowledge does not diffuse automatically from advanced firms into the wider economy. Industrial competence often depends on judgement, accumulated experience and technical understanding that are difficult to transfer beyond the setting in which they were developed.

This is Mexico’s industrial spillover bottleneck: advanced production generates knowledge and capability, but their diffusion across domestic firms, workers and institutions remains uneven.

The intermediary layer helps overcome this bottleneck. Testing laboratories allow suppliers to prove quality independently. Technical colleges convert firm-specific training into recognised qualifications. Specialist suppliers adapt one client’s requirements into capabilities that can serve others. Regional financiers help firms fund the transition from technical potential to commercial scale.

Foreign investment becomes more developmental when its expansion begins to rely on capabilities created beyond the investor’s original network.

Mexico’s missing translators are therefore more than commercial intermediaries. They are the firms and institutions that determine whether industrial sophistication remains concentrated or becomes a broader source of domestic growth.

V. Below the Percolation Threshold

Mexico possesses many of the elements associated with advanced production: competitive industrial clusters, skilled labour, technical universities, major logistics infrastructure and extensive manufacturing experience.

Their presence does not by itself create an integrated national productive system.

Network theory helps explain why. A system may contain many capable elements while remaining fragmented. Its performance depends not only on the strength of each element, but on whether enough connections exist for activity to move across the system as a whole.

In statistical physics, percolation describes the point at which isolated connections become a continuous network. Below that threshold, current can move within individual clusters but cannot cross the material. Once enough links are added, separate clusters connect and transmission becomes possible across the entire structure.

The importance of each new connection therefore changes as the network develops. Before the threshold is reached, adding capacity to an isolated cluster strengthens that cluster without necessarily affecting the wider system. By contrast, a single link between two previously separate clusters can sharply expand the reach of the network.

This is the network-level expression of the industrial spillover bottleneck described earlier. At the level of firms, the bottleneck limits the diffusion of knowledge and capability. At the level of the wider economy, it appears as insufficient connectivity between productive clusters, institutions and regions.

A similar logic applies to industrial development.

An additional investment in an already successful location may raise output while leaving the broader productive geography unchanged. A more modest investment that connects a supplier to an anchor firm, a technical college to an industrial corridor or an inland region to reliable infrastructure can create combinations that were previously unavailable.

The developmental value of investment therefore depends partly on its position within the network. Connections that bridge separate capabilities may matter more than additional capacity within places that are already well integrated.

Mexico has many productive nodes, but the links between them remain unevenly distributed.

Some regions already combine infrastructure, specialised suppliers, skilled workers, institutional capacity and access to major transport routes. Investment entering these environments reinforces a functioning industrial system.

Elsewhere, a plant may operate successfully while surrounding firms struggle to qualify as suppliers, technical institutions lack the resources to respond to industry needs and infrastructure is oriented mainly toward the border rather than the surrounding territory.

This helps explain Mexico’s persistent regional divergence.

Its strongest manufacturing centres attract further investment because they already offer the conditions firms require. Each new project enlarges the labour pool, deepens supplier networks and reduces the uncertainty facing future investors.

Gunnar Myrdal described this process as cumulative causation: growth creates conditions that support further growth.

The same mechanism can operate in reverse. Regions with weaker infrastructure, fewer productive firms and thinner institutional capacity attract less investment. Skilled workers leave, local revenues remain limited and public institutions have fewer resources with which to improve conditions.

Nearshoring is therefore likely to reinforce Mexico’s existing industrial geography before it broadens it. The central regional question is whether new investment will continue to deepen established corridors or begin to connect them into a more continuous national production system.

VI. Why Dualism Persists

Mexico’s economy still combines a highly productive modern sector with a much larger field of low-productivity activity.

W. Arthur Lewis expected development to proceed through the gradual movement of labour from traditional activities into a modern sector. Profits would be reinvested, production would expand and workers would shift into more productive employment.

Mexico has industrialised extensively without fully completing that transition.

In 2024, the informal economy generated 25.4% of national output. Formal employment accounted for roughly three quarters of GDP, even though a much larger share of workers remained in informal arrangements.

Informality is often described as a failure of registration or legal compliance. It is also a form of productive organisation, typically associated with limited capital, fragmented operations and weaker access to finance, technology and larger markets.

Many informal firms lack the accounting systems, collateral, stable revenues and operating margins needed to absorb the costs of formality. Registration alone does not remove those constraints. Formalisation becomes sustainable when firms are productive and organised enough to support it.

This creates a self-reinforcing cycle. Low productivity makes formalisation difficult, while informality restricts access to many of the resources that could improve productivity.

Economists describe this persistence through path dependence and low-productivity equilibria. Existing conditions shape what firms are able to do, so changing a single rule or incentive may have only limited effects.

A small enterprise does not become an industrial supplier simply because a multinational plant opens nearby. The gap between them may involve finance, certification, management, technology and access to stable demand.

Dualism can persist because the transition into higher-productivity activity places substantial demands on individual firms, while many of the capabilities required -credit, certification, training, infrastructure and reliable demand - depend on institutions beyond them. Where those supports remain uneven, informality can become a durable economic position rather than a temporary stage.

VII. The Boundary of the American Opportunity

The United States will remain the principal external force shaping Mexico’s industrial trajectory. Its market, firms and production networks provide access to a scale of demand, capital and technological complexity that Mexico would be unlikely to reproduce domestically.

Mexico’s exposure to the American economy is unusually concentrated. The United States is its dominant export market, a major source of investment and the central destination around which much of its manufacturing system is organised.

This creates an exceptional industrial opportunity. As American firms reconsider the geography of production, Mexico can attract investment, expand exports and assume a more important role in strategic supply chains.

The opportunity nevertheless has a clear boundary.

The North American production system coordinates factories, components, standards and logistics across borders with considerable precision. Its structure is shaped primarily by the commercial requirements of the firms operating within it.

Those requirements may align with Mexico’s development priorities in important areas, but the alignment will rarely be complete. A production network may require greater output from Mexico without producing the same degree of regional convergence, domestic ownership or employment upgrading.

The United States can generate demand for Mexican industry and increase the strategic value of Mexican production. How the resulting income, investment and technological capacity are distributed within Mexico depends on a wider set of domestic institutions and policy choices.

Mexico’s opportunity therefore lies in using its stronger position within North American production to shape the composition, location and long-term capabilities of its own industrial economy.

VIII. Two Industrial Geographies

Mexico’s automotive and aerospace industries illustrate two different forms of industrial success.

The automotive corridor demonstrates scale. Over several decades, Mexico has developed extensive manufacturing capacity, complex logistics and a dense network of multinational producers and suppliers. The sector has transformed regional labour markets and placed Mexico at the centre of North American manufacturing.

Its scale is a major achievement. It also shows that a large and mature industry can remain unevenly connected to the wider economy. Supplier development, productivity gains and regional benefits have advanced more strongly in some firms and territories than in others.

Querétaro’s aerospace cluster offers a different model. Its importance lies less in production volume than in the concentration of specialised institutions around it. Training centres, universities, testing facilities and engineering services have developed alongside anchor firms, strengthening the region’s technical capabilities.

The cluster shows how foreign investment can shape the institutions surrounding production as well as production itself. Yet these capabilities remain concentrated within a relatively narrow regional and industrial base.

The contrast is revealing. Automotive demonstrates the power of industrial scale; aerospace demonstrates the value of institutional depth. Mexico’s broader challenge is to combine both: large production systems supported by domestic capabilities that extend across more firms, workers and regions.

Conclusion: The Distance Between Importance and Power

Mexico now occupies a more consequential place in advanced production. Its factories shorten supply chains, expand regional capacity and allow complex manufacturing to be organised across borders with increasing precision.

Automotive and aerospace reveal the limits of that progress. Industrial scale can coexist with uneven spillovers, while technical sophistication can remain concentrated within a small number of firms and regions.

Mexico’s importance rests on the functions it performs within North American production. Its power will depend on how far it can shape what those functions produce next: stronger domestic firms, deeper technical capability, broader regional participation and greater control over the direction of industrial development.

The central question is therefore whether Mexico can convert its growing industrial importance into a more durable capacity to determine its own productive trajectory.

Sources and Further Reading

Office of the United States Trade Representative, bilateral goods-trade data for the United States and Mexico; Mexico’s Secretariat of Economy, foreign direct investment data; OECD, Economic Outlook and Economic Surveys: Mexico 2026; Sean Dougherty, Boosting Growth and Reducing Informality in Mexico (OECD, 2015); OECD, Boosting Productivity in Mexico through Integration into Global Value Chains (2017); INEGI, Conociendo la industria automotriz 2024; Administrative Record of the Light-Vehicle Automotive Industry; and Medición de la Economía Informal 2024; International Monetary Fund, Mexico 2025 Article IV consultation and related productivity analysis; World Bank, Productivity Growth in Mexico: Understanding Main Dynamics and Key Drivers; Safran, corporate and site-level documentation on aerospace activity in Querétaro.

The 2015 and 2017 OECD studies are used for longer-run structural analysis, particularly on informality, regional clusters, industrial linkages and integration into global value chains, rather than as evidence of current conditions. Sector-specific studies of Mexican manufacturing have identified similar patterns of limited local capability formation. This article synthesises those findings into a general framework and extends the logic to the network level, drawing on percolation theory from statistical physics.

Figures, forecasts and institutional assessments are presented as available at the date of publication and may later be revised by their originating institutions.