Foreign direct investment and industry response to organized crime: The Mexican case

Organized crime is a disincentive for investment and business activity. We use murders as a proxy for presence of regional organized crime and study the relation between direct foreign investment and organized crime for different industries in Mexico. Our contribution is the focus on sectoral differences. The data is for net foreign direct investment from 116 countries into the 32 Mexican states from 2004 to 2010. Imputing causality, we find that organized crime deters foreign investment in financial services, commerce, and agriculture, but not oil and mining sectors for which we find increased crime associated with increased investment. There is no effect of organized crime on foreign investment in manufacturing.

► We analyze the role of organized crime on industry-specific FDI into Mexican states. ► We estimate fixed-effects and GMM models from 2004 to 2010. ► A heterogeneous relationship is found between homicide and FDI in primary sectors. ► A negative relationship is found between homicide and FDI in some service sectors.