The effects of Mexico's and Brazil's liberal economic policies on the attraction of foreign investment

Inflows of foreign direct investment, portfolio investment, and commercial bank lending comprise an integral part of the investment capital required for economic growth in developing countries. Historically, Mexico and Brazil both benefited from large investment and lending inflows while having highly interventionist economic policies. However, their capital inflows slowed in the mid-1980s following the financial crisis initiated by Mexico's 1982 inability to meet interest obligations on its foreign loans.; Mexican and Brazilian policymakers gradually disassociated themselves from the economic policies that brought them rapid and sustained growth and high levels of industrialization since the 1930s, but which had become exhausted by the early 1980s. They generally eschewed government interventions designed to promote the industrial expansion and export competitiveness of strategic industries. Under pressure from international and domestic economic constraints, they implemented liberal economic policies intended to enhance efficiency and international competitiveness while removing restrictions on foreign investment. But would these policy reforms convince foreign direct investors, who had once been drawn to establish subsidiaries designed to sell into protected local markets, to continue to invest once tariff barriers were removed? If so, which reforms attracted the most investment? And how were such policy changes perceived by investors in the financial sector?; To answer these questions, I examine the relationship between Mexico's and Brazil's liberalizing reforms and U.S. investors' perceptions and behavior. I use business and financial journals and company annual reports as barometers of investors' perceptions of reforms. I also track changes in the Mexican and Brazilian share of U.S. overseas investment levels.; I identify the main policy draws to several kinds of foreign investment, and conclude that multiple reforms are necessary to attract investment. The North American Free Trade Agreement, privatization, a relaxed environment for foreign investment, and enhanced intellectual property protection counted as the most important reforms for computer industry investors. In the automobile industry, most critical were NAFTA, tax decreases, and deregulation of prices. For the food processing industry, they were trade liberalization, NAFTA and privatization. Trade liberalization, NAFTA, reductions in public spending, privatization and looser foreign investment laws particularly encouraged foreign portfolio investment and bank lending.