Decentralization and local industrial policy in Mexico

Globally, local officials increasingly employ tools of industrial policy, once considered the prerogative of national governments. On one hand, some research suggests officials who are sensitive to the needs of local industry may be better able to design appropriate policy interventions. On the other, many studies of decentralization suggest that dynamics common to local discretion – including uneven capacity, capture by local elite, and narrow political motivations – may undermine effective industrial policymaking. There is little comparative scholarship that adjudicates between these potential outcomes by examining how local policymakers intervene in industrial development. Accordingly, this paper examines how state governments used discretion allowed by a business development program in Mexico (Fondo PyME) to shape their own approaches to industrial development. It examines the design of state-level interventions under the Fondo PyME and compares these interventions with effective industrial policies employed by so-called developmental states. Quantitative evidence indicates a tendency for Mexican states to use horizontal and passive interventions that address the immediate, short-term needs of local firms, rather than the targeted, risk-mitigating, conditional interventions that were historically effective for developmental states. These findings raise questions about how much local discretion will contribute to effective national industrial development policies.