Regional Integration and Technology Diffusion : The Case of NAFTA

This paper examines the impact of NAFTA on trade-related foreign R&D and total factor productivity (TFP) in Mexico. The measures of foreign R&D are constructed based on industry-specific R&D in the OECD, OECD-Mexico trade patterns, and input-output relations in Mexico. We find that i) trade with Mexico's NAFTA partners has a large and significant impact on Mexico's TFP while trade with the rest of the OECD does not; and ii) NAFTA has led to a permanent increase in TFP in Mexico's manufacturing sector of between 5.5% and 7.5% and to some convergence to the economies of the US and Canada