Chapter 2. Towards a more prosperous and competitive Hidalgo

In response to the new signs of opportunity for tackling Hidalgo’s economic challenge, the newly elected executive of the state of Hidalgo implemented in 2016 some reforms to reignite Hidalgo’s economy. Most of this chapter analyses the steps taken, their implementation and, where possible, the results that can already be observed. It highlights the lessons and benchmarks that can be learnt from Hidalgo’s experience, and formulates some assessments and recommendations for Hidalgo based on the experiences of other OECD members.

    

Key findings

  1. 1. Conditions may be right for the establishment of a more prosperous and competitive Hidalgo. Road infrastructure improvements that facilitated the state’s accessibility together with a surge of modern economic reforms have attracted foreign investments and are opening the way to a potential wave of opportunity for Hidalgo’s economy. However, policy must aim to improve enabling factors to attain a sustained economic growth in the long run.

  2. 2. Hidalgo is less focused on tradable activities than the national average. The state shows, however, a higher concentration in the manufacturing sector with little prominence of other tradable sectors, such as information activities.

  3. 3. The foreign direct investment in Hidalgo is more diverse in origin than at the national level. With a lower prominence of United States investment than at the national level, Hidalgo has the opportunity to build a position within a relatively more “global” industrial value chain.

  4. 4. Hidalgo could further benefit from the consolidation of Mexico within the global value chains (GVC). Its link with the foreign market is mainly driven by intermediate products, rather than final high-value-added products.

  5. 5. Hidalgo has hence untapped opportunities to increase its transition towards tradable and productive activities in the service sector such as information or logistics. In terms of manufacturing, the state can increase productivity in subsectors with large workforce such as the textile and food industries.

  6. 6. Hidalgo’s economic development policy is based on a well-thought-out plan that aims to improve the current business environment, promote new local and foreign investment and support innovation in specific strategic sectors.

  7. 7. The implementation of the state’s economic development plan can better link the competitive advantages with local realities, especially in northern municipalities. As Hidalgo is faced with a highly imbalanced distribution of its economic activity, the economic plan should be implemented with a place-based approach to reduce such a divide.

Enabling factors

  1. 1. The south part of Hidalgo is well connected through physical infrastructure. However, northern municipalities lack paved roads, rail and port connections. The whole territory lags behind in terms of information and communications technology (ICT) infrastructure. This issue has however been set as a high priority for the new administration.

  2. 2. The entrepreneurial support policy in Hidalgo lacks a strategic view aligned with the economic plan and that integrates funding mechanisms, soft assistance programmes, incubators and new foreign direct investment (FDI) investments. A strategic view will also strengthen the approach to entrepreneurship policy as an instrument to achieve broader socio-economic goals rather than just a key element for science and technology priorities.

  3. 3. Basic education in Hidalgo performs well both in coverage and quality. However, there is a mismatch between graduates from higher education and the local labour market, which translates into a lack of highly skilled workforce for local firms. In addition, incentives for strengthening the link between higher education institutions and private firms is deficient, which represent a bottleneck for a more dynamic innovation system.

  4. 4. Hidalgo is lacking a holistic innovation policy that goes beyond science and technology and sets strategic priorities. The innovation performance of Hidalgo in the national and international context is relatively poor and has not improved over time.

  5. 5. The new law of public-private partnerships (PPPs) in Hidalgo goes in the right direction to provide a sound legal PPP framework. It can further benefit from establishing a clear strategy to co-ordinate PPP projects across the level of governments.

  6. 6. Informal business represents the vast majority of the economic entities in Hidalgo (85%), which affects its economic growth through a systematic under-optimisation of local human and business capital. This phenomenon is largely explained by structural problems in the economy, but specific measures targeted to microfirms and in co-ordination with the federal government can contribute to reducing it.

Implementation of policy complementarities

  1. 1. Hidalgo’s economic strategy aims to mobilise the new strategic sectors and improve the state’s competitiveness by focusing on four main factors: cost, quality, innovation and value creation. However, to address the productivity challenge over time, the economic strategy of the state requires an incremental approach strategy to improve key enabling factors: infrastructure, human capital, business ecosystem, innovation as well as integrated regional policy.

  2. 2. Hidalgo’s economic strategy aims to promote clusters around the five strategic sectors. The policy approach requires a better integration within the whole-innovation strategy for the state.

  3. 3. The flagship industries that have been chosen for Hidalgo’s special economic zone (SEZ) depend on the existing industrial base already in place in the area. It should benefit from a clearer strategy to measure outcomes and complement the socio-economic and institutional conditions of the state.

Introduction

The state of Hidalgo has long experienced economic stagnation, although since the 2008-09 international crisis the economy has been gaining strength. Recent changes in the business ecosystem, regulation and investment conditions have given new momentum to the state’s economy.

Over the last decade, Hidalgo had only managed to make some slow gradual improvements in terms of gross domestic product (GDP) per capita. Between 2003 and 2014, GDP per capita grew somewhat above the national average in Hidalgo, slowly closing up the gap with national standards. Notwithstanding this, in 2014, the state of Hidalgo contributed to only 1% of Mexico’s national gross value added (GVA) and generated 1.6% of national employment (INEGI). This is despite the state accounting for 2.2% of the country’s working-age population (2015). Of this GVA, total investments registered that year amounted to 3.6% of the state’s value-added, a participation lower than that observed at the national level of 9.2%. In 2014, gross fixed capital formation, which captures increased (productive) investments in assets and inputs, totalled MXN 1 128 million, 2.06% of the value added generated in Hidalgo, also lower than that registered at the national level of 9.03%.

Despite this scenario, Hidalgo’s current administration has recently managed to consolidate important investment projects in strategic sectors such as the electric automobile industry and food industry. These recent changes have been accompanied by the introduction of a new approach to stimulate the state’s economic development.

In response to the new signs of opportunity for tackling Hidalgo’s economic challenge, the new administration of the state of Hidalgo implemented in 2016 some reforms to reignite Hidalgo’s economy. Most of this chapter analyses the steps taken, their implementation, and where possible, the results that can already be observed. It highlights the lessons and benchmarks that can be learnt from Hidalgo’s experience, and formulates some assessments and recommendations for Hidalgo, based on the experiences of other OECD member countries.

This chapter is organised around three main sections. The first examines the current challenges and opportunities of Hidalgo’s productive system as well as the main economic policies undertaken by the current administration. The second looks at the enabling factors needed to boost productivity over the medium and long term. Finally, the third focuses on governance responses including policies and strategies to support development in the state of Hidalgo.

Hidalgo’s productive system and the new economic strategy

Regional productive fabric

The type of economic structure and its level of diversification can determine the economic outcome of a region. OECD regions that are undergoing a catching-up process in their stages of economic development are characterised by a high level of diversification and greater share of concentration in tradable activities. Tradable activities typically include manufacturing, some service sectors, resource extraction and utilities (OECD, 2016[1]) (see Box 2.1). Tradable sectors are those goods and services that are exported to other regions or countries either as final or intermediate goods. Productivity in tradable activities tends to be larger than non-tradable activities across OECD countries and regions. Therefore, they are key activities for lagging regions such as Hidalgo to develop in order to catch up to its productivity frontier to other regions.

Furthermore, high-productivity in non-tradable activities requires of economies of agglomeration, which are still underdeveloped in Hidalgo (see Chapter 3). It is to no surprise that Hidalgo’s labour productivity in the non-tradable service sector is 2.6 times lower than in the tradable sector (Chapter 1). In this sense, integration into global value chains (GVC) also matter for productivity and sophistication of production (OECD, 2017[2]).

Hidalgo’s economic history is largely characterised by the mining sector. Mining of different metals, including silver and gold in the Pachuca/Real del Monte region, had dominated the state’s economy since the colonial era. Hidalgo’s first important source of post-colonial FDI came in 1824 from British direct investment in the region’s mining sector following Mexico’s War of Independence. This British investment contributed to the introduction to Hidalgo’s mining industry of steam-powered machinery and many different modern technologies for the time (Randall, 1972[3]). Following a significant slowdown in the mining industry that started in the 1950s, which deteriorated Hidalgo’s economy and welfare, efforts were undertaken to shift the state’s economy from mining and agriculture to manufacturing. Of the manufacturing industries that have historically taken hold in Hidalgo, the state’s textile industry has been an important engine of economic development.

Hidalgo has a relatively diversified economic structure. According to the index of specialisation (i.e. measures how specialised the state’s productive structure is with respect to the national average), Hidalgo has a lower level of specialisation (0.31, where 1 means over-representation of sectors) than the average of Mexican states (0.38) (see Chapter 1).

Hidalgo is slightly less concentrated on tradable activities (35.7% of GVA) than the national average (37.7%) (See Table 2.1). Most of the tradable sector in Hidalgo is concentrated in manufacturing activities (58% of tradable activities), followed by non-manufacturing industry (i.e. energy) (17%). Other tradable sectors such as financial services or information have less prominence as a value-added activities in Hidalgo’s economy and present one of the biggest productivity gaps with the national level (see Table 2.1).

Overall, Hidalgo’s economic structure shows a higher share of manufacturing activities (20.6% of GVA) than the national average (16.1%). The largest contributor to manufacturing in the state is the subsector of production and refinery of petroleum (43%), which not only lacks the capacity of job creation (employs 5% of the labour force working in the manufacturing industry) but is concentrated in a small number of companies (8 establishments).

Other relevant subsectors in manufacturing are the textile industry (8% of manufacturing) and the food and beverage (7%). While they add a lower value to the manufacturing sector, they employ most of the labour-working population in the sector (26% and 22% respectively).

  • In terms of textile, Mexico is the sixth supplier of clothing to the United States due in great measure to its proximity, low cost and high-quality suppliers of fibre, textile and clothing. In recent years, Mexico and Hidalgo have been gaining attractiveness to many Asian suppliers of textile due to increasing labour costs in Asia and shortening of textile supply chains. It benefits Hidalgo since the state leads the country in the preparation and spinning of textile fibres and yarn manufacturing, and ranks fourth nationally in the manufacture of fabrics (Álvarez Guevara, 2014[4]). The textile industry has a relatively high number of economic units (over 8 000, mostly small and medium-sized enterprises [SMEs]) and is highly linked with an extensive network of family-based informal sewing workshops. It generates sources of employment, yet not always formal, particularly for people with limited economic resources.

Other sectors of relevance in the state are:

  • The energy sector of Hidalgo is the 5th largest producer of electricity in Mexico with an installed generation capacity of 2 386.60 megawatts (MW). Its geographic location is a competitive advantage due to its proximity to regions characterised by high consumption of energy. As an energy supplier, Hidalgo receives the raw material for its transformation in fuel and mainly delivery the electricity to the centre of the country. It has also an important potential for developing renewable energies, in particular, solar and wind energy.

  • The agriculture, fisheries and forestry sector represented 3.7% of Hidalgo’s GVA in 2015, although employs 18% of Hidalgo’s working population. Most agriculture in Hidalgo (98.8%) is performed by small- or medium-sized farms and productive units. The state is the first producer of barley and alfalfa and it ranks among the top producers of maguey (wild agave) and corn in the country (see Chapter 3 for details concerning agriculture in Hidalgo).

  • The service sector in Hidalgo is mostly concentrated in non-tradable activities (65% of the service sector’s GVA is repairs, food sale, accommodation, healthcare and education). In fact, distributive trade, repairs and food services represent the most important sector in Hidalgo’s economy (25.5% of GVA). As mentioned before, the non-tradable services sector has a particularly low productivity. This ongoing concentration in low productivity services limits the room for added value activities in the state (Chapter 1).

Table 2.1. GVA, Employment and productivity per industry, 2015

 

Share over total GVA (%)

Share over total employment (%)

Labour productivity gap

Mexico

Hidalgo

Mexico

Hidalgo

Hidalgo/Mexico

Distributive trade, repairs, transport, food services activities

26.4

25.5

31

29

0.71

Manufacturing

16.1

20.6

17

16

0.91

Real estate activities

12.0

13.5

1

1

0.73

Public administration, compulsory social services, education, human health

10.3

12.1

13

13

0.81

Non-manufacturing industry, including energy

8.0

6.0

16

15

0.79

Construction

7.8

10.1

8

10

0.71

Agriculture, forestry and fishing

3.2

3.7

14

18

0.59

Other services

2.2

2.2

11

10

0.75

Financial and insurance activities

5.1

2.6

1

1

0.65

Professional, scientific, technical activities, administrative

6.2

1.7

5

3

0.29

Information and communication

3.1

0.6

1

0

0.29

Notes: Labour productivity is calculated using employment by place of residence. When the labour productivity gap falls below 1 means that productivity in the state is lower than the national level. Tradable sectors are defined by a selection of sectors defined in the SNA 2008. They include agriculture, industry and manufacturing, information and communication, financial and insurance activities, agriculture and other services (see Box 2.1).

Tradable sectors are in bold.

Source:  OECD (2018[5])Regional Economy, OECD Regional Statistics (database), http://dx.doi.org/10.1787/a8f15243-en.

Box 2.1. Drivers of growth in different types of regions

Drivers of growth vary across levels of development. The barriers to growth that regions must overcome vary widely across regions and levels of development. Successful performance, therefore, requires a place-based approach, rather than “one-size-fits-all” economy policy. Several characteristics could be associated with a stronger regional catching-up process. OECD (2016[1]) classified regions with respect to their productivity growth in 3 groups and analysed the growth pattern from 2000 to 2013:

  • Frontier regions (regions with the highest GDP per worker and 10% of national employment).

  • Catching-up regions (regions growing faster than frontier).

  • Diverging regions (regions falling behind).

The study found that several characteristics could be associated with a stronger regional catching-up process. Population density could also determine the capacity of a given region to benefit from the diffusion of technology, in particular in the service sectors. Another element is the level of education of the regional workforce. Research and development expenses should be a factor promoting the adoption of innovations. Finally, the quality of regional and local governments should contribute to the adoption of good policies and investment choices

In particular, the tradable share in gross value-added (GVA) is (statistically significantly) higher in catching-up regions (Figure 2.1). The tradable sector allows greater opportunities to catch up through “unconditional convergence”, meaning convergence to the global frontier is less dependent on a country’s particularities or institutional weaknesses. Tradable services and resource extraction are the elements of the tradable sector that account for most of the difference in the catching-up and diverging regions. The contributions to GVA from tradable services and from resource extraction (i.e. mining and drilling) in catching-up regions exceed the contributions in diverging regions, tradable services by about 5 percentage points and resource extraction by even more in 2013.

Overall several characteristics of the tradable sector give rise to its special role for economies. First, it tends to be an innovative and dynamic sector, which adapts to and pushes the technological frontier. Second, manufacturing has traditionally employed not only the highly skilled, but also a large number of medium- and low-skilled workers at relatively high wages, which sets it apart from other high-productivity sectors such as mining or finance. Third, the growth and success of the tradable sector are not limited by the size of the local market, which decouples its growth, to a certain degree, from the rest of the economy (Rodrik, 2016[6]).

Figure 2.1. The tradable sector plays a critical role in regional productivity trends
GVA and employment shares by type in TL2 regions
Figure 2.1. The tradable sector plays a critical role in regional productivity trends

Note: Catching-up/diverging regions grew by at least 5 percentage points more/less than their national frontier over the 2000-13 period. The frontier is defined as the aggregation of regions with the highest GDP per worker and representing 10% of national employment. Due to lack of regional data over the period, only 24 countries are included in the averages. Tradable sectors are defined by a selection of the 10 industries defined in the SNA 2008. They include: agriculture, industry, information and communication, financial and insurance activities, and other services. Non-tradable sectors are composed of construction, distributive trade, repairs, transport, accommodation, food services activities, real estate activities, business services and public administration.

Sources: OECD (2016[1]), OECD Regional Outlook 2016: Productive Regions for Inclusive Societies, https://doi.org/10.1787/9789264260245-en; Rodrik, D. (2016[6]), “Premature deindustrialization”, Journal of Economic Growth, Vol. 21(1), pp. 1-33.

Hidalgo’s FDI has surged in recent years and is becoming more diversified

Hidalgo has ranked 25th place out of all the Mexican states in terms of foreign direct investment (FDI) attraction over the last 10 years to 2017 (INEGI). It underlines the historic low capacity of Hidalgo to attract FDI when compared to other Mexican regions. Fluctuations in its annual FDI figures have been high from year to year, responding to exceptionalities in investments (see Chapter 1). Hidalgo’s FDI strategy has traditionally followed a case-by-case approach and often one-off investments.

This trend, however, appears to be reversing in recent years. Since 2014, FDI in Hidalgo has increased (Figure 2.2) with a relatively greater dispersion in origins than the national level (Figure 2.3). The importance of investment from the United States is much less dominant in Hidalgo (23% of the FDI between 2008 and 2017) than at the national level (43%) (Secretary of Economic Development of Hidalgo, 2016[7]). The lower reliance is partially explained by its low initial level of FDI and by the efforts of the current administration to diversify its foreign investments. In terms of allocation, most of the FDI has been allocated to manufacturing, transport and warehousing (see Chapter 1).

Figure 2.2. Nominal foreign direct investment (FDI) in Hidalgo
Figure 2.2. Nominal foreign direct investment (FDI) in Hidalgo

Source: National Registry of Foreign Investment (2018[8]), Secretary of Economy, https://www.gob.mx/se/acciones-y-programas/competiti.

Figure 2.3. Origin of FDI, average between 2008 and 2017
Figure 2.3. Origin of FDI, average between 2008 and 2017

Source: National Registry of Foreign Investment (2018[8]), Secretary of Economy, https://www.gob.mx/se/acciones-y-programas/competiti.

Global value chain (GVC)

GVCs are often complex networks involving multi-directional flows of material inputs, services and personnel, ownership of assets via foreign direct investment (FDI) in a cross-border context, enforcement of contracts and standards, encompassing transfer of technology and protection of intellectual property (IP).

Improving the GVC linkages of local industry has many benefits. It entails importing competition and accelerating the reallocation of domestic resources towards the most competitive firms. It also facilitates the diffusion of knowledge spill-overs from suppliers or foreign direct investment (FDI). Through improved GVC participation, local industries tend to gain access to new markets that contribute to better optimise local human capital, competitive advantages and natural resource endowments that contribute to greater economic growth.

Many Mexican industries have increased their importance within the GVC. The country’s policy has favoured foreign trade and investment through various agreements; 12 free trade agreements have been signed with 46 countries (OECD, 2017[2]). Mexico is gradually evolving into a global manufacturing hub. Following the North American Free Trade Agreement (NAFTA), Mexico’s strategic location, low unit labour costs and increasingly adept labour force helped the country consolidate its position within the GVC (i.e. some Asian suppliers are using Mexico as an entrance point to North American markets). Mexico initially had benefited from its integration in GVCs mostly as an assembler of manufactured inputs. However, in recent years, it has moved up the GVC to increasingly producing domestic content. This means that more domestic value-added is present in Mexico’s exports (with the automobile sector leading the way and producing more cars with higher value-added [luxury cars] and with less imported content) (OECD, 2017[2]).

With the rising strains in the international trade environment, existing trade agreements have been afflicted by increased uncertainty. Given Mexico’s trade openness, any retreat from trade agreements directly impacts its exports and investments. In part, because of Mexico’s success in establishing its position within the GVCs, Mexico could lose substantial market share with trading partners, triggering a significant deceleration in output, depending on the size of the trade flows affected (OECD, 2017[2]). Without turning its back on the position that Mexico has built and made for itself within the North American industrial value chain, there is also a logical need to expand the scope of its industrial influence that would reduce its dependence on an increasingly domineering partner at its northern border.

Hidalgo has not benefited as much as many of its neighbouring states from the consolidation of Mexico within the GVC. This may be due to past policy circumstances, but also to the relative isolation of Hidalgo. The state was historically perceived as a place where people and goods could go to, but not go through in terms of connectivity. This condition was dramatically changed in 2009 with the construction of the Arco Norte that circumvents the capital city and is now a key aspect of Hidalgo’s attractiveness (see section on connectivity and infrastructure later in this chapter).

There is an important potential to develop the participation of Hidalgo’s businesses within the foreign market. Hidalgo’s economy has seen exports represent only a very marginal proportion of its business. Hidalgo is the 13th state with the lowest level of exports in the country (0.5% of national exports value). In 2016, transport equipment, mainly auto-parts, represented most of the exports (50%), followed by products derived from oil and coal (26%) and textile industry, mainly textile inputs (5%). Agro-industry exports, found inside others products, represented 1.5% of exports (Figure 2.4).

As seen in Figure 2.4, Hidalgo’s linkages with external markets are mainly driven by its manufacturing sector; particularly intermediate products (transport equipment, i.e. auto parts, petroleum derivative products and textile inputs). It underlines that the participation of Hidalgo in GVC tends to be more as a supplier of inputs to other markets rather than a producer of final products.

Figure 2.4. Distribution of exports by subsector, Hidalgo (2016)
Figure 2.4. Distribution of exports by subsector, Hidalgo (2016)

Source: INEGI (2017[9]), Exports by Federative Entity, México.

Globalisation has brought an increased competition to the tradable sector and especially to manufacturing. In this context, Hidalgo cannot base its economic growth in intermediate, standardised manufacturing products, but needs to move up into flexible and customised-oriented production. To create larger value in GVCs, Hidalgo should increase the ratio of domestic value added to its exports. The highest value-added activities in GVCs can be often found in pre-fabrication activities (research and development (R&D,) branding development, design) and in post-fabrication activities (marketing, promotion and after-sales services). This phenomenon is known as the smile curve (OECD, 2017[2]) (Figure 2.5).

Figure 2.5. The smile curve in GVC
Figure 2.5. The smile curve in GVC

Source: Adapted from Baldwin. R.E. and S.J. Evenett (2015[10]), “Value creation and trade in 21st century manufacturing”, Journal of Regional Science, Vol. 55(1), pp. 31-50.

Hidalgo can then encourage firms to integrate shop-floor production with product development (design) and sales. This particularly applies to the textile industry, which has a vast production base but lacks branding and marketing skills. Furthermore, a higher support to R&D investments and concept development can spur high-value activities in the state. It is especially needed since Hidalgo has decreased its number of R&D outputs (from 0.8 patents per million inhabitants in 2002 to 0.5 in 2015), lagging far behind the national average (see Chapter 1). The state can also co-ordinate along with federal government a better link between established national firms that export their products (i.e. the refinery) with local suppliers.

Additionally, Hidalgo has the potential to link other sectors with foreign markets by trying to diversify its composition of exports. Supporting exports from other tradable sectors, such as agriculture and services, will generate a greater presence in foreign markets. A larger interconnection with foreign markets not only diversifies the outlets for Hidalgo’s products but also favours Hidalgo’s visibility and that of its firms, which could potentially help to open up and better consolidate the state’s position within GVCs. Hidalgo also has the opportunity to build a position within a relatively more global industrial value chain. Not having locked itself into an overwhelming dependence on North American industry means that Hidalgo has the possibility to more strategically diversify its international industrial linkages.

There are hence untapped opportunities for Hidalgo to transition towards tradable and productive activities in the service sector such as logistics or information. In terms of manufacturing, the state can increase productivity in subsectors that employ a large workforce and have the potential to build locally different stages of the productive chain such as textile and food industry. However, Hidalgo should bear in mind the risks associated with the very rapid evolution of GVCs. A GVC can experiences changes in response to global factors including trade restrictions or technological change. Therefore, opportunities linked to GVCs should not be analysed as static but rather as constantly moving targets that need very careful diagnoses and well-designed strategies. Overall, the allocation strategy on economic sectors should be based on the analysis of the state’s position within the global value chains.

Hidalgo’s competitive advantages and endowments

Hidalgo’s existing competitive advantages, which include its safety, environment, connectivity, low business cost and result-driven governance are very much in line with making the state an attractive place for people, ideas, investments and businesses.

Safety

Many new foreign investors in Hidalgo have selected the state due to its relative safety and low level of conflict when compared to most other Mexican states. Because of the often-difficult social conflicts and illicit conduct plaguing many regions of Mexico, and the consequent negative external reputation that has emerged, many foreign investors and firms may be reluctant to do business in Mexico, despite its potential benefits. A place like Hidalgo, that offers relative safety for its tangible and human resources, forms an attractive oasis in the midst of an otherwise complicated and risk-ridden business environment. Greater visibility and promotion of this fact would most likely attract investment in even greater numbers. Hidalgo’s public administration needs to keep the efforts and resources in maintaining and further developing safety as one of the state’s main competitive advantages for attracting FDI.

Similarly, the state has been faced with relatively low levels of labour conflicts in the past. This is also seen by external investors as a point of attractiveness for Hidalgo, albeit one that will require wise and proactive action by local administrations in collaboration with the private sector, neighbouring states and labour organisations. At the moment, on average, the wages and compensations offered to Hidalgo’s labour market fall below those found in comparable jobs of neighbouring states (Figure 2.6). As the state’s economic development plan achieves its results and the demand for labour increases, conditions for workers will need to quickly adjust to the national averages if labour conflicts are to be avoided.

Figure 2.6. Crime rate in selected Mexican states
Figure 2.6. Crime rate in selected Mexican states

Source: INEGI (2018[11])Mortality: Deaths by Homicidehttp://www.inegi.org.mx/sistemas/olap/proyectos/bd/continuas/mortalidad/defuncioneshom.asp?s=est

Results driven governance

Much has been done by Hidalgo’s current state administration (2016-22) to create a supportive business environment for FDI. Until 2016, for the general citizen, entrepreneur or investor, the ease of doing business was deteriorating in comparison to the rest of Mexico (Figure 2.7). As described in chapter 4, the state of Hidalgo is now working on creating a conducive business environment by implementing an administrative simplification strategy. Steps have therefore been taken to improve the relevant regulatory framework. Similarly, legislation has been adopted that obliges the state administration and that of the state’s 84 municipalities to improve regulations in ways that will make things more agile for business (see Chapter 4). This is seen as the first steps towards the eradication of excessive bureaucracy and corruption linked to business activities. These measures are meant to streamline and reduce transaction costs associated with doing business in Hidalgo.

These are important steps forward for amplifying Hidalgo’s attractiveness but they are still mostly aimed at large FDI business interests. The efforts to improve Hidalgo’s business environment and create a fertile eco-system for the attraction, creation and growth of businesses should further include ventures of all sizes and origins beyond those perceived as strategic. Moreover, the state should hence seek for a wider political consensus on the implemented reforms, involving other political parties, the private sector, civil society and relevant stakeholders, to attain a long-term stability of the recent reforms beyond political cycles.

Figure 2.7. Ease of opening up a firm and doing business in Hidalgo, 2012-16
Figure 2.7. Ease of opening up a firm and doing business in Hidalgo, 2012-16

Source: World Bank (2016[12]), Doing Business in Mexico. Washington D.C

Environment

Hidalgo benefits from a relatively better quality of its environment (see Chapter 1). This can potentially make Hidalgo a better place to live and establish a business. Although certain specific industrial areas in the south of Hidalgo are struggling with air and water contamination issues (see Chapter 3), overall the state of Hidalgo enjoys low levels of environmental contamination, especially compared to the Mexico City Metropolitan Area.

The environmental virtues of Hidalgo stand to become increasingly important as a source of comparative advantage. This advantage will stem from the growing importance that environmental concerns will suppose for quality living standards and eventually the location decisions of individuals and businesses. High human capital employees tend to be especially attracted to places where they can have high-quality standards of living. This is key if Hidalgo is to establish and grow a knowledge-intensive economic base for the state. Similarly, environmental conditions are likely to deteriorate in the metropolitan area of Mexico’s capital city (Ibarrarán, 2011[13]). This can potentially accentuate the comparative attractiveness of Hidalgo resulting from the quality of its environment.

Northern Hidalgo is especially endowed by the quality of its natural and environmental conditions. Such attractiveness can be strategic for industries such as tourism. Hidalgo must strike a good balance between exploiting the advantages that the environmental conditions can offer, without spoiling these attributes in the process.

Connectivity

Hidalgo lies in close proximity to the national capital and to the State of Mexico, which represents Mexico’s main economic and population hub. The southern part of the state falls within the Mexico City Metropolitan Area and modern road and rail networks connect the State’s southern municipalities with the nation’s capital. The Arco Norte highway is an important transport artery passing through the southern limits of Hidalgo. The highway circumvents the Mexico Valley and its very congested metropolitan area, allowing travellers and transporters to bypass the city and important delays. The Arco Norte was inaugurated in 2009 and amplified in 2018. It offers Hidalgo State a road connection with Mexico’s main north-south axis and a means of disenclavement that avoids the congested metropolitan area. Businesses and their road-freight can now reach the United States much more easily. The road system also allows easy access to Mexico’s western and eastern naval ports without the need for passing through the capital.

The southern part of the state is also well served by an extensive rail network that connects the state to the main north-south as well as east-west axes. This rail infrastructure is adequate for cargo, general logistics as well as passenger transport.

The state’s connectivity is less developed and would require attention in the northern half of Hidalgo, located in the more topographically arduous Sierra Madre Oriental region. Similar to the issue of accessibility in northern Hidalgo already discussed in Chapter 1, the transport connectivity in this region, both road and rail, is deficient. This scarcity comes in terms of both inter-municipal connectivity as well as poor connections with the capital and the regional economic centres, especially those to the east in the neighbouring state of Veracruz where naval ports that could be strategic for the development of northern Hidalgo are located.

Low business cost

The cost of doing business in Hidalgo can be relatively more economical. In comparison to the cost of establishing and doing business in another part of the Mexico City Metropolitan Area, Hidalgo offers several cost-saving advantages. The potential cost advantages of the state come from the connectivity of the state (in the south) with the Mexico City area, as well as easy connections with the Atlantic and Pacific port areas that avoid the congested Mexico City area. Hidalgo also falls on Mexico’s main north-south road and rail axes. This allows for logistical savings relative to more peripheral, less connected states, or those that are unable to avoid the delays and costs of going through the capital’s intense traffic.

Industrial real estate is also another source of cost advantage. Land and real estate in Hidalgo, particularly industrial real estate, is relatively less expensive than comparable sites in the capital’s greater metropolitan area. This can suppose important savings for businesses establishing their offices and operations in Hidalgo.

Labour costs and wages tend to be lower in Hidalgo. This potentially reflects the lower cost of living in Hidalgo as compared to the Mexico City area. However, the administration must resist the temptation of using Hidalgo’s current low labour costs as a point of attractiveness. Using labour costs as a point of attraction would only contribute to entering a race to the bottom, where neither Hidalgo’s workforce nor its industry would end up benefiting in the long-run. Not only would this strategy likely result in labour conflicts that would harm Hidalgo’s reputation and image amongst potential FDI, but the benefits of building a high human capital labour force would be forgone. Encouraging investments in Hidalgo’s labour force and greater human capital development will potentially increase the overall value added of doing business in Hidalgo.

Hidalgo’s existing competitive advantages – safety, results-driven governance, environment, connectivity and low business cost – can constitute important differentiated assets for the state’s economic development if well integrated within Hidalgo’s strategy for the future. The state’s competitive advantages, however, have to be carefully maintained. These strategic strengths should be further enforced and protected, eventually making them core competencies for the state’s economic strategy. A solid territorial development strategy should be based on its assets and potential, both emerging from its competitive advantages. Out of all potential competitive advantages, Hidalgo should focus on those that offer the greatest strategic value in terms of exclusiveness, market relevance and sustainability of the competitive advantage that comes from being difficult or very costly for other regions to duplicate or imitate.

Apart from the said competitive advantages, the proximity to the capital and the availability of vacant industrial infrastructure currently form the main existing endowments of the state. The lack of clear tangible, human or natural endowments for business means that regulatory and policy measures will need to be the principal tools used to amplify local competitive advantages and implement the state’s economic strategy. A strategic incremental approach that measures progress in each stage can be a good tool to promote its competitive advantages. The resources and capabilities that form the basis of Hidalgo’s competitiveness are dynamic in nature. This means that they change over time and can build these up, pushing capacity limits and allowing for new more valuable advantages. From an incremental strategic point of view, Hidalgo should envision a clear path of resource and capability development, so as to build on its value-adding advantages and strengthen its attractiveness for FDI.

Hidalgo’s economic strategy

The development experience across several OECD countries has shown that strategic planning can be important to the development process. Countries and regions at certain levels of economic development can benefit from planning especially in the provision of basic public services and those that are essential for growth and diversification, such as schooling, infrastructure and creating the right framework for investments in innovation. Effective strategic planning can help solve co-ordination issues, externality issues, reduce asymmetries of information, socialise part of the costs of discovery, contribute to the better functioning of markets and create new markets where there are none (OECD, 2016[14]).

Hidalgo has given itself a competitive new economic strategy (Figure 2.8). The state government, which took office in 2016, quickly put in place its economic strategy that falls under the responsibility of the state administration’s Secretariat of Economic Development. This ambitious strategy came as a marked contrast to that of previous administrations, which had a less proactive stance on actions to stimulate and guide the local state economy.

Hidalgo’s Economic Strategy is supported by three key actions (a regional economic policy with sustainable development and joint work with the private sector) and built around four main guiding action pillars (Secretary of Economic Development of Hidalgo, 2016[7]):

  1. 1. Create a conducive business environment: Generate an institutional framework that promotes existing economic activity, facilitates the opening and operation of businesses and promotes productivity as well as competition.

  2. 2. Strengthen existing economic activity: To consolidate current and future economic vocations, fostering the competitiveness of companies and their inclusion in global markets.

  3. 3. Promote new local, national and foreign investments: Strengthen and create better conditions for attracting investment in infrastructure, connectivity, human talent, skilled labour, quality of life, legal certainty and security.

  4. 4. Promote entrepreneurship, innovation and development of new strategic sectors: To promote an economy based on innovation, technology, knowledge and high-impact entrepreneurship, aimed at the new sectors of the global economy.

Figure 2.8. Sectorial plan for the economic strategy of Hidalgo
Figure 2.8. Sectorial plan for the economic strategy of Hidalgo

Source: Secretary of Economic Development of Hidalgo (2018[15]), Presentation of Economic Development.

The economic strategy identified by some ambitious goals. Each action pillar is linked to a specific and measurable target:

  1. 1. Hidalgo aims to be ranked amongst the top five competitive states in Mexico.

  2. 2. Its average annual GDP growth is set at 3.5%.

  3. 3. FDI should reach MXN 10 billion of investment per year.

  4. 4. It should develop new clusters in four sectors.

  5. 5. Ten thousand new workers should be formally employed per year.

The last objective has emerged from the assessment of the level of growth required to optimise Hidalgo’s local human capital generation. Out of the approximate 16 000 new graduates coming out of Hidalgo’s higher education system every year, it is calculated that some 10 000 of them either do not find adequate employment or have to leave the state to find a job. The annual objectives set by the state are meant to absorb the local human capital and create durable economic growth for Hidalgo.

Hidalgo’s state and municipal administrations are working to improve the first pillar –create a conducive business environment – by gaining credibility and moving up standardised international rankings. It includes the World Bank Doing Business in Mexico report. The ranking has not been very favourable to Hidalgo in the past, motivating the current administration to directly address those aspects that can allow the state to make progress in the ranking and in this way signal credibility towards potential foreign investors. There is an initial working programme with Pachuca so as to identify unnecessary government procedures, timings and steps.

A full revision of its regulatory framework has already been undertaken (more on this in Chapter 4). In April 2017 a constitutional reform was approved, making regulatory improvements mandatory for all state and municipal governments of Hidalgo. In the same month, the Law of Regulatory Improvement (Ley de Mejora Regulatoria) was approved. It gives the state, among other business facilitation measures, a one-stop shop system for all government procedures and sanction mechanisms (more on this in Chapter 4). This law has been described by the Federal Commission for Regulatory Improvement as Mexico’s most advanced, mainly due to its one-stop shop system.

In addition, the government of Hidalgo has been approving a package of laws that will further enhance the state’s business environment. These include: the Law of Productive Alliances for Investment to attract more investment; the Law for the Promotion of Economic Development to facilitate the establishment of new economic units; and the Law to Promote Hidalgo’s Sustainable Energy Development. The latter aims to increase Hidalgo’s competitiveness by encouraging, promoting and regulating sustainable energy development. The law also serves to grant legal certainty to investors that participate in the optimal use of energy infrastructure and promote energy efficiency.

As for the second pillar – strengthen current economic activity – the state has been conducting programmes to support first employment with apprenticeship schemes and promote local SMEs and entrepreneurs (the programmes will be discussed in detail in the second section of this chapter). Other sectors where the economic strategy is being implemented include:

  • In the manufacturing sector, the sectorial plan for economic development has identified that business from the largest productive sectors (metal-mechanic, agro-industrial, textile) should adopt better design management practices and develop new products through technological innovations that allow them to create higher value added in the manufacturing process.

  • As for the energy industry, the government has a plan to consolidate Hidalgo as the most important state for transformation, storage and transit of energy products. It is contemplating infrastructure projects focusing on the construction of gas pipelines and promoting renewable energy projects (solar and wind).

  • In services, the state aims to increase the industrial parks located in the southern municipalities. To do so, it has invested in the maintenance of installations and enabling new zones to build industrial parks.

  • In the agriculture sector, Hidalgo’s administration is actively working to modernise and increase the value added of Hidalgo’s farming operations. In this sense, through a co-ordinated effort, the Secretary of Agriculture supports the state’s farmers to migrate towards contract farming schemes. Such a system will help local farmers to play a better role within the local value chain of Hidalgo’s food and beverage industries.

Finally, for the pillar “Increasing new foreign and local investment”, SEDECO has established three strategic priorities with concrete actions (Table 2.2). The strategy aims to set an attractive economic environment with competitive conditions for business creation as well as direct support and follow-up to potential investors with an adaptation of regulatory framework and promotional campaigns.

Table 2.2. Strategy and actions to increase foreign and local investment in Hidalgo

Strategies

Actions

Establish a modern system to permanently support the potential investor during the different phases of investment in the state

- Provide support and business assistance, specialised by sector, to guide the investor in the specific project requirements.

- Manage and link the different governmental institutions, public and private organisations, to facilitate and expedite the establishment of companies.

- Create a digital portal aimed at potential investors, a one-stop shop to manage and facilitate the requests for new investment projects.

- Integrate a global network of contacts that allows the identification of potential investors.

- Manage the attraction of investments in clean energy.

Implement global promotion strategies for the dissemination of competitive advantages and investment opportunities available in Hidalgo

- Launch a promotional campaign to position the image of Hidalgo as the new investment destination in the centre of the country.

- Design specialised and sectorised promotional material regarding investment, in digital and printed format.

- Organise and/or participate in promotional events, business fora and business summits of strategic and consolidated sectors.

Promote the conditions that define a favourable business environment, to encourage and facilitate the establishment of new companies and the consolidation of those already established

- Adapt the legal and regulatory framework to generate legal certainty, as well as facilitate and guide the balanced development of investments in the state.

- Promote collaboration agreements between the productive and educational sectors in terms of training human capital and training for work, which contribute to the transfer of knowledge and specialisation.

Source: Secretary of Economic Development of Hidalgo (2016[7]), Sectorial Program of Economic Development 2017-22.

In a co-ordination effort to align the strategic goals across the territory, SEDECO conducted a co-ordinated territorial agenda among state and municipalities. It involved meeting with municipalities to identify their needs and productive infrastructure in place. The goal is to attract private investment at the local level based on the potential assets of each municipality and encourage municipal governments to focus on business attention and monitoring of investments. SEDECO hence identified 26 areas and 40 warehouses with industrial potential.

According to the economic strategic plan, on the fourth pillar “Promote and develop new strategic sectors”, the plan aims to boost four strategic sectors pertaining to energy, agro-industry, sustainable electric mobility and chemical-pharmaceutical. Hidalgo’s economic strategy aims to promote investment, entrepreneurship and innovation within these specific industries.

These sectors were chosen as a strategy to boost high-value-added sectors that increase the quality of jobs and wages in the state. The selection of these sectors was based on the following:

  • Energy was selected with the aim of boosting the renewable energy industry in the state by addressing the state’s potential of affordable land in a location not suitable for agriculture with favourable sunlight exposition. An American solar energy company has started a project in the municipality of Nopala. It aims to start operation during the first semester of 2019. The energy will be supplied to the national energy network. Another project of wind energy is in the first phase in the municipality of Huichapan, an area known for its favourable winds It is expected to have a production capacity of 120 MW.

  • Agro-industry responds to the expected link that can be made between the agriculture sector and the new beverage and agri-food companies arriving to the state.

  • Boosting electric mobility in order to make Hidalgo a destination for the manufacture of hybrid and electric vehicles. It aims to benefit from the closeness to Mexico City and its potential demand for these types of vehicle and leverage on the arrival of a new foreign automotive company as an anchor to develop the sector.

  • The pharmaceutical sector can use as a leverage the existing pharmaceutical companies that have established themselves in the state’s industrial parks. Pisa Industrial Pharmaceutics has invested in a manufacturing site for veterinary products in the Atilaquia Industrial Park (close to Tula). Likewise, the Mexican pharmaceutical company Quimpharma invested MXN 102 million in the industrial park Tepeji del Río.

To mobilise these new sectors and the broader economic base, the current administration (Secretary of Economic Development of Hidalgo, 2016[7]) has identified four factors as the main focus to improve Hidalgo’s regional competitiveness:

  1. 1. Costs: According to the state administration, many firms that decide to locate to and remain in Hidalgo may do so in order to benefit from the relative cost advantages that the state offers or can eventually come to offer. The administration is, therefore, working in order to amplify and consolidate these cost-saving opportunities for Hidalgo’s firms and industries. The cost advantages of the state are said to come from the state’s connectivity (in the south) with the Mexico City area, allowing for logistical savings relative to more peripheral states. Industrial real estate and land is also another source of cost advantage as it is relatively less expensive than comparable sites in the capital’s greater metropolitan area. Additionally, joint efforts are being conducted by the state administration to consolidate the local productive value chains in order to build a business ecosystem that offers cheaper locally available inputs for entrepreneurs. In the words of the state administration, the cost advantages for firms are not meant to come from labour savings.

  2. 2. Quality: The state and local administrations are working with local firms in order to get them to achieve recognisable quality standards and certifications. This is especially important to promote export market expansion amongst local producers. Developing an eco-system of quality supplier and complimentary industries can also become a point of attractiveness for potential investors and entrepreneurs, especially those that compete on the differentiation of their goods and services, which are much more likely to be compatible with the high value-added economic structure that Hidalgo wants to give itself.

  3. 3. Innovation: Efforts are being implemented in order to stimulate innovation, especially within industries deemed strategic for their knowledge generation and intensity. These industries are more likely to generate spill-overs that can encourage greater value added throughout the local economy.

  4. 4. Value creation: This aspect is closely linked to innovation and perceived as a natural outcome of sector-specific promotion policy. There is a need for greater specification of the character of the value required for Hidalgo.

Positive results are being generated

Some positive results are visible, particularly with respect to the creation of jobs and the attraction of FDI. During the 2 years of the strategy (second half of 2016-first half of 2018), more than 30 new investment projects have occurred in the state, amounting to over MXN 30 billion. Overall, the FDI in Hidalgo grew 73% between 2017 and 2018, above the growth at the national level (19%) (Secretary of Economic Development of Hidalgo, 2018[15]). This influx of new investments has led to a rise in the state’s employment. During the first half of 2018, Hidalgo registered the 2nd highest growth rate of formal jobs (6.5%) across Mexico (3.3%).

Some examples of the sectors in which some of these new investments were made include: the beverage industry (Modelo), the food industry (MUNSA and BIMBO), the construction industry (GICSA) (estimated of MXN 1.9 billion), the electrical automobile industry (JAC) (estimated of MXN 4.4 billion and 5 000 jobs).

The recent foreign investments are thus an important opportunity for Hidalgo to attain a more sustainable development growth across the territory. The strategic economic plan has called for a diversified and strong economic activity. Much of this improvement in the economic environment will have to rely on the correct integration of the FDI with the local assets, business and human capital. To do so, an incremental strategic approach is needed where short-term results can be capitalised in a sustainable manner in the future. Such a strategy has to be built upon the development of a right ecosystem of enabling factors to boost productivity in the long term.

Enabling factors for Hidalgo’s competitiveness and prosperity

The different pillars of Hidalgo’s economic strategy are all set to improve productivity in the state. However, addressing this productivity challenge to attain a sustainable outcome over time will require a strategic and integrated approach to investing in key enabling factors. The specific enabling factors for regional growth have been identified through the observation by the OECD of many regional economies throughout a diverse set of countries (OECD, 2009[17]). Although there is no magic solution that fits all contexts, some common elements do emerge in regions where the public administration has been able to steer their economy to more prosperous and sustainable levels. These common elements, referred to as enabling factors, include infrastructure, human capital, business ecosystem, and innovation as well as integrated regional policy (see Box.2.2). These factors are interdependent and regional growth requires a full set of them to be present simultaneously in order to have any real effectiveness over a sustainable and inclusive growth.

According to OECD findings, greater growth occurs when regions are able to mobilise their own local assets and resources, rather than depend on public sector support (OECD, 2009[17]). Hidalgo’s government should promote growth accordingly. Fostering growth, even in regions of the state that are lagging economically, is in the interest of Hidalgo as it contributes to the state’s output without hindering growth opportunities elsewhere. It also helps to better attenuate several social and agglomeration related challenges that can hamper development efforts.

Box 2.2. Enabling factors for regional growth

OECD analysis of the key determinants of regional growth, the length of time needed for these factors to generate growth and the most successful combinations of factors lead to several suggestions for effective regional policies:

  • Provide infrastructure as part of an integrated regional approach. The analysis suggests that infrastructure alone has no impact on regional growth unless regions are endowed with adequate levels of human capital and innovation. In other words, infrastructure is a necessary, but insufficient, condition for growth. The analysis also reveals that it takes about three years for infrastructure to positively influence growth.

  • Invest in human capital. Regions with well-educated populations will grow. Investments in tertiary education take about three years to have a positive impact on regional growth.

  • Emphasise innovation and research and development. Investments in R&D have a positive effect on patent activity in all categories, as do R&D expenditures by businesses, the public sector, higher education institutions and the private non-profit sector. However, innovation is a longer-term process and appears to have a positive influence on regional growth only after five years. The analysis suggests that as capital and talent agglomerate, they tend to positively influence growth in neighbouring regions. However, innovation remains a highly localised element.

  • Focus on integrated regional policies. Agglomeration economies are partly responsible for regional growth. Sources of growth from within regions, such as human capital and innovation, are more important than a region’s physical distance from markets. Although a region with good accessibility to markets has an added advantage, its growth depends on the presence of human capital, innovation, infrastructure and economies of agglomeration. Regions perform well when local actors in a regional innovation system can communicate easily with each other. Indeed, one region’s performance strongly influences neighbouring regions, suggesting that inter-regional trade and inter-regional linkages play an important role in regional growth.

Source: OECD (2009[17])How Regions Grow: Trends and Analysishttp://dx.doi.org/10.1787/9789264039469-en.

Overall, focusing on enabling factors across the territory is especially meaningful for a state such as Hidalgo. It faces a highly imbalanced distribution of its economic activity (with a north-south divide that leads to greater private sector concentration in the southern municipalities (see Chapter 1). Such a north-south divide is not only economic but rather multifaceted in nature. In fact, the state has a marked cultural divide, where the north has a much greater proportion of the rural indigenous population. This is coupled with an important geographical and topological divide, where the southern half of the state is situated within the Eje Neovolcanico topographical region shared with Mexico City Valley, whereas the northern half of Hidalgo State is characterised by the mountainous topographical region of the Sierra Madre Oriental. This has obvious consequences on the accessibility and connectivity of northern Hidalgo (poor access to markets, lacks local proximity service provision and a deficient availability of many basic amenities).

Given that Hidalgo’s current economic strategy stands to have a disproportionate impact in the south, it is important to plan for future pockets of agglomeration in the southern municipalities, promote a feasible and adaptable development plan in the north and a plan linking the northern and southern geographies. The north will need its own development strategy based on bottom-up endogenous processes. Pre-emptive measures aimed at boosting economic activity in northern Hidalgo, as well as complementary measures facilitating the integration of newcomers in southern Hidalgo, should play a greater role within the state’s economic strategy. These are not only predictable social consequences of the state’s economic development efforts, but they can have significant economic and strategic consequences if they come to negatively affect the existing safety that characterises the state.

In general, the enabling factors are instrumental for the state to reduce the strong divide present in the state while addressing the main bottlenecks for productivity and to unlock opportunities for growth in different areas.

Access to market: Infrastructure

Infrastructure is a necessary driver for productivity growth and well-being in OECD regions (OECD, 2012), although it is not a sufficient condition. It improves accessibility with local, national and international foreign markets, facilitates public service delivery and reduces the cost of the flow of technology and the movement of labour. Investments on infrastructure in isolation, however, do not automatically lead to higher levels of development. To be effective, they need to be co-ordinated with other enabling factors for development, in particular education, innovation and a well-functioning business environment.

Particularly in Hidalgo, investing in quality infrastructure and accessibility is not only a matter of economic outcome but is directly linked with the need to improve well-being and reduce the current north-south divide in the region.

Hidalgo’s northern territories and settlement areas are predominantly rural in nature. They also have a strong interrelation to southern urban settlements in the region due to strong interlinkages in commercial, labour, educational, medical or even leisure-related activities. Similarly, although to a lesser extent, residents of the state’s urban areas also have strong linkages with the north travelling for tourism, visiting family and the homestead, or for buying certain goods and services that are unavailable in the south. The main obstacle to further valorise these interrelations is the lack of adequate road and inexistent passenger rail connections between Hidalgo’s north and south.

Infrastructure has been improving in Hidalgo, albeit skewed towards the south

Road network

The quality and structure of the road network in Hidalgo underline the unequal conditions between southern and northern municipalities. Road network in the state is composed mainly of unpaved rural roads with most of the paved and modern roads located in the south of the state (Figure 2.9). Hidalgo has a high road density relative to its land area (0.6 km of road per km² vs 0.3 km of road/km² across Mexican states). However, the share of unpaved roads is higher (62%), than the average of Mexican states (53%) (INEGI, 2016[18]). Rural roads account for more than half of the network (51%), which is above the average of the country (43%). The federal roads, the most modern roads, account for just 7% of the network, far below the share across Mexican states (17%).

The most important road development has been the Arco Norte highway that crosses the south of the state. The inauguration of this highway in 2009 brought Hidalgo out of its enclavement. Local population and industry can now circumvent the very congested Mexico Valley to reach the main national road networks, including the main north-south trade routes that link Mexico to the United States, and ports in both the west linking Hidalgo to the Pacific Ocean and east with the Gulf of Mexico. This allows for important time and cost savings, and allows the state to now be strategically situated from a logistical standpoint in the centre of Mexico.

Figure 2.9. Main paved roads, Hidalgo, 2017
Figure 2.9. Main paved roads, Hidalgo, 2017

Source: INEGI (n.d.[18]), Conjunto de Datos Vectoriales de Carreteras y Vialidades Urbanas Edición 1.0 (Distribución por Entidad Federativa), http://www.inegi.org.mx/geo/contenidos/topografia/vectoriales_carreteras.aspx.

Rail network and access to ports

Overall, Hidalgo is well connected to the national rail network and benefits by its favourable geographic closeness to key national ports (Figure 2.10). With 865 kilometres of railways, it is the 15th state with the largest rail network in the country. The closest seaport to Hidalgo’s capital city, Pachuca, is that of Tuxpan in the neighbouring state of Veracruz. This port is situated at barely two hours’ distance by road from Pachuca. It is also one of the closest ports to Mexico’s national capital, and the connection between both requires crossing the state of Hidalgo. This is important for Hidalgo as the port of Tuxpan is Mexico’s largest receptor of petrol and supplies 96% of all the petroleum consumed in the Mexico City Valley. The port recently completed an expansion phase that has added a new terminal to its capacity infrastructure. Estimated annual capacity of the port in 2018 is of 700 000 TEU (20 feet containers) and 100 000 cars. The relative proximity of Hidalgo to the port will give the state some clear logistical advantages that can help its attractiveness and competitiveness for certain industries and investments.

Figure 2.10. Railway and port connectivity in Hidalgo
Figure 2.10. Railway and port connectivity in Hidalgo

Source: Government of Hidalgo (2017[19]), Answers to OECD Questionnaire for the Hidalgo Territorial Review.

Industrial parks and logistics

In Hidalgo, there are ten industrial parks located in the south of the state, near Arco Norte (see Box 2.3). Each of these is meant to lay down favourable conditions for the spontaneous development of an industrial cluster. All have the basic services required for industrial operations, such as electricity, water supply, drainage infrastructure and telecommunications. Some of Hidalgo’s industrial parks are also equipped with facilities for the supply of natural gas and rail services. Each of these industrial parks has a pre-defined vocation focused on high value-added industries for the operation of industrial plants and distribution centres. Some additional parks are also being built through private investment such as the industrial park of the Altiplano. However, only one park fulfils international standards and most of the key important parks are located just in the south of the state (Figure 2.11). There is hence a need for further modernisation and efforts in following international certifications.

Box 2.3. Hidalgo’s industrial parks

Hidalgo has ten main industrial parks, all located in the south of the state:

  1. 1. PLATAH. Logistics, food, industrial equipment and industrial kitchens.

    Characteristics: Surface: 312 ha.; 119 lots.

  2. 2. Atitalaquia. Food sector, logistics, construction, technological innovation.

    Characteristics: Surface: 229 ha.; 70 lots.

  3. 3. Tula. Petrochemical, plastic, pharmaceutical and construction.

    Characteristics: Surface: 97 ha.; 114 lots.

  4. 4. Tepeji del Río. Food, beverages, textiles, clothing, chemicals and logistics.

    Characteristics: Surface: 518.2 ha.; 266 lots.

  5. 5. Tizayuca. Petrochemical, food and beverages, textile-confection, construction, metalworking, logistics.

    Characteristics: Surface: 300 ha.; 314 lots.

  6. 6. La Reforma. Food, beverages, construction and distribution.

    Characteristics: Surface: 34.95 ha.; 50 lots.

  7. 7. Metropolitano. Automotive, textile and clothing.

    Characteristics: Surface: 49.38 ha.; 27 lots.

  8. 8. Sahagún. Automotive, metalworking.

    Characteristics: Area: 50.20 ha.; 30 lots.

  9. 9. MPyMes Sahagún. Metalworking.

    Characteristics: Surface: 9 ha.; 45 lots.

  10. 10. QUMA. Industrial, commercial and logistics.

    Characteristics: Surface: 72 ha.; 42 lots.

Figure 2.11. Industrial parks’ location in Hidalgo
Figure 2.11. Industrial parks’ location in Hidalgo

Source: Government of Hidalgo (2017[19]), Answers to OECD Questionnaire for the Hidalgo Territorial Review.

The state is giving itself the adequate logistic infrastructure. Hidalgo is in the process of establishing the Terminal Intermodal Logística de Hidalgo (TILH), which is an inland intermodal logistics centre with an annual capacity of 200 000 TEU, as well as a new logistics park (Zona de Actividad Logística de Hidalgo – ZALH). This dry port and logistics centre is the product of collaboration between Hidalgo’s state administration, Hidalgo’s corporate alliance Corporativo UNNE (leader of Mexico’s logistic sector) and the Hong-Kong-based firm Hutchison Port Holding. This infrastructure will help consolidate Hidalgo’s position as a logistical leader for central Mexican freight and cargo.

Energy

Hidalgo is an important player in terms of energy infrastructure for the country. It produces 43% of the hydropower in the country’s central region and it is the 5th biggest electricity producer in the country (9.4% of electricity in Mexico) with 25 electric stations across the state. The Tula-Tepeji region, in the southwest of the state, houses the Miguel Hidalgo refinery, the biggest Mexican refinery in the country. The state has three gas pipelines that all cross thorough of the southern municipalities and provide the energy to the industrial parks’ network. Hidalgo is also building its first solar farm and has important potential in wind energy.

ICT infrastructure

Virtual connectivity is also important for Hidalgo. In 2017, 67% of households in Hidalgo lacked an Internet connection, a higher percentage than the national average of 49.1% (Chapter 1). As with most other infrastructure in Hidalgo, the distribution of Internet connectivity is largely marked by the north-south divide, with several municipalities of southern Hidalgo having Internet coverage levels of up to half of all households. This contrasts strongly with many municipalities of the north, where in some case less than 1% of local households has an Internet connection. It can be expected that Internet access and use by businesses in Hidalgo follows roughly the same patterns as the overall population.

The government is aiming to improve infrastructure, but challenges remain

The state has set the strategy to enhance and modernise the road network with the support of the federal government. It includes designing a programme to evaluate the status of the network, improve existent roads and develop a project portfolio of roadways. In this regard, two important projects, co-financed by the federal government stand out:

  • The expansion of the Pachuca-Mexico City highway from two to four-lanes.

  • The expansion and modernisation of the road that connects Huejutla in the north with Pachuca into a four-lane highway.

The Huejutla-Pachuca road is particularly important for attaining an inclusive growth in the state. The completion of this initiative will benefit eight municipalities and allow their rural areas to not only increase the trade with urban centres but also receive public services more efficient. However, due to budget cuts and ongoing negotiation at the national level, the road has experienced delays keeping the project at its very early construction phase.

There is also an active plan, promoted by the state administration, to further develop and deploy the fibre across Hidalgo’s territory and reach 100% Internet connectivity. For this, the state launched the strategy Hidalgo for Universal Coverage in Telecommunications which involves a regulation on telecommunications to guide and clarify rules on broadband investments that was approved in mid-2018. This will give much higher levels of connectivity and access to public services (telemedicine and tele-education are also contemplated in the strategy), particularly to municipalities in the north. It will also allow small producers a better access to market and potentially make important advances in terms of innovation. As part of the strategy, the government of Hidalgo will make available more than 3 700 public buildings for the private sector to install fibre optic, antennas and radio bases that will help to bring Internet and mobile communications to increase coverage. So far, the state government has generated some initial results like the optical fibre metropolitan ring (investment of MXN 60 million), the increase of access to the Internet in 300 public buildings and the creation of 200 digital access centres (Government of Hidalgo, 2018[21]).

Availability of good Internet is crucial for business, but availability does not automatically suppose high connectivity. Many communities of the north lack the basic tools and training to make good use of the added connectivity. Connecting the state, especially low-density populated areas, will need to be accompanied by programmes and measures to help Hidalgo’s population and businesses make the optimal use of this connectivity for the prosperity and well-being. Examples of community engagement to support the provision of fibre optical networks in rural areas of Sweden and the United Kingdom can be used as a guide for Hidalgo (Box 2.4).

In terms of road network, the state should make further efforts to improve the quality of roads, especially rural roads (e.g. increase paved roads). In addition, a strategy to improve the resilience of its road network is needed. Natural events have been underlined as a major problem to preserve good quality infrastructure in the state. It has a stock of more than 500 km of roads affected by floods. This kind of impact on the infrastructure not only implies a lack of communication for certain localities but also increases the risk and reduces the time to commute.

Although the traditional priority for Hidalgo in terms of infrastructure investments has centred on enhancing linkages with Mexico City, better connections with neighbouring states, international markets and between northern and central municipalities will improve the accessibility of the whole territory. Linking northern municipalities with the ports of the gulf can unlock most of their economic opportunities and boost the internationalisation of local business. It can also further exploit the geographic proximity to some port. Huejutla, alike other northern municipalities, are closer to some ports like Tuxpan (152 km distance) or Tampico (167 km distance) than to the capital of the state Pachuca (221 km). For doing so, improving the co-ordination with neighbouring states and federal government is needed in terms of infrastructural planning and development for both passenger and freight transport (Chapter 4). Notably, Hidalgo should:

  • Explore mechanism of co-ordination with neighbouring states to develop infrastructure projects that benefit northern municipalities with roads, secondary roads and railways. It may thereafter generate further advantage of its geographic location by increasing its trading relations with the other states (e.g. San Luis de Potosi or Veracruz).

  • Promote a co-ordinated development of modern infrastructure connectivity between the north part of the state with the ports of the Gulf (Chapter 4 further develops the co-ordination mechanisms for this).

  • Strengthen the connection between municipalities in the centre of the state with Huejutla or other poles of growth in the north.

Box 2.4. Deployment of fibre optical networks through collaborative approaches

As an increasing amount of economic and social activity is undertaken over communication networks it becomes more challenging to be restricted to low-capacity broadband when living in some rural or remote areas. Given that most countries have regions that are sparsely populated, it raises the question of how to improve broadband access in these areas.

There is a growing “grassroots movement” in Sweden to extend optical network fibre coverage to rural villages. There are around 1 000 small village fibre networks in Sweden, in addition to the 190 municipal networks, which on average connect 150 households. These networks are primarily operated as co-operatives, in combination with public funding and connection fees paid by end-users. People in these communities also participate through volunteering their labour or equipment as well as rights of way in the case of the landowners. The incumbent telecommunication operator, as well as other companies, provides various toolkits and services for the deployment of village fibre networks in order to safeguard that these networks meet industry requirements. As the deployment cost per access in rural areas can be as much as four times what it cost in urban areas, such development may not attract commercial players and rely on such collaborative approaches. Aside from any public funding, Sweden’s experience suggests that village networks require local initiatives and commitment as well as leadership through the development of local broadband plans and strategies. They also require co-ordination with authorities to handle a variety of regulatory and legal issues and demand competency on how to build and maintain broadband networks. The most decisive factor is that people in these areas of Sweden are prepared to use their resources and contribute with several thousand hours of work to make a village network a reality.

In the United Kingdom, Community Broadband Scotland is engaging with remote and rural communities in order to support residents to develop their own community-led broadband solutions. Examples of ongoing projects include those in Ewes Valley (Dumfries and Galloway), Tomintoul and Glenlivet (Moray), which are inland mountain communities located within the Moray area of the Cairngorm National Park. Another example of a larger project can be found in Canada and the small Alberta town of Olds with a population of 8 500, which has built its own fibre network through the town’s non-profit economic development called O-net. The network is being deployed to all households in the town with a number of positive effects reported for the community.

Sources: OECD (Forthcoming[22]), Territorial Reviews: Småland-Blekinge 2019 Monitoring progress and special focus on migrant integration

Education, human capital and skills

Human capital is a critical factor influencing regional growth and development throughout all types of OECD regions (OECD, 2017[23]). A skilled human capital is at the essence of regional development and competitiveness by building a learning society that is able to absorb as well as create knowledge, drive innovation and facilitate local adaptability to changing labour demands and technology. Human capital endowment is paramount to boosting productivity growth in the region.

Improved human capital also helps to stimulate social cohesion and well-being because of access to better jobs and potential quality of life enhancements. Analysis by the OECD has shown that, overall, reducing the proportion of the people in a region with very low skills seems to matter more than increasing the share with very high skill levels (OECD, 2017[23]).

Mexico scores below the OECD average in all 3 domains of OECD Programme for International Student Assessment (PISA) 2015: science (416 vs. 493), mathematics (408 vs. 490) and reading (423 vs. 493). Educational attainment in Mexico is indeed a challenge with severe consequences for the national economic development, particularly in relation to tackling informality (see Chapter 1).

In this sense, if Hidalgo wants to reach the aims set in its strategic plan in terms of economic transformation towards a higher-value economy, first and foremost, Hidalgo will need to build and optimise its human capital endowment. Its current workforce is mostly low-skilled, as only a small percentage of students who start basic education (10.1% in 2016/17) move on to pursue higher education.

Hidalgo has strong basic education but weak incentives for students to pursue higher education

In the current educational context of Hidalgo, the state’s strength is in the basic level of education, both in coverage and quality. During the 2016/17 school year, coverage in basic education level reached 100% (in elementary and middle school) and dropout rates were very low (0% and 9% respectively). In the 2017 national education evaluation PLANEA for middle school (which is comprised within the basic education: pre-school, elementary and middle school), Hidalgo registered a positive performance. In mathematics, Hidalgo (512) scored above the national average (497) and in language and communication Hidalgo (504) is closer to the national average (495) (Figure 2.12).

Figure 2.12. National average scores of PLANEA 2017 in middle school
Figure 2.12. National average scores of PLANEA 2017 in middle school

Source: INEE (2018[24]), Resultados Nacionales 2017: 3 de Secundaria, http://planea.sep.gob.mx/content/general/docs/2017/RESULTADOS_NACIONALES_PLANEA2017.pdf.

High school enrolment has nearly doubled since 2007 (41.7%). The growth rate has been more significant in the technological high school track (50.2%) than in the general one. In comparison to the national average of students that pursued the technological high school track in 2016/17 (36.3%), Hidalgo’s proportion of high school students on the same track was higher (42.5%). This high school track could potentially turn into a pipeline of middle-skilled workers for the formal private sector.

Despite these advances, Hidalgo faces a more challenging situation when it comes to high school and higher education where coverage is low and dropout levels high. Higher education in Hidalgo has a low coverage (see Figure 2.13) and faces challenges to provide incentives for high school students to continue with higher studies. While dropout in high school is a national phenomenon, Hidalgo’s dropout rates (13.7%) are above the national average (12.8% in 2016/17). There is great diversity among Mexican states, for example, Durango (17.3%), Morelos (17%) and Campeche (16.6%) have large dropout rates; while Querétaro (10.7%) and Jalisco (2.7%) experience low dropout levels. High dropout rates in Hidalgo can be related to existing poverty levels (see Chapter 1) and are also a symptom of the mismatch between the offer provided by the state’s higher education institutions and the demands of the local industry.

Figure 2.13. Total enrolment for the 2016/17 school year
Figure 2.13. Total enrolment for the 2016/17 school year

Note: Basic education comprises pre-school, elementary and middle school and it represents 64.4% of the total enrolment of students in Hidalgo.

Source: Government of Hidalgo (2017[19]), Answers to OECD Questionnaire for the Hidalgo Territorial Review.

At the moment, there is a strong mismatch between the human capital development in the state’s educational institutions and the demands of industry. Within the current composition of university studies by field, social sciences, administration and law (39.4%) dominate higher education in Hidalgo, while engineering manufacture and construction come next with almost a third of enrolled students (31.5%). Overall, in the curriculum of tertiary education, there is an over-representation of social sciences and underrepresentation of computer science (4%), agronomy (2.4%) and services (1%). It can be improved due to the prominence of the agriculture and tourism sector in the state’s economy and the strategic focus of the administration on high-skilled sectors.

There is an even greater mismatch when considering the future needs of human capital required to effectively implement the state’s economic development plan. The share of students going into engineering studies is a positive sign of alignment with the state’s development priorities; however, the proportion of students that pursue degrees in natural and computer science remains low (3.7%) (see Figure 2.14).

Figure 2.14. Percentage of higher education degrees by field of study in Hidalgo, 2016/17
Figure 2.14. Percentage of higher education degrees by field of study in Hidalgo, 2016/17

Source: Government of Hidalgo (2017[19]), Answers to OECD Questionnaire for the Hidalgo Territorial Review

Hidalgo’s policies and actions to face challenges

To face the current challenges, the government of Hidalgo has a set of objectives:

  • Design joint actions to improve the development of competencies in basic, upper-middle and higher education as a policy to determine a specific graduate profile for each level of education.

  • Improve Hidalgo’s education indicators through the strengthening of activities such as tutoring, academic mentoring, and educational guidance.

  • Improve the results of student’s standardised tests.

In order to deliver these results, teacher training is central. Strengthen training, upgrading and career advancement schemes for school directors, pedagogues and teachers are also considered priorities for the Secretary of Public Education of Hidalgo. This objective is also aligned with the federal Education Reform (2012).

In order to tackle high school dropout rates, particularly when it is related to poverty and inequality, different Mexican states have pursued diverse policies. Hidalgo could benefit from these examples to reduce dropout in high school. In the case of Jalisco that reduced dropout from 3.2% (2015/16) to 2.7% (2016/17), the creation of technical councils integrated by school directors, professors and parents has been a key aspect of their policy. In addition to these councils, the state government has invested in infrastructure and distance learning (Secretaria de Educación de Jalisco, 2018[26]). In the case of Morelos, where dropout rates have decreased from 20.8% (2015/16) to 17% (2016/17) their strategy includes an universal scholarship (Beca Salario) to incentivise students to stay in school. Any student enrolled in a public institution from the third year of middle school until postgraduate studies is eligible to apply (OECD, 2017[23]).

There are also increasing attempts to link Hidalgo’s education and human capital development policy with its economic plan, particularly to encourage the creation of links between academia and the private sector (Table 2.3).

Table 2.3. Policies and objectives to create linkages between academia and private sector

Policy

Objective

Implementation of the Mexican Dual Model of Academic Training (Modelo Mexicano de Formación Dual)

Design curriculum that provides a balance between academic and practical formation.

My first job, my first wage (Mi primer emploe, mi primer salario)

Foster linkages between students and local companies and improve human capital through paid internships.

Entrepreneurs Model

(Modelo de Emprendedores)

Encourage the development of skills, linkages and financial incentives (scholarships) for an entrepreneurial environment.

Financial Park

Foster the creation of linkages between universities and the private sector.

Targeted for high school students to acquire basic financial knowledge.

Source: Government of Hidalgo (2017[19]), Answers to OECD Questionnaire for the Hidalgo Territorial Review.

A relevant policy to better link academia and business is the Mexican Dual Model of Academic Training. It is a federal policy designed to integrate students from the technical high school track into the labour market as part of the broader federal Education Reform of 2012. In order to do so, the Ministry of Education designed a balanced curriculum between theory and practical training and will provide certification to students that participate in the programme. It initially targeted 11 pioneer states with plans for a gradual expansion to the whole country.

The government of Hidalgo, through the local Secretary of Education, launched a pioneer agreement in 2017 with the Consejo Coordinador Empresarial de Hidalgo (local business association) to begin the implementation of the Dual Model of Academic Training. Since the beginning of 2018, there are further plans to accelerate its implementation by involving more local business associations and technical schools and universities. This is a step in the right direction and the reach of the programme should be expanded in order to benefit the large cohorts of graduates from the technical high school track and reduce the mismatch in the local labour market.

In order to support the higher knowledge-intensive pedagogy, greater emphasis should be given to the provision of intermediate skills within the Hidalgo labour force. Vocational training, but also language and IT training could make a significant difference in the productivity of Hidalgo’s workforce and substantially increase their suitability with the current and future needs of the state’s private sector. See Box 2.5 for the importance of vocational education and training.

Box 2.5. Vocational education and training (VET) for local labour markets

Vocational education and training (VET) delivery should be aligned with the local sectoral and occupational labour market profile. Turning specifically to mechanisms for local decision-making in VET, the ability of local actors to align VET delivery with the sectoral and occupational profile of the local labour market is critical.

Countries are using a number of mechanisms to allow local actors to tailor the sectors and occupations covered by VET programmes in their local areas. These include: i) developing a national menu of choices, from which local stakeholders are able to choose; ii) allowing for local choice as long as nationally set parameters are met; and iii) market-based mechanisms, including steering through subsidies.

The market approach case often drives apprenticeship programmes as they require interest from both a trainee and a workplace sponsor. In the short-term, the system ensures a reasonable degree of alignment between apprenticeship offerings and labour market demands, but this does not always imply alignment in the longer-term and might mean a sacrifice of strategic goals.

Source: OECD (2016[27])Job Creation and Local Economic Development 2016http://dx.doi.org/10.1787/9789264261976-en.

The state government programme “Mi primer empleo, mi primer salario” (My first job, my first wage) is the largest effort at the moment to foster the creation of links between the local human capital and the private sector through paid internships. The programme selects recent graduates from local universities and technological high schools for paid internships co-financed by the local government and local SMEs. Selected candidates also undertake training in socioemotional skills to improve their work performance. The objective is to increase the professional experience of recent graduates and meet the labour market demand from local firms. The programme was implemented in 2017 and is already working with over 700 local firms. It has an annual budget of MNN 24 million that benefited over 1 000 interns during its 1st year and had a hiring rate of 70%. In comparison to an earlier programme ”Manos a la obra” that had a similar objective, the current programme has significantly expanded the coverage in terms of interns, local SMEs and number of municipalities served (Government of Hidalgo, 2018[28]).

Despite the progress achieved to foster linkages between academia and local firms, higher education institutions still appear irresponsive to the mismatch between educational programmes on offer in their institutions, and the current as well as future demands for skills and knowledge-intensive human capital needs. This reinforces a vicious cycle where higher education graduates in Hidalgo often choose to leave and take their valuable human capital elsewhere and local firms prefer to recruit from out of the state. In this regard, the state government has the competencies to influence the curriculum of public universities and steer them towards programmes that better match the current and future skilled labour demand.

Hidalgo could improve education outcomes in the states by considering the following:

  • Demand and supply of skills need to be addressed simultaneously and in a balanced fashion. There is a need for greater two-way perceptions of the links between local human capital and industrial development, where the economic development strategy also takes the existing human capital configuration of Hidalgo’s population as a starting point and attempts to best optimise these resources and skills through the implementation of the economic strategy.

  • Local higher learning institutions should be incentivised to have a more local outlook on their role within society. National and even international-based performance criteria are increasingly used to benchmark and measure the output of these institutions. Their faculty and the institutions’ executives are appraised according to the international outreach and impact of their work, with unfortunately little and often declining importance to local issues and conditions. As seen above, in Hidalgo there is a considerable mismatch between the higher education graduates and the needs of the local labour market that should be addressed. The government of Hidalgo is already implementing policies in this direction like the Mexican Dual Model of Academic Training and “Mi primer empleo, mi primer salario”. Its implementation should be strengthened and its reach expanded in order to cover the large cohorts of graduates from the technical high school track.

    The transversal measures CTI2.2 – Consolidate the link between academia and business for the generation of new knowledge applied to the problems and needs of the state productive sector – and CTI2.6 – Build highly specialised human capital in strategic economic sectors – specifically address the issue of human capital improvements. The relation that is being constructed, though, is one where Hidalgo’s human capital development policy is subordinate to the necessities of its economic development. While linking education and skills development with local economic necessities is a good first step, the relation must be more bi-directional so as to truly develop a forward-looking proactive system that will not only deliver the future human capital requirements but whose graduates will also become active agents that will drive the path towards the state’s strategic aims.

  • Innovation abilities and skills will be key success factors for Hidalgo’s transition to a higher value-added knowledge-based economy, as stated in its strategic plan. But there is generally low or inexistent investment by these firms in training for innovation and innovation management. These skills could more easily be developed by local firms through greater collaboration with higher education institutions. Unfortunately, universities are currently only turned to by local companies in order to request human resource or social services. In this sense, the Council for Human Capital of the State of Morelos is a good example of how to begin the institutionalisation of linkages between the local higher education institutions and the private sector (see Box 2.6).

Box 2.6. The link between academia and business

The Ministry of Economy of Morelos created a body called the Council for Human Capital of the State of Morelos whose mission is to promote and achieve economic development based on a strong investment in human capital, innovation and cross-sectoral collaborations.

The state Ministry of Economy played a crucial role in creating the conditions for the Council to become operational. However, it has now been constituted as an independent civil association. The Council is integrated by local business associations, representatives from higher education institutions, government representatives, unions and research centres. The president of the board is the Consejo Coordinador Empresarial de Morelos (local business association).

The institutional structure of the Council is organised around five working groups (government, education, the private sector, syndicates and social organisations) and nine sectorial technical groups to which working group members participate. Each of the sectorial groups below corresponds to a priority sector. Around these sectors, the Council has defined a number of programmes that it will launch in different phases and that aim to mobilise multiple stakeholders from all walks of life. The following technical groups have been identified: i) white economy; ii) tourism; iii) research and education; iv) construction; v) agriculture and fishing and agro-industry; vi) renewable energy; vii) teleworking; viii) high technology; and ix) logistics.

In order to further shape the Council into an effective institution to lead human capital development in Morelos, the OECD recommended that the nine priority sectors by economic activity and thematic areas should not be treated as silos, as that may impede cross-fertilisation between them. Instead sectoral and thematic areas (research and education, renewable energy, high technology and logistics) should be organised around a matrix that ensures sectors benefit from the synergies of thematic areas and working groups of the thematic areas should participate in all sectorial activities to spread common knowledge.

Source: OECD (2017[23])OECD Territorial Reviews: Morelos, Mexicohttp://dx.doi.org/10.1787/9789264267817-en; Consejo de Capital Humano de Morelos (n.d.[29])http://consejocapitalhumano.mx/acerca/ (accessed 15 October 2018). 

Entrepreneurial and SMEs ecosystem

New and small businesses are often a driving force of innovation and knowledge diffusion, they respond to new or niched demands and social needs, and contribute to the empowerment and inclusion of marginalised groups. In the OECD area, small and medium-sized enterprises (SMEs) account for 60% of total employment and generate 50% to 60% of value-added on average (OECD, 2017[30]). Entrepreneurship is hence an important instrument for economic growth mostly because new firms generate employment, bring innovation to the market and increase overall industrial productivity through increased competition (Van Stel et al., 2005). In the case of an economically defined territory such as Hidalgo, entrepreneurship can be most useful as a means to economically optimise under-utilised local human capital. When the labour market does not offer enough opportunities for local residents to make optimal use of their personal capacity and talent, the entrepreneurial route is often an alternative way that can help to channel the benefits of this human capital to the local economy.

Entrepreneurship can also have a significant impact on Hidalgo’s local innovation system. Innovative entrepreneurship can have many local spillover benefits (OECD, 2012[31]) Entrepreneurship and innovation, combined, can improve the economic competitiveness of the area; they create economic growth and new wealth for the locality; and ultimately, they improve quality of life for local residents.

In Mexico, SMEs account for 99.8% of enterprises and 72.3% of employment. This is a significantly greater share than in most other OECD countries. Another particular characteristic of the SME sector in Mexico besides its size is its high share of very small enterprises. Microenterprises (employing less than 10 people) account for 96.1% of all businesses in Mexico. However, they have low productivity (contribute to 18% of Mexico output compared with 40% of employment). Their low productivity is partly tied up with their higher levels of informality (OECD, 2013[32]).

Hidalgo has a wide range of tools to support entrepreneurship...

The promotion of entrepreneurship, innovation and the development of new strategic industries is one of the four key axes of Hidalgo’s economic development strategy. So is the creation of an adequate business ecosystem and the strengthening of existing businesses. In this sense, the state administration has established a series of programmes and strategies that are directly aimed at stimulating entrepreneurial activity and culture in Hidalgo.

The state’s Secretary for Economic Development (SEDECO) is actively collaborating with Hidalgo’s Business Competitiveness Institute (IHCE) and the Sub-Secretariat for Economics to deliver a concerted support mechanism for Hidalgo’s entrepreneurs, SMEs and/or potential entrepreneurs. The IHCE has different functions that range from training and assistance to start a business or offering high tech services like 3D printings for porotypes (Table 2.4), to collaborating in the co-ordination of financing for SMEs.

Table 2.4. Functions of the Hidalgo Institute for Entrepreneurial Competitiveness

Main functions

Objective

Human Capital Formation

- Provide practical knowledge and skills to entrepreneurs and business owners through courses, workshops, mentoring and consultancy services. This will increase their professionalisation and strengthen productivity and competitiveness of local SMEs.

Entrepreneurial Training

- Provide step by step assistance for creating new companies. For example, suitability of products for the local market, creating a bar code, registering a brand name, etc.

Technological Oversight

- Provide relevant and timely information about recent technological research, new technology, etc.

EmpreRED

- Link and connect entrepreneurs and SMEs from all municipalities of Hidalgo.

Design Lab

- Foster firms design through technological innovation and focusing on priority sectors for the local economy.

- Provide services of 3D printing to test prototypes.

Source: Data provided by Instituto Hidalguense de Competitividad Empresarial.

Of these efforts, a diversity of economic support measures to entrepreneurial ventures and SMEs are available in Hidalgo. Most of these are captured within the framework of the “pon tu negocio, yo te apoyo” (Set up Your Business and I Will Support You) programme. The programme is co-ordinated by SEDECO in conjunction with the Federal Government, through the Nacional Financiera (NAFIN), the National Institute of the Entrepreneur (INADEM) and Commercial Banking. The objective of the “pon to negocio, yo te apoyo” framework is to co-ordinate federal entrepreneurship programmes and increase the financing funds for local SMEs. Considering the great diversity of federal programmes to support entrepreneurship and SMEs, this framework to liaise between the federal and local level is a step in the right direction to simplify access to credits.

The “pon tu negocio, yo te apoyo” programme offers financial support to new and existing SMEs falling into specific sub-programmes addressing particular segments of Hidalgo’s entrepreneurial fabric. The financing schemes offer accessible interest rates in comparison to commercial banks, less red tape and orientation to formalise SMEs in addition to training for the development of business plans. The programme has specific measures for young entrepreneurs, others for women entrepreneurs and several aimed towards business owners whose firms are active in specific sectors of the economy (fashion and textile, construction, restauration and agro-foods, among others). These latter measures aim to encourage modernisation, innovation and value-adding investments of Hidalgo’s SMEs.

The OECD Studies on SMEs and Entrepreneurship: Mexico found that decentralisation of competencies and budget to the states is key to achieve national-local coherence (OECD, 2013[32]). In that sense, it recognised the importance of co-funding and co-selecting arrangements with the SME Fund (now called National Entrepreneur Fund). Such arrangements create incentives and opportunities for states and municipalities to run intermediary organisations for policy delivery. However, further co-ordination on the SMEs’ policy in Hidalgo should be pursed. In particular, the simplification of the National Entrepreneur Fund operating procedures will facilitate co-funding by local level partners (OECD, 2013[32]).

Hidalgo’s entrepreneurs can count on the support of the Fondo Nacional Emprendedor (National Entrepreneur Fund). This fund can be accessed through an area of the IHCE responsible for linking the programmes of INADEM at the federal level and facilitate their access to Hidalgo’s entrepreneurs and SMEs who participate in the initiatives of SEDECO. The programme assists Hidalgo’s entrepreneurs and SMEs through the support of integral productive projects in favour of increasing their competitiveness and improving the economic situation of the State. Support provided by this fund includes quality accreditation and certification, fostering technological upgrades and organisation of networking events with transnational companies and new suppliers. Other states have benefited from this programme, particularly with the aim to create strong linkages between local SME’s and innovative FDI. Querétaro, in particular, made an interesting use of the National Entrepreneur Fund (previously SME Fund) as a vehicle to link local SMEs into international supply chains (see Box 2.7).

Box 2.7. Linking local SMEs with innovative FDI

Querétaro and INADEM

The SME Fund was a federal initiative in which state governments could co-fund on one-to-one basis programmes and projects that addressed local problems. Overall, the SME Fund has proven a valuable policy co-ordination tool although a scarcity of resources at the state level has resulted in unequal contributions from federal and state governments. In Querétaro, there are opportunities in the automobile and auto parts sectors, in which the state has specialised since the 1960s, and more recently in the emerging aerospace sector (with the Canadian firm Bombardier as an anchor firm). The presence of international firms in these sectors has led the state government to place a strong emphasis on the local implementation of the national Supplier Development Programme in its use of the SME Fund.

The programme provides a vehicle to link SMEs into international supply chains through quality accreditation, technological upgrades and the organisation of events for established transnational companies to meet potential new suppliers. It has also been used to transpose manufacturing knowledge from the existing automotive sector to the expanding aerospace sector.

The state was responsible for developing the approach’s design, which included close collaboration with the relevant local support institutions. Thus, efforts to develop local suppliers have been co-ordinated with local business incubators (particularly the high technology incubator) and with the technology centres of the National Council of Science and Technology (CONACYT) that are hosted in the state.

Source: OECD (2016[27])Job Creation and Local Economic Development 2016http://dx.doi.org/10.1787/9789264261976-en.

Enhancing the scope of soft assistance measures for entrepreneurs

Hidalgo’s support also relies heavily on soft assistance measures such as administrative simplification, training, human capital development, networking opportunities and business advisory services. An example of this is the Sistema de Apertura Rápida de Empresas (Rapid Business Opening System). This administrative simplification effort aims to identify and simplify the basic municipal procedures for the opening and operation of new businesses. The aim of the effort is also to facilitate their resolution in an agile and expeditious manner by the corresponding municipal office (permits, licenses, land-use, etc.), in a maximum 72-hour period.

Another example of Hidalgo’s soft assistance measures is the State’s entrepreneurial capacity development programme. To promote greater and better entrepreneurial activity in Hidalgo, an entrepreneurial capacity development programme has been implemented. This capacitation programme is based on the following four main phases:

  • Entrepreneurial culture: The promotion of an entrepreneurial culture and mindset within Hidalgo’s population is achieved through events, conferences and workshops where local entrepreneurial examples and potential role-models are celebrated and presented to the population. In these events, entrepreneurship and the entrepreneurial career is explained, as well as its potential benefits.

  • Idea and project development: The development and implementation of good business ideas and projects are encouraged through many different measures, such as incubation programmes, assistance in securing the necessary financial and seed capital, and project development consultancy, among others.

  • Business creation: This phase concentrates on the launch of the entrepreneurial ventures and includes measures such as financial support, assistance with developing networks and social capital, grants, as well as legal assistance.

  • Business development and growth: The assistance delivered in this phase serves to help entrepreneurs to scale-up their ventures and expand into new markets and industries. The assistance offered helps entrepreneurs secure venture capital, formalise strategic alliances, access federal grants as well as other forms of financial support.

The four-phase capacitation approach allows entrepreneurial support in Hidalgo to be more comprehensive and thoroughly serve the initial life-cycle of the entrepreneurial venture. When entrepreneurial support is only focused on the business creation event, entrepreneurs are often left unaccompanied during the post-start-up phase. The post-start-up phase, which roughly accounts for the first three years of a business’s life, is often filled with complexities. This is when a large proportion of entrepreneurial ventures fail. Sustaining entrepreneurial support and accompaniment throughout this critical phase of a venture’s life, as Hidalgo is implementing, greatly contributes to reducing premature business mortality.

In complement to Hidalgo’s entrepreneurial capacitation programme, the state counts on an intensive network of business incubators. Hidalgo has a total of 19 different incubators that are meant to offer services and support a diversity of different types of start-ups. Most of these serve the start-up phase and the initial years following the launch of the venture. But others offer more ‘pre-incubation’ accompaniment and support, aimed towards the idea and start-up project development phase that precedes the creation of the venture. Other incubators in Hidalgo serve more as business accelerators, helping firms that have past their initial creation to consolidate their business and grow to higher levels of business competitiveness.

Of Hidalgo’s 19 business incubators, a total of 13 are associated with higher learning and research institutions. Two more are directly focused on high-technology industry start-ups and ventures and three are identified as high-impact business incubators. This is in clear coherence with the state’s strategy to prioritise knowledge-intensive business creation found in Hidalgo’s Development Plan 2017-22 in the transversal measure CTI2.5 –Generate programmes to support the creation, development and consolidation of innovative businesses. However, the incubators’ programmes are skewing the business creation and business development phases of the entrepreneurial towards a very limited proportion of potential entrepreneurs.

The bulk of Hidalgo’s entrepreneurs that do not fit the “high-impact” profile are served by the state’s four remaining business incubators. These cater only to specific segments of entrepreneurs; one is aimed towards agro-entrepreneurs, another towards women entrepreneurs, a third is specialised on entrepreneurs transitioning from the labour market, and finally, a fourth incubator is dedicated on serving entrepreneurs with disabilities. Hidalgo would benefit from having a more inclusive entrepreneurship support policy, especially in what accounts for post-start-up assistance for entrepreneurs.

While Hidalgo’s economic strategy, as well as its State Development Plan 2017-22, have key pillars that seem to prioritise the establishment of a science, technology and innovation-based economy, Hidalgo has programmes that propose to use entrepreneurship for more than just technological transfer to the economy. It has, in particular, some measures within its plan that propose using entrepreneurship as a multifunctional tool to help achieve many other socio-economic goals:

  • Entrepreneurship is therefore proposed as a tool to help the economic empowerment of women and individuals in vulnerable economic situations. The sectorial plan has two strategies on this front:

    • Focus the attention on women (See Box 2.8), people in vulnerable situations, interested in starting a self-employment project.

    • Agree with public and private institutions on actions that allow people in situations of vulnerability access to resources to develop their business idea.

Hidalgo can take advantage of international experiences on this front to ensure a successful and wider implementation of programmes to benefit women’s entrepreneurship. Developing a network, promoting work-life balance and establishing role models of successful cases can generate a relevant impact in women-led business.

  • Entrepreneurship is also used as a tool to help people transition out of informal employment, thought two strategies:

    • Encourage the formalisation of microbusinesses and small businesses (see the section below on mitigating informal business activity).

    • Promote productive integration and co-operation for the local economic development of micro- and small enterprises.

  • Hidalgo also turns to entrepreneurship, specifically social entrepreneurship, as a means to help spur greater social responsibility within the local business fabric by empowering the population of Hidalgo with the installation of socially responsible and inclusive businesses.

  • Similarly, the State Development Plan calls on encouraging entrepreneurial ventures as a way to help give value and preserve local heritage and traditions through the promotion of artisanal activity and the preservation of traditional festivities of the state.

Box 2.8. Fostering women’s entrepreneurship

The implementation of targeted policies and programmes to support women’s entrepreneurship and self-employment can be argued considering that women are under-represented in entrepreneurship in comparison to men and closing the gap would result in welfare gains. In addition, there is evidence that women are held back in entrepreneurship by institutional and market failures, including discouraging social attitudes. Finally, there is some evidence that women have a lower awareness of public support programmes and that in-take mechanisms favour male entrepreneurs. However, policy can support women entrepreneurs by:

  1. 1. Promoting a positive attitude through role models and ambassadors: Role models can play a crucial role in developing an entrepreneurial spirit and have demonstrated an ability to influence an individual’s entrepreneurial propensity through positive representations.

  2. 2. Develop entrepreneurial skills through training courses and mentoring: Training programmes for women usually provide the same content than mainstream courses. However, there is evidence that women-only programmes are more effective and in-take mechanisms for mainstream programmes can potentially be gender-biased since they may not account for the different characteristics and needs of women entrepreneurs (i.e. women are often excluded from growth-oriented programmes because women-owned businesses are traditionally smaller).

  3. 3. Facilitate access to finance through financial literacy and a range of financial institutions: Policies to support entrepreneurs in accessing funding are rooted in addressing market failures, including information asymmetries and funding gaps. Offering microcredit to women entrepreneurs is common.

  4. 4. Build entrepreneurial networks and ensure linkages to mainstream infrastructure: Networks for women entrepreneurs should not reinforce gender differences by isolating women from mainstream business service providers and other stakeholders from other communities. A common approach to building networks is to create them around other policy interventions such as training or other business development services.

  5. 5. Promote work-life balance and access to social protection: First, family and tax policies should support women’s participation in the labour market in general. Historically, public policy related to women and families and aimed at their protection almost entirely focused on women as employees, but policies need to be adapted to self-employment.

Women’s Enterprise Centre Initiative, Canada

The network of Women’s Enterprise Centres (WECs) was established in 1994 as an effort to better address the challenges faced by women entrepreneurs. WECs, present in each of the four provinces of Western Canada, are operated by non-profit organisations, and are awarded five-year renewal contracts to offer advice, business planning assistance, mentoring, networking opportunities, information and referrals to accountants and lawyers and specifically to women. They also deliver loan funds targeted at new or existing businesses owned by women. The WECs have provided a one-stop-shop for women entrepreneurs.

Some of the most significant impacts achieved by this programme have been on: further developing their business, management and personal skills; increased their access to other programmes and services through information resources; and enabling them to network. The impact of the loan programme was also significant. Overall, clients attribute 55% of their current businesses revenues to the services provided by WEC.

Sources: OECD/EU (n.d.[33]), Policy Brief on Women’s Entrepreneurs, OECD/European Union, Paris; OECD, (2013[32]), Mexico: Key Issues and Policies, https://doi.org/10.1787/9789264187030-en.

A good example of the Hidalgo’s innovative approach to entrepreneurship promotion can be found in its Hidalgo Emprende (Entrepreneurial Hidalgo) strategy. Hidalgo Emprende has been established with the aim of mapping out and linking all the relevant actors of Hidalgo’s entrepreneurship ecosystem. In this way, a better supply of assistance measures can be offered by the many actors (such as business incubators, accelerators, higher learning institutions, chambers of commerce and related consultancy firms among others) involved in delivering entrepreneurial support services and infrastructure in the state.

Hidalgo Emprende links together the individuals, institutions and organisations that supply advice, training, finance and general assistance to entrepreneurs and their businesses. This helps avoid the isolated delivery of institutional assistance and services to the different potential users and participants within Hidalgo’s entrepreneurship ecosystem. Such a co-ordinated support framework also helps to avoid duplications and inefficiencies as well as encourage better communication and the transfer of information relative to good practices and innovative methods that can be repeated by others in the network.

Hidalgo Emprende’s approach to entrepreneurship support is at the vanguard as it deliberately focuses on the person rather than the business plan. This is good for the effective development of local entrepreneurial talent since entrepreneurship is not a one-off event. Studies report that between one-third and one-half of business creators have had previous entrepreneurial experience (e.g. Sarasvathy, Menon and Kuechle (2013[34]) and Westhead and Wright (2015[35]). It has been found that individuals with past entrepreneurial experience, even informal entrepreneurial experience, tend to run ever more successful, innovative and internationally-oriented businesses over time (McGrath, 1999[36]; Ucbasaran, Westhead and Wright, 2009[37]; Vaillant and Lafuente, 2018[38]). This is due to the fact that the capabilities and know-how necessary to run a business have a predominantly experimental nature. Therefore, the fact that Hidalgo Emprende’s approach to entrepreneurship promotion focuses on the person instead of the venture allows it to develop successful entrepreneurial careers consisting of a multitude of ever-improving ventures, instead of one-off projects.

…but there is a need to be more strategic and better align the existing elements of the entrepreneurial policy

The entrepreneurial support policy advanced by Hidalgo’s state administration should better align existing local programmes. A more strategic view will help them make better use of federal programmes and foster better co-ordination synergies among all levels of government. There seems to be an unbalanced approach to entrepreneurship policy as an instrument to achieve broader socio-economic goals and as an element in the science and technology priorities.

Hidalgo’s network of business incubators risks over-focusing on high-impact businesses that prioritise high-technology ventures. Hidalgo should avoid skewing its entrepreneurial policy on either “high-impact” entrepreneurship or sector-specific entrepreneurship. Such policy orientation might lead to sub-optimal outcomes since it excludes many potential novice entrepreneurs that start with modest firms, gain entrepreneurship specific experience and then later move towards more complex ventures that optimised this accumulated experiential business know-how. Focusing largely on what is deemed as high-impact or technological entrepreneurship often sets the bar too high for novice entrepreneurs and is equivalent to placing barriers to entry to an entrepreneurial career for many who could potentially develop to becoming “quality” entrepreneurs in the future. In fact, empirical evidence in OECD countries shows that fast-growing new firms are not necessarily only in technology- or knowledge-based sectors (although prominent) and can be found in both manufacturing and services (OECD, 2013[39]).

What is meant by quality entrepreneurship is businesses with some innovative element. These will not necessarily be only among the entrepreneurs that are human capital intensive but encompass a broader idea of entrepreneurship. An effective solution is a two-track system with an intensive track for growth-potential businesses (more likely but not exclusively high human capital and technology) and a less cost-intensive track for other entrepreneurs. This encourages a vision where businesses with growth potential span other sectors than high technology (OECD, 2013[39]).

It is important for the state’s policy to capitalise on the learning benefits of past entrepreneurial experience, even though the experience has not been successful. It should be acknowledged that business failure does not equate to individual failure and that entrepreneurial experience no matter the industry or degree of formality equates to valuable entrepreneurial learning and better entrepreneurial talent. In a context of complex economic and institutional conditions as well as past economic stagnation such as Hidalgo, business failures are not only caused by entrepreneurs’ mistakes, but mostly by exogenous factors that indiscriminately affect business performance. Policy should encourage entrepreneurs to re-enter entrepreneurship and continue their entrepreneurial career no matter the outcome of their past entrepreneurial experience, through awareness and mentorship programmes within the current institutional framework.

Hidalgo Emprende’s approach to entrepreneurship together with the soft assistance measures put in place by the IHCE are a step in the right direction towards “quality” entrepreneurship described above and to capitalising with previous entrepreneurship activities.

Considering the high levels of informality in Hidalgo and the preponderance of microfirms in Mexico, there is a gap in Hidalgo’s entrepreneurial policy for these types of firms. Policies tailored for microfirms are particularly important for the reduction of informality. Within the current framework of “pon tu negocio, yo te apoyo” there are few financing options for informal microfirms that seek to formalise their business, there is only the “Mi Primer Crédito” (My first credit) scheme. However, this scheme is insufficient to service the number of informal businesses in Hidalgo (see the section below on mitigating informal business activities).

Overall, what the state government is lacking is a strategic view for entrepreneurship. This would foster better co-ordination among the existing elements of the entrepreneurial ecosystem. The strategic vision should encourage the creation of strong linkages between the financing schemes, the work of local business incubators (mostly linked with higher learning and research institutions) and the soft assistance programmes provided by the IHCE. Joint collaboration can facilitate the identification of quality entrepreneurship as well as gaps and imbalances that can be addressed. The strategic view can better integrate the socio-economic dimension of entrepreneurship and the science and technology priorities established in the State Development Plan.

A better co-ordination strategy among the state level entrepreneurship programmes will also improve the co-ordination with the local and federal levels of government. The institutional structure of the National Entrepreneur Fund creates incentives for strong intermediaries that can make the credits at the local level available. A simplification of the National Entrepreneur Fund’s process would make it more efficient. However, it can still be a useful tool for local entrepreneurs. As seen in the example of Querétaro, this fund can be instrumental in fostering linkages among local SMEs and the new FDI.

In order to exploit the multi-functionality of entrepreneurship, especially if the state is to create positive synergies with its innovation policy, Hidalgo should consider the following:

  • Promote the presence of entrepreneurial drive that is capable and willing to take controlled risks by implementing innovative business processes, products and strategies.

  • Research and higher learning institutions must be sufficiently agile to facilitate collaboration with entrepreneurs and their ventures. In addition, universities should be encouraged to promote graduate entrepreneurship. Although university business incubators already exist, they should be encouraged to organise business plan competitions and incorporate entrepreneurship as part of the curricula.

  • Foster a market perspective from the very beginning of the research and development process. For innovation to be valuable from an entrepreneurial point of view, it must be technically feasible, socially (market) desirable and economically viable. Whereas the scientists and engineers that work for research centres tend to take the first criterion into consideration, they are generally not as concerned by the remaining two criteria: desirability and viability. The collaboration of experienced entrepreneurs within the innovation process from its inception allows for innovations that are more easily transferable and compatible as a business opportunity.

Some bottlenecks exist that limit knowledge transfer. One of the main obstacles limiting innovation and knowledge transfer in Hidalgo is the lack of linkages between business and knowledge centres, especially universities (Secretaría de Economía). The regulatory framework imposed on universities is said to be partly responsible for establishing constraints that discourage early collaboration with local SMEs in areas of research and development.

The strategic thinking of both institutions and businesses in Hidalgo is also accused of often being too driven by short-term results to lead them towards longer-term research and development collaborations. Similarly, local businesses in Hidalgo, notable micro- and small businesses, usually do not have the financial or human capital necessary to effectively contribute to an innovation development and transfer process. The State Development Plan proposes many measures to help palliate these deficiencies; however, until now, the national and state public resources towards the process has been described as insufficient.

Innovation

Innovation is today a major driving force for economic growth across OECD countries. Furthermore, the speed of innovation generation is constantly increasing, making innovation a basic requirement for competitiveness. OECD economies that are not conducive of innovativeness have little chance of economic prosperity in the knowledge-based activities.

In Mexico, it has been found that there is a positive relationship between innovation, GVC integration and productivity levels (OECD, 2017[2]). Mexico as a whole has been able to catch up with the OECD average in terms of R&D expenditure, standing above 0.6% of GDP (OECD, 2017[2]). The country’s objectives are to reach 1% of GDP in the near future. The federal government’s Innovation Development Programme 2013-18 and Special Programme for Science, Technology and Innovation 2014-18 (PECITI) has had much to do with these results.

Hidalgo’s administration has set innovation as a transversal policy…

The innovation performance of Hidalgo’s industry has been lagging behind, without experiencing much of Mexico’s increased R&D expenditure. The reason for this largely rests on its industrial structure. The current Hidalgo’s administration has set a series of initiatives that aim to remedy this deficit in R&D investment in its State Development Plan 2016-22. The promotion of Hidalgo’s science, technology and innovation has been set as a transversal axis within the State Development Plan.

Specifically, Hidalgo’s state Development Plan aims to “consolidate a knowledge society and economy in the state of Hidalgo, making scientific, technological and innovation development the basis of its sustainable economic and social progress.” In this sense, the transversal strategies of science, technology and innovation are:

  • CTI1. Increase the effectiveness, closeness and transparency in government management through the development of knowledge, technology and innovations that contribute to the digitalisation of the State Government and the municipalities.

  • CTI2. Consolidate a solid, dynamic and diverse economy based on science, technology and innovation that generates sustainable development in the productive sectors and activities of the state and contributes to the social and economic well-being of the Hidalgo population.

  • CTI3. Consolidate a knowledge society through the creation of scientific and technological capabilities that promote a comprehensive and balanced development of all regions and industries of the state.

  • CTI4. Generate the conditions of peace, security and governability necessary for economic and social development through scientific research, technological development and innovation.

  • CTI5. Promote sustainable development through the generation and use of knowledge for the proper and responsible use of natural resources.

Similarly, Hidalgo’s policy aims to create an ecosystem conducive to innovation and high-impact entrepreneurship, by strengthening the technology park network, talent management, scientific capabilities and state technologies according to the challenges and opportunities of the global economy. The Council of Science, Technology and Innovation of Hidalgo (Citnova) is the body in charge of promoting the development of science and technology in the state by increasing the technology infrastructure and supporting students to either pursue a higher education programme (PHD) or join the labour market. It also channels resources from the National Council for Science and Technology (CONACYT) to deliver scholarships for higher education.

The state has technology infrastructure but it can be further expanded. Hidalgo has three science and technology parks: Pachuca City of Knowledge and Culture; the Scientific and Technological Park of Hidalgo in San Agustín Tlaxiaca (hosts the Citnova); and the Center of Technology and Business in Ciudad Sahagún. Pachuca City of Knowledge, for instance, concentrates universities, science and technology-intensive companies linked to research, development and innovation centres.

The state has in total 13 centres of research and development, which is low compared to similar states such as Morelos (44 research centres). In 2015, the state ranked 30th (among 32 states) in the indicator of research centres per 100 000 inhabitants (Government of Hidalgo, 2016[40]).

…but Hidalgo’s innovation policy requires a holistic approach with a broader scope

Hidalgo’s innovation strategy over-focuses on research and development and sciences and technology. However, innovation is more than that. The Oslo Manual recognises four types of innovation: product innovation, process innovation, marketing innovation and organisational innovation (OECD, 2015[41]) (Box 2.9). Innovation requires not only physical capital, skilled workers and research infrastructures but also co-operation between local firms, academia and the public sector. Furthermore, research and innovative activities require institutions that can guarantee property rights and stable social, economic and legal conditions (Segarra-Blasco, Arauzo-Carod and Teruel, 2018[42]).

Experience across OECD countries reveals that a common environment for all the key player is relevant to concentrate ideas in the same geography and enhance local innovativeness (OECD, 2011[43]). The innovative capacity of firms located in a territory is related to their proximity with other innovative firms, local infrastructures that promote R&D activities, and the supply of scientific and business services (Feldman and Florida, 1994[44]). The effects on economic growth stem from the externalities that emerge from the concentration and co-opetition of firms either within a specific industry or by the diversity of complementary industries in a specific area. The mechanisms that foster the economic impact of innovations involve both knowledge spill-overs and the absorptive capacity of the agents involved. The spatial proximity of complementary resources, institutions and activities help promote knowledge flows that, for local firms and entrepreneurs, diminish costs and facilitate converting knowledge into innovation (Gaustella and Van Oort, 2015[45]).

Innovation policy in Hidalgo has defined different strategies and programmes, but it lacks clarity on the tangible goals and intermediate actions as well as the secretary or institutional body that have to be in charge to oversee the policy implementation. The state’s transversal strategy of innovation should also expand its scope for innovation, work out common goals and support different types of innovation including marketing or organisational.

There is hence a need for a strong leadership with a holistic vision to drive the innovation process in Hidalgo. Across the OECD, different structures to lead innovation policy at the local level are used. Some regions have created a regional secretary of innovation (e.g. Morelos in Mexico has a State Secretary for Sciences and Technology), while others conduct the policy through regional development agencies (Belgium or Canada), councils or inter-departmental committees (Spain). Many agencies (such as IWT in Flanders or Scottish Enterprise) have been created by the regions themselves to implement policies (OECD (2017[23]); OECD, (2011[43])). In this sense, Citnova or a state secretary in Hidalgo could take the further lead in conducting innovation policy and facilitating a fertile interaction among different government levels, private sector and academy.

In the particular case of Citnova, it is important to better define its role in the innovation ecosystem and its functions, including mutual goals with other levels of government and an action plan shared by all the stakeholders. It would also be desirable for the council to work closely with the state Secretary of Education and local universities to define its priorities.

Box 2.9. Innovation beyond R&D and sciences and technology

There is growing recognition that innovation encompasses a wide range of activities R&D to organisational changes, training, testing, marketing and design. Innovation is defined as the implementation of a new or significantly improved product (good or service) or process, a new marketing method, or a new organisational method in business practices, workplace organisation or external relations (OECD/Eurostat, 2005[46]). Four types of innovation are defined by the Oslo Manual:

Product innovation: A good or service that is new or significantly improved. This includes significant improvements in technical specifications, components and materials, software, user-friendliness or other functional characteristics.

Process innovation: A new or significantly improved production or delivery method. This includes significant changes in techniques, equipment and/or software.

Marketing innovation: A new marketing method involving significant changes in product design or packaging, product placement, product promotion or pricing.

Organisational innovation: A new organisational method in business practices, workplace organisation or external relations.

By definition, all innovation must contain a degree of novelty. The Oslo Manual distinguishes three types of novelty: an innovation can be new to the firm, new to the market or new to the world. The first concept covers the diffusion of an existing innovation to a firm – the innovation may have already been implemented by other firms, but it is new to the firm. Innovations are new to the market when the firm is the first to introduce the innovation on its market. An innovation is new to the world when the firm is the first to introduce the innovation for all markets and industries. Innovation, thus defined, is clearly a much broader notion than R&D or technological change and is therefore influenced by a wide range of factors, some of which can be influenced by policy.

Sources: OECD (2015[41]), The Innovation Imperative: Contributing to Productivity, Growth and Well-Being, https://doi.org/10.1787/9789264239814-en; OECD/Eurostat (2005[46]), Oslo Manual: Guidelines for Collecting and Interpreting Innovation Data, 3rd Edition, https://doi.org/10.1787/9789264013100-en.

Improving integration of business and academy

The innovation strategy should also aim to involve and empower other stakeholders in building and conducting the policy. A more bottom-up leadership is likely to rally and maintain a more durable and less politicised momentum for the innovation process.

Innovation policy should enable firms to adopt forms of work organisation that support innovation. OECD research indicates that different models of work organisation adopted by SMEs can be related to differences in their innovation performance (OECD, 2015[41]). For instance, SMEs that adopt a “learning organisation” or “discretionary learning” model, associated with teamwork, performance incentives and greater employee discretion in the planning and execution of tasks, have greater levels of product and process innovation and greater inter-organisational co-operation, relative to more traditional and hierarchically organised SMEs (OECD, 2015[41]). IHCE should support SMEs and entrepreneurs with guidance on this process to attain a fertile innovative environment among local business.

Human capital and a skilled workforce are also a cornerstone for innovation and a variety of disciplines and levels of skills can contribute to it. OECD research has shown that participation in innovation varies across types of innovation (OECD, 2015[41]). For instance, graduates in arts and engineering have the same likelihood of participating in product innovation, while engineers are significantly more likely to have a job involving technology innovation research (OECD, 2015[41]). The region’s overall skills supply is comparatively low, with a lower share of research centres and knowledge-intensive business services than neighbouring regions. A key priority to upgrade skills is to further strengthen the structures for knowledge transfer between the region’s universities and research actors and local trade and industry.

Hidalgo should hence implement a triple helix partnership in order to create a wider innovation ecosystem and address the skills needed in the workforce. This type of partnership should also foster a demand-led approach to innovative projects from the private sector (involving different levels of firms). It means that the private sector can define the skills needed to develop an academy as well as design and provide training programmes. It is important to ensure this approach leads to an open-innovation model where innovative firms and research centres can share ideas within the same environment. The innovation system in Brainport in the Netherlands can guide the effort of Hidalgo to create this partnership and spur innovation through a collaborative work among stakeholders (Box 2.10).

Innovation should be also viewed as a mechanism to decrease inequalities in the state by tackling the problem of “dual economies” where innovative and technologically advanced firms coexist with traditional and low productive sectors. Supporting innovation in established SMEs especially in the northern areas can foster inclusive growth by reducing productivity gaps and wage gaps between small and large companies. Inclusive innovation policies address this problem by:

  • Facilitating their access to technologies or organisational innovations created elsewhere that could be useful in increasing their productivity.

  • Promoting small-scale innovations in less innovative sectors, particularly encouraging traditional industries to undertake R&D projects.

  • Supporting SMEs from more disadvantaged groups to overcome barriers.

For a regional innovation system, civil society should be perceived as a producer and user of knowledge, thus the interests of the local population should be represented and different dimensions of well-being taken into account in the programme design and implementation (OECD, 2017[23]). Hidalgo should spread knowledge to municipalities about its current innovation policies and strategic sectors in an effort to mobilise not only key actors from civil society but also all governmental actors of the state, particularly those in rural and indigenous communities. Connecting these communities to the state’s strategic goals will be critical for inclusive growth.

Considering the government is a critical provider and regulator of public services of which marginalised communities are often excluded from inclusive innovation will also require a degree of social innovation. For example, to carry out the Sao Francisco national project in Brazil that would bring potable water to 12 million people, civil society organisations were involved in the project’s social and environmental programmes and decided jointly on social issues. As a result, citizens have access to health and education services and technical assistance to develop irrigated crops on their land (OECD, 2015[47]).

Box 2.10. Promoting innovation systems

The case of Brainport Development in Eindhoven (Netherlands)

Brainport Eindhoven Region is the industrial high-tech heart of the Netherlands, covering Eindhoven and 20 surrounding municipalities, and is part of the South East-Netherlands (ZON) region. Industrial activity in the region ranges from the manufacturing of complex machines and systems, semiconductor industry to embedded systems for automotive to advanced medical systems and design.

Innovation in the region was previously based on closed organisational forms and mainly driven by Philips. The company’s loss of international competitiveness drove it to establish the first knowledge campus and transitioned from a closed model of innovation into an open model by stimulating strong involvement of the private sector.

The innovation system of Brainport is to an important extent business-driven, powered by entrepreneurial leadership and strong collaboration between industry, knowledge institutes and government in the triple helix and ample participative involvement of civil society.

Besides collaboration in the triple helix, its governance depends on how the national, the regional and the local governments co-operate and interact, and how Brainport connects to and collaborates with other regions (domestically and internationally). The most important innovation policy instrument, both in funding size and in popularity, is the national WBSO scheme for a corporate tax deduction of R&D expenditures.

The project management approach consists of a large number of bottom-up initiatives with external project owners. Brainport Development invites the involved firms or knowledge institutes to take ownership of initiatives and projects that are being carried out.

Brainport Development was declared the Intelligent Community of the Year 2011 out of more than 400 participants and won the Eurocities Award in 2010 in the “co-operation” category, for co-operation among companies, knowledge institutions and government.

Source: OECD (2015[47]), Innovation-driven Growth in Regions: The Role of Smart Specialisation, https://www.oecd.org/innovation/inno/smart-specialisation.pdf.

Mitigating informal business activities

The informal economy is significant in Hidalgo (see Chapter 1) and is composed of informality in business and employment. Both informal economic units and informal employment represent related but distinct challenges that authorities must get under control in order to improve the development and growth opportunities for Hidalgo’s economy. This section focuses on the informal business unit in Hidalgo and the ways in which the public administration can reduce its presence in the state since informal employment is addressed Chapter 1.

Informal businesses represent over 85% of all economic entities active in Hidalgo (Baez-Morales, 2015[48]). This makes Hidalgo amongst the 5th most informal economies of all Mexican states (Baez-Morales, 2015[48]). Despite several reports that have highlighted the problem of business informality in Mexico (INEGI, 2014[49]; INEGI, 2015[50]), the phenomenon has been found to have increased in importance over the last decade (Baez-Morales, 2015[48]). The informal economy was estimated at 25% of Mexico’s GDP in 2012 (INEGI, 2014[49]).

As explained in Chapter 1, a considerable dimension of informality in Hidalgo is related to structural factors such as poverty and is mostly reflected through economic activities like subsistence agriculture. Most of these structural factors should be addressed in co-ordination with federal policies and within a long-run framework. However, there are informal workers and businesses that belong to the induced/voluntary category that can receive further attention from the state of Hidalgo (Chapter 1). In that sense, there are instances where an important component of informality is related to the rational choices of firms to remain informal based on the poor cost-benefit analysis. Workers and businesses in this group have relatively high levels of education and qualifications thus their inclusion in the formal sector through targeted policies can translate into productivity gains for the economy. Targeting the cost of formalisation to both workers and firms, and the limits in the availability of jobs are common policies that contribute to reduce informality (Oviedo, 2009[51]).

Informal business, economic or production units are often difficult to define, and therefore to delimit and measure. There is no single kind of business informality, and, therefore, it is plausible to say that there are different types and degrees of informality. Informal business units can, however, be split into three general categories which are all found in Hidalgo (Baez-Morales, 2015[48]). First, the bulk of informal economic units is made up by the self-employed. This category may overlap with informal employment but is not necessarily always the case. Artisans and service providers may find opportunities in supplying their goods and services without formalising their activity. It can be their primary source of revenue or a complementary activity to supplement formal employment. Second, there are informal business units that are unregistered firms and employers. These firms operate informally and hire unregistered labour to carry out their operations. Finally, the third common form of the informal business unit comes from market-based legal production of goods and services that is deliberately concealed from public authorities. These are formal private or public organisations that undertake some of their operations informally, where both formal and informal labour can be used in the process.

The potential long-term growth benefits of formality are not often perceived by firms who do see the short-term advantages of informality (higher earnings, greater flexibility, and general satisfaction). Furthermore, the benefits of formality can be less apparent in the case of remote areas where infrastructure and public service provision are poor, and where informal protection networks may substitute for the state (de la Torre and Rey, 2016[52]). This is in many ways what is observed amongst indigenous communities of northern Hidalgo. In these areas, formal contracts may not be perceived to provide good enough services to be worth the contributions. But informality in Hidalgo is not exclusive to the north of the state and is also typical of the small and microfirms in the urban areas in the south of Hidalgo. There are economic inefficiencies associated with the use of public goods by those (informal firms) who do not pay for them.

The high levels of informality in Hidalgo have a direct impact over many aspects of the state’s socio-economic well-being. High informality affects Hidalgo’s economic growth by engendering a systematic under-optimisation of local human and business capital. Similarly, informality results in underinvestment in a business capacity and opportunity development, which perpetuates economic hardship into the future. Informality also impacts social protections of workers, consumers and citizens in general. The excess of informality in the economy, directly and indirectly, impacts the government revenue generation ability, often impacting local budgets and the ability to provide local proximity services. And finally, tolerance of informality has a socio-cultural impact, where local norms and attitudes towards the rule of law and respect for institutions are affected. This last aspect may be much more significant than it seems for Hidalgo.

The main strategic objective of the sectorial economic plan of Hidalgo is to create more and better jobs to foster better living conditions for families in Hidalgo. It is seen as both an economic and social policy goal, which is supported by the four strategic pillars of the sectorial plan. It ultimately aims to create better quality jobs that contribute to informality reduction.

In Mexico, the sectorial plan has identified that microfirms are the ones that have a lower access to financing (10%), below the access of small and medium enterprises (39.8% and 27.8% respectively). In Hidalgo, improving access to financing for SMEs is a relevant policy considered in the sectorial plan. Within the “pon tu negocio, yo te apoyo” framework, the credit scheme “Mi primer crédito” (My first credit) is tailored for informal businesses that want to transition to the formal economy. However, considering the huge number of microfirms, there is thus an imbalanced availability for funds targeted to microfirms in the country, more can be done to create incentives for formalisation. Hidalgo could benefit from the experience of good practices at the federal level in Mexico and the experience of other states for financing microfirms (see Box 2.11). These experiences show that training and funds for microfirms can be more effective by targeting associations of agglomerated microfirms (particularly from traditional sectors). A strategy such as this can also reduce the risks of fragmentation of funds.

Box 2.11. Financing and supporting microfirms in Mexico

Modernisation and Integration (Mi) programmes

The federal government in Mexico has carried out programmes to finance microfirms. An example of good practice for this kind of policies is the Modernisation and Integration (Mi) programmes. It aims to help microfirms in traditional sectors to modernise their production processes and integrate into markets. The programme encourages firms to migrate from the informal to the formal sector. To be eligible, enterprises have to register, showing that they have traded for six months.

The programme is structured in 4 stages: i) promotion to attract microenterprises; ii) organisation of the microenterprises into training groups of up to 20 for modularising training; iii) provision of consulting services to smaller groups of 5-8 enterprises and 6 hours of customised one-on-one consulting; and iv) access to financing for modernisation and improvements (particularly for the acquisition of new equipment).

The following are some of the Mi programmes:

  • Mi Tortilla: aims to work with 8 000 tortilla makers in 4 regions and is dealing with approximately 1 000 participants each year.

  • Mi México Paradores Turísticos: seeks to promote microenterprise development in the area of touristic villas. The Marquesa National Park was the first location for the roll-out of this project.

  • Mi Estética: has been developed in co-operation with the Mexican Chamber of Physical Beauty to advise beauty shops on technical subjects and implement working programmes for better management.

Manos de Morelos

In addition to these federal programmes, there have also been interesting local initiatives to promote the formalisation of microenterprises, such as Manos de Morelos. Manos de Morelos is a crafts association formed and supported through a combination of state and federal funds, bringing together artisans from around the state. After a craft fair organised by the state in 2008, artisans organised themselves into a group. The state has continued to support the organisation through basic training to association members; offered consulting assistance to increase productivity; provided advice on exporting goods; and with state funding purchased new equipment and opened a permanent gallery for their work.

The benefits of institutionalising what is typically a fragmented group of unrelated producers go beyond better production and preventing fragmentation of resources. They have developed a recognisable brand that distinguishes local work and to which notions of quality and tradition can be attached. Equally, co-operation creates learning opportunities, artisans share new ways of producing, as well as new designs, and these innovations can command higher prices.

Source: OECD (2013[32]), Mexico: Key Issues and Policies, https://doi.org/10.1787/9789264187030-en.

There is no quick fix for this problem and solutions should be aligned and supported by federal policy. Full compliance may not be the ideal policy objective on the reduction of informality since structural factors may involve long time to be solved, the costs of enforcement can by high and there might be adverse effects on a rapid transition for many informal enterprises. In this regard, international experience suggests that strengthening enforcement works best when the appropriate incentives to formalise are created so that informal firms have a viable transition path from informality into formality (Box 2.12). To do so, fighting informality should be at the heart of a co-ordinated action plan in the state with shared-responsibilities among state secretaries and levels of government. Together with a policy that creates incentives for formalisation, Hidalgo should:

  • Build capacities to enforce regulation. It should include sanctions to guarantee the regulation enforcement and develop clear policies in the state.

  • Enhance programmes to encourage social mobility, expand tertiary education and move people away from subsistence agriculture. Some of these social programmes should be supported and in line with the federal government.

  • Enhance co-ordination within the structure of incentives at the local and federal level.

  • At the same time, it is important that Hidalgo’s public-sector lead by example by eliminating informality within public administrations and public procurement (see Chapter 4).

Box 2.12. Spanish reforms to combat informality

Spain is a good example of a country that has carried out extensive reforms that led to a dramatic increase in tax collection (the ratio of tax collection to GDP doubled) and a significant reduction in informal employment. The Spanish reform package included five crucial elements: i) it reduced the costs of being formal; ii) it improved its audit technology and increased enforcement; ii) it improved its communications strategy; iv) it modernised administrative processes and functions; v) it provided basic social protection for all.

Source: Oviedo, A. (2009[51]), Economic Informality: Causes, Costs, and Policies - A Literature Survey of International Experience, World Bank Country Economic Memorandum (CEM), Washington.

Establishing the public-private partnerships framework in Hidalgo

Public-private partnerships (PPPs) are long-term agreements between the government and a private partner whereby the private partner delivers and funds public services using a capital asset, sharing the associated risks (OECD, 2012[53]). OECD governments and the private sector see PPPs as an effective mechanism to deliver public services both with regards to infrastructure assets (such as bridges, roads) and social assets (such as hospitals, utilities, prisons). PPPs can provide much-needed savings for the public sector and a fair deal for the private sector by sharing the associated risk to the project and combining private sector innovation and financing. However, experiences from OECD countries show that it can be difficult to get value for money out of PPPs if government agencies are not equipped to manage them effectively. Moreover, PPPs can obscure real spending and reduce the transparency of government actions by using off-budget financing (OECD, 2012[53]).

PPP investments tend to be especially important when it comes to improving the innovation system of a territory. The presence of strong externalities and spill-overs makes such investments of public interest, but also bring private sector beneficiaries who are willing to participate in order to make these projects a reality. Having a co-ordinated vision is a key aspect of successfully driving and implementing a local innovation system.

Public-private partnerships (PPP) are still uncommon in Hidalgo. In Hidalgo, public-private “co-responsibility” is identified as a key component of the economic development strategy. Such shared projects have mostly been used when it comes to alternative energy and waste treatment as well as roadwork maintenance projects. Three examples stand out:

  • The Tepojaco Renewable Energy Project: This project consists in the production of electrical energy from household and industrial residues. The energy production plant when completed will process on a daily basis approximately 2 000 tons of solid urban waste in order to produce an estimated 55 MW of electrical energy.

  • The Tula-Tepeji Regional Solid Waste Treatment Centre and the Pachuca Regional Solid Waste Treatment Centre: Through PPP investments and management, these two independent projects plan to generate electrical energy from solid urban waste and contribute to reusing and recycling solid waste with caloric value so that it can be commercialised as fuel.

  • PPP Program for the Conservation of the Federal Road Network 2017-27 (Pirámides-Tulacinga-Pachuca): This project, which involves public and private participation, was launched by the Mexican federal government and stretches across the states of Mexico and Hidalgo.

There are several other examples of close public-private collaboration, especially when it comes to industrial development efforts, such as the Tula intermodal and dry-port complex, or Hidalgo’s Special Economic Zone that is being proposed. But, although close collaboration is important, it does not represent a PPP joint engagement. Together with co-ordination/collaboration fora, PPPs typically do not include service contracts or turnkey construction contracts, which are categorised as public procurement projects. Nor is the privatisation of utilities where there is a limited ongoing role for the public sector considered as PPPs.

In addition, academia, business, and the government are already linked by the Council of Science, Technology and Innovation of Hidalgo, that promotes interaction and collaboration on joint projects. These include, among others, some technology development and research initiatives. There are also construction projects of areas for networking and training in the Scientific and Technological Park of Hidalgo. But these initiatives are greatly insufficient. They do not exactly fit the definition of PPP agreements as investments and management responsibilities are not equally shared.

To encourage the greater use of PPP arrangements in the state, the government of Hidalgo approved in 2018 a new PPP regulation which brings important benefits in terms of investments. The Law for the Promotion of Private Investment in Public Projects is meant to change the perspective towards PPP arrangements; from a regulatory stance to an incentivising approach on PPP projects. The law proposes some changes with respect to the current law framework in this regard (Table 2.5).

The new legislation does away with the previous PPP law of 2011 that did not include the possibility of private agents becoming the promoters of PPP proposals. The new order implies a permanent call to private agents to apply their creativity and leadership towards the elaboration of projects that favour the strategic objectives of Hidalgo's development.

The law offers an overall comprehensive legislative structure and application mechanism that helps to promote PPP projects and make their implementation more agile. Hidalgo’s new PPP legislation includes minor modifications to the Public Debt Law of the State of Hidalgo to adjust its content to the federal norms in matters of financial discipline and accounting harmonisation.

Table 2.5. Characteristics of the draft Law for the Promotion of Private Investment in Public Projects of Hidalgo

Characteristics (selected)

2011 Law on PPP

Law

Formulation of project proposals

Public entity

Private agent

Responsible for operation and maintenance costs

Private agent

Private agent

Responsible for debt, if financing is required

Private agent

Private agent

Payment of studies, opinions and executive projects

Public entity and private agent

Private agent

Acquisition of real estate, if required

Public entity

Private agent (in some cases)

Private agent

Responsible for the success or failure of the project

Public entity (design)

Private agent (operation)

Private agent

Sources: Government of the State of Hidalgo (2017[54]), Law for the Promotion of Private Investment in Public Projects of the State of Hidalgo.

Making the most of the draft law of PPPs

Although the PPPs draft legislation in Hidalgo goes in the right direction to provide a sound legal PPP framework, the state should closely consider the OECD principles for public governance of public-private partnership. These principles can guide Hidalgo to ensure added value from PPP projects, define clear institutional roles and prevent ill-designed projects from going forward (see Box 2.13).

Box 2.13. OECD Principles for Public Governance of Public-Private Partnership

The interest in PPPs has been growing in recent years and the need for fiscal restraint in most OECD member countries is expected to further increase their usage. This presents policymakers with particular challenges that should be met with prudent institutional answers

The OECD Principles for Public Governance of Public-Private Partnerships provide concrete guidance to policymakers on how to make sure that public-private partnerships (PPP) represent value for money for the public sector.

They provide guidance on when a PPP is relevant – e.g. not for projects with rapidly changing technology such as IT, but possibly for well-known generic technology such as roads.

  1. 1. Public-private partnerships require active consultation and engagement with stakeholders: PPPs may be used to introduce a more private-sector approach to service delivery in sectors that have previously been a part of the government.

  2. 2. Key institutional roles and responsibilities should be maintained: a sound procurement process; implementing the specific PPP; fiscal and budgeting issues; auditing of the PPP; rule monitoring and enforcement.

  3. 3. Ensure that all significant regulation affecting the operation of public-private partnerships is clear, transparent and enforced. Red tape should be minimised and new and existing regulations should be carefully evaluated.

  4. 4. All investment projects should be prioritised at the senior political level. As there are many competing investment priorities, it is the responsibility of government to define and pursue strategic goals. The decision to invest should be separate from how to procure and finance the project.

  5. 5. Carefully investigate which investment method is likely to yield most value for money. A procurement option pre-test should enable the government to decide on whether it is prudent to investigate a PPP option further.

  6. 6. Transfer the risks to those that manage them best. This should involve the party for whom it costs the least to prevent the risk from realising, or for whom it costs the least to deal with the consequence of the realised risk.

  7. 7. The procuring authorities should be prepared for the operational phase of the PPPs. Particular care should be taken when switching to the operational phase of the PPP, as the actors on the public side are liable to change.

  8. 8. Value for money should be maintained when renegotiating. Any renegotiation should be made transparently and subject to the ordinary procedures of PPP approval.

  9. 9. Ensure there is sufficient competition in the market by a competitive tender process. Where market operators are few, governments should ensure a level playing field in the tendering process so that non-incumbent operators can enter the market.

  10. 10. Ensure that the project is affordable and the overall investment envelope is sustainable. PPPs are more difficult to integrate with the annual budget process than more ordinary expenditures. This makes affordability assessments particularly important when the project is being prepared.

  11. 11. The project should be treated transparently in the budget process. The budget documentation should disclose all costs and contingent liabilities.

  12. 12. Guard against waste and corruption. The necessary procurement skills and powers should be made available to the relevant authorities.

Source: OECD (2012[53]), Recommendation of the Council on Principles for Public Governance of Public-Private Partnerships, http://www.oecd.org/governance/budgeting/PPP-Recommendation.pdf.

PPPs arrangements tend to be a particularly complex process. Therefore, some specific points may contribute to improving the application of Hidalgo’s Law for the Promotion of Private Investment in Public Projects:

  • Infrastructure projects must be aligned with the strategic plans of the regional or local government. The financing schemes of projects should impact the development plans thus avoiding institutional laziness.

  • There should be a clear strategy around the types of projects financed through PPPs and the regulation of their financing schemes.

  • Real competition is essential to guarantee value for money of the investments. Therefore, direct adjudication of projects should be limited to very specific cases.

  • Real costs, guarantees and liabilities should be fully integrated into the multi-year budgetary planning of the government.

A robust legal PPPs framework also requires a well-aligned and functional institutional environment. PPPs are conducted by different government departments and on various sectors. The development of local capacities across the government to analyse and enforce regulation is hence important to attain a positive economic and social outcome from the PPPs’ projects. To ensure that all secretaries deal properly with PPPs (i.e. in terms of their budget or to avoid over-commitment), some OECD government have created a special unit to manage PPPs. Hidalgo could consider establishing a unit or expert group to co-ordinate levels of government and manage the implementation of PPPs in the state, the example of Victoria in Australia can be used as a guide (Box 2.14).

Another key action is to clearly define the risks involved in PPPs. One of the main added features in the law of Hidalgo is that it transfers more responsibilities to the private agent. This change is welcome since the private agent is generally more efficient to deal with the demand and supply-side operation risk as well as with the construction risk (OECD, 2008[55]). However, following Principle 6, risk should not be transferred to the private partner in all situations. For example, governments cannot transfer to the private sector the risks associated with the responsibilities for maintaining services. Furthermore, risks that are no clearly defined and identified can impose a barrier to find a suitable private partner, at least for an acceptable price for the state. Hidalgo should hence clearly define and identify the risks in the PPPs’ contracts as well as establish clear methods by which risks can be apportioned.

Box 2.14. Partnerships Victoria, a PPP unit in Victoria, Australia

Partnerships Victoria provides the overall policy framework for the Victoria state government in the provision of public services through public-private partnerships. The focus on whole-of-life costing, full consideration of project risks, optimal risk allocation between the public and private sectors, value for money assessment and protecting the public interest are key features of the policy. Approximately 10% of Victoria’s public investments have been pursued through Partnerships Victoria.

Partnerships Victoria is the centre of expertise in the PPP area and its role is to be responsible for the policy framework and to assist with key competency. The primary roles of Partnerships Victoria are to: i) develop policy; ii) play an advisory role in project implementation; and iii) set policy and give advice on contract management. For individual projects, Partnerships Victoria provides commercial expert advice, ensures that policy issues are identified and addressed, monitors budgetary issues, maintains the integrity of its policy framework, and facilitates Treasury approval of good projects.

Overall, Partnerships Victoria has an active role in PPP projects without being the owner but providing policy guidelines and expertise. To improve competency both for the public and the private sector, Partnerships Victoria conducts relevant courses and training. The minister responsible for Partnerships Victoria is the Treasurer, and relevant line ministers are responsible for initiating and implementing actual projects. The project approval process includes four key points where the Treasurer’s approval is necessary for a Partnerships Victoria project to continue to its next phase. These four points are: i) funding approval; ii) approval to invite expression of interest; iii) approval to issue a project brief; and iv) submission of contract management strategy and arrangements. The responsibilities of the Treasury include the approval of funding and having the minister responsible for Partnerships Victoria bring overall budget issues into the project discussion.

Sources: Partnerships Victoria (2018[56]), https://www.dtf.vic.gov.au/infrastructure-investment/public-private-partnerships; OECD (2008[55]), Public-Private Partnerships: In Pursuit of Risk Sharing and Value for Money, https://doi.org/10.1787/9789264046733-en.

Implementing policies to support the competitiveness of Hidalgo

The economic strategy developed by the Hidalgo’s secretary of the economy needs to be well co-ordinated with the activities and strategies of the other ministries in the state to ensure strategies and programmes are well aligned and do not undermine each other. When this is the case, policy complementarity gains are possible (see Box 2.15). Hidalgo’s economic strategy has already made important progress in several areas, but these strategies need to be well co-ordinated with those by other ministries, particularly those responsible for the enabling factors.

Box 2.15. Adding policy complementariness to the State Development Plan

The concept of policy complementarity refers to the mutually reinforcing impact of different actions on a given policy outcome. Policies can be complementary because they support the achievement of a given target from different angles. For example, production development policy, innovation policy and trade policy all support the competitiveness of the national industry. Alternatively, a policy in one domain can reinforce the impact of another policy. Sequencing is also important in policy complementarity. Some policies are best put in place simultaneously. For example, innovation, industrial and trade policies must be synchronised to address the issue of industrial competitiveness from all angles. Other policies realise their synergies in a sequential way. For example, investments in broadband infrastructure need to be followed up with specific policies on access and diffusing those services to the population.

Complementarities between policies can be “latent”, but can be triggered by specific governance arrangements, for example, mechanisms that facilitate co-ordination across levels of government (vertical co-ordination) can help attain complementarity across policies from various levels. Alternatively, they can be induced, by combining different policies through conditionality schemes, or when the complementarities are the result of strategic planning. Employment generation opportunities, for example, can be attached to direct cash transfers to support the inclusion of poor people in production so that they can avoid dependency on income transfers.

Policy complementarities can also be spontaneous when they appear as positive side-effects of independent actions of ministries or bodies.

Source: OECD (2016[14])OECD Territorial Reviews: Peru 2016http://dx.doi.org/10.1787/9789264262904-en.

State development planning: Axis 2 - A Prosperous and Dynamic Hidalgo

The implementation of Hidalgo’s State Development Plan for 2016-222 is necessary for the future prosperity and competitiveness of the state of Hidalgo. The plan defines the core trajectory guiding the direction of public administration.

The regional development plan should be the co-ordinating umbrella that integrates the objectives and strategies of the various ministries to ensure policy responses are adapted to the needs of the territory. Individual objectives and indicators should reinforce each other and be part of common strategic objectives. The current State Development Plan (further discussed in Chapter 4) has too many indicators that could better reinforce each other. Furthermore, the priorities and sequence of the objectives can be further clarified through the short, medium and long term in the State Development Plan. It can help reduce duplications and gains efficiencies through policy-complementarities.

For example, Axis 2 of the State Development Plan 2016-22 – A Prosperous and Dynamic Hidalgo – has the over-arching goal to strengthen and improve the conditions of the state’s economic environment. This includes the infrastructure of innovation and connectivity, economic diversification and legal assurances for conducting business. This is meant to attract talent and investment to Hidalgo. Besides this, the Axis conceives prosperity in a wide sense where economic growth must also be socially inclusive and sustainable.

Axis 2 of the development plan is divided into 5 main lines of action, each with its detailed measures aimed at achieving the set objectives.

  • 2.1 Inclusive economic progress: Contribute to greater inclusive economic growth that reduces income inequality among Hidalgo’s population and guarantees their well-being.

  • 2.2 Dynamic and innovative economic environment: Contribute to the generation of a dynamic and innovative state economic environment that encourages the attraction and retention of talent and productive investment for Hidalgo.

  • 2.3 Articulation and consolidation of existing productive sectors: Consolidate the participation of Hidalgo’s primary, secondary and tertiary sectors in the generation of value added, articulating them in value chains that contribute to the local development as well as the quality of life of Hidalgo’s workers.

  • 2.4 Tourism as a lever for development: Resize tourism as a socially responsible economic activity, which favours the attraction of investments aimed at generating quality infrastructure and services, as well as local and internal market development.

  • 2.5 Modern and productive agriculture: Promote a productive, competitive and sustainable agri-food sector that collaborates with food security and safety. Stimulate greater value-added products, with a business approach in the use of technological innovations guided by the synergy between businesses, research centres, producers and financial institutions to achieve quality products, so as to improve the standard of living of the population dedicated to agricultural production.

Each of the five lines of action has its own measurable quantitative targets relative to the base year set before the implementation of the plan, relative to the end of the plan in 2022, and relative to a longer-term perspective in 2030.

To this, three different transversal strategies add to the actions found within Axis 2 of the State Development Plan: gender strategy, youth protection strategy, and the science, technology and innovation strategy. The action lines of these cross-cutting strategies influence and are integrated into all axes of the development plan. Each action line of the transversal strategies bares their own targets and objectives that add to those included to Axis 2 already mentioned above. Overall, several of these areas can complement each other (e.g. dynamic and innovative economic environment and articulation and consolidation of existing productive sectors) and perhaps should share common objectives and targets.

Whereas the measures needed to reach the set targets and objectives of Axis 2 of the State Development Plan have been well defined in the plan, the distribution of responsibility and allocation of resources over the implementation of each set of measures have yet to be further clarified. For this, the state should create a co-ordination mechanism that can attain complementarities and shared-responsibilities among secretaries. Special cabinets by areas or other forms of joint work can be implemented for this purpose in order to oversee the implementation of each strategic axis (Chapter 4).

An incremental approach to consistency over time

Hidalgo must follow an incremental approach strategy to make the most of FDI investments and ensure consistency of the economic outcomes over time. In such an approach (see Box 2.16), policy purposefully takes short-term decisions to make gains that will serve its longer-run strategy (Vaillant, 2018[57]). It means adopting a real options perspective with a clear strategy where the state’s new economic capabilities (i.e. the economic dynamic generated from the new investments and the efforts in strategic sectors) build upon the existing economic ecosystem and competitive advantages to achieve envisioned long-term goals. In turn, the final strategic goals should be based on consolidating the enabling factor that will sustainably boost the productivity and competitiveness of the state of Hidalgo.

Much in the way that SEDECO has initiated its policy, the implementation of Hidalgo’s economic strategy must continue to think in terms of a strategic incremental policy approach. Before dedicating too many resources and efforts to developing various initiatives in parallel without clarity of how to enhance complementarities among them and the territory, the administration must achieve short-term results that open the doors to capabilities that allow incremental advances. For instance, trying to enhance at once the five strategic sectors (logistics, energy, agro-industry, electric mobility and pharmaceuticals) can divert the attention needed to build upon the existing results such as the new regulations to improve the business ecosystem and recent inflow of foreign investments.

Implementing this strategy means that Hidalgo’s efforts should avoid focusing on the administration’s four factors to increase the state’s competitiveness (cost, quality, innovation and value-creation). Trying to promote competitiveness with these factors can lead to unexpected consequences if they are developed at different speeds. For example, out of these factors, only one (cost) currently has a significant presence in the state (and only in the south). In the absence of the remaining key factors, firms attracted only by the potential cost advantages will unlikely prioritise value creation and knowledge-intensive development.

Box 2.16. A strategic incremental development policy approach

Because of spill-overs and learning effects, it is often more useful to evaluate the collective contribution to wealth and welfare creation of development initiatives than to assess each policy or measure on its own. The policy that fails to produce concrete short-term results may still improve the skills, knowledge or methods of production (McGrath, 1999[36]). Measures may be pursued with the explicit recognition that they are likely to fail as they are viewed as part of an entire portfolio of economic development policy. What matters is that they enhance the territory’s accumulated resource and knowledge base by reducing uncertainty, increasing variety, and expanding the local capability frontier giving access to greater opportunity (Vaillant, 2018[57]).

This strategic incremental approach to territorial development has key posits that are borrowed from the real options’ literature for financial investment (Copeland and Copeland, 2003[58]). Options (policy measures in the case of territorial development) are best valued as part of a “bundle”. This means that policymakers need to visualise a strategic path of subsequent policy moves that form the steps and tactics by which resource and capabilities are gained at every level, gradually opening new opportunities that were previously unattainable (McGrath, 1999[36]).

Sources: McGrath, R. (1999[36]), “Falling forward: Real options reasoning and entrepreneurial failure”, Academy of Management Review, Vol. 24, pp. 13-30; Copeland, T. and T.E. Copeland (2003[58]), Real Options, Revised Edition: A Practitioner's Guide, A.P. Texere Publishing Ltd., New York; Vaillant, Y. and E. Lafuente (2018[38]), “Entrepreneurial experience and the innovativeness of serial entrepreneurs”, Management Decision, pp. 1-24.

The incremental approach also requires concrete measures to evaluate the performance and trajectory of the economic strategy. It involves monitoring that the efforts in the economic strategy produce positive effects on the enabling factor and linking these policy outcomes with budget (Chapter 4). To measure the impact of the economic strategy, Hidalgo needs to establish a benchmark in order to determine the baseline and the pressing needs to target firs.

The comparison of the enabling factors in Hidalgo against its benchmark of TL2 regions can depict the bottlenecks in the state. The comparable benchmark is composed by Mexican and OECD regions with similar initial levels of GDP per capita and initial market in 2003 and share of manufacturing in GVA in 2004 (see a detailed analysis in Chapter 1). Hidalgo experiences a larger gap in the high skill labour force (labour force with secondary and tertiary education), patent activity and connection to broadband. However, the largest gap is found in the low level of patent activity (Figure 2.15).

Following the incremental approach, Hidalgo’s economic policy should initially focus on translating the recent economic outcomes into increasing patent generation in the state. Innovation capacity will allow the state to better internalise the new knowledge and technology coming with the FDI investments. It involves making greater efforts to promote the interaction between business and universities to generate R&D. As discussed in the section of human capital, this stresses again the need for a mechanism to enable joint work between universities and private sector (see the section on human capital).

Figure 2.15. Gap on the Hidalgo’s enabling factors with benchmark regions
Figure 2.15. Gap on the Hidalgo’s enabling factors with benchmark regions

Note: Values above/below 100 indicate the indicator is higher/lower in Hidalgo than in the benchmark group of TL2 regions.

Source: OECD (2018[5])Regional Economy, OECD Regional Statistics (database), http://dx.doi.org/10.1787/a8f15243-en.

Second in the priorities for long-term development should be extending broadband technology across the territory. This is a plan already put in place by the current administration. However, the plan must ensure that people and local infrastructure are prepared to seize the access to digital connectivity.

Therefore, Hidalgo can implement a framework of action to ensure that all segments of the population can benefit from the economic growth generated by more knowledge- and innovation-intensive activities, opportunities to train and upskill, and the exploitation of synergies across sectors. For this framework, the enabling factors can be established as the final goal to attain sustainable regional development grounded in inclusive and environmentally-friendly policies.

The framework needs to be implemented through the right set of policies and government tools so as to effectively attain sustainable inclusive growth. Complementary policies, effective use of governance tools and better co-ordination among different stakeholders and government levels (it will be addressed in depth in Chapter 3 and 4). The framework must also be integrated with a placed-based policy that leverage on the local specificities of the territory such as smart specialisation policy.

A smart specialisation approach for Hidalgo

Smart specialisation is a process of “entrepreneurial discovery” whereby market forces and the private sector discover and produce information about new activities and the government assesses the outcomes and empowers the actors most capable of realising the potential. This can be achieved by further developing currently competitive sectors and investing in the enabling factors, which in turn allow new sectors to flourish.

The smart specialisation strategy has presented a profound structural revolution in the way innovation policies are conceived (Capello and Kroll, 2016[59]). Compared to traditional regional innovation policies, it comprises many innovative aspects (see Box 2.17). First of all, research and development expenditure is no longer the main barometer of innovation activity. A large variety of innovation types beyond simple product innovation are taken into consideration. Process, market as well as business model innovation are now perceived on par, even favoured to product improvements. Smart specialisation aims that entrepreneurial discovery does not find its roots only in high-tech industry activities, but. target general purpose technologies and networks as well.

Box 2.17. Key aspects of smart specialisation

Smart specialisation is focused on helping entrepreneurs identify their knowledge-based strengths at the regional level and in a more exploratory approach in which public decision makers listen to market signals using a range of assessment tools (e.g. SWOT analysis, surveys) and mechanisms such as public-private partnerships, technology foresight and road mapping. The success of smart specialisation policy measures is closely dependent on the capacity of regional government institutions to act as co-ordinators or facilitators of the intervention.

The OECD has identified the following key messages to promote smart specialisation:

Policies for entrepreneurial discovery. The smart specialisation approach calls for an “entrepreneurial selection” of market opportunities (e.g. to minimise failures and to avoid ill-informed policy decisions). While successful companies will constitute the new specialisation of the country/region (self-discovery), the role for policy is to develop a flexible strategy focusing on measurable intermediate goals, identifying bottlenecks and market failures and ensuring feed-back into policy learning processes. The approach includes incentives to strengthen entrepreneurship and encourage agglomeration.

Promoting general purpose technology platforms and networks. Given the range of applications of general-purpose technologies, technology platforms involving public and private actors but also standard-setting organisations can help increase productivity in existing sectors and help identify sectors in which to concentrate resources.

Diagnostic and indicator-based tools and infrastructure. Smart specialisation requires regions and countries to maintain an infrastructure and indicator base to monitor and evaluate performance and policies.

Strategic governance for smart specialisation. Good governance and the development of local capabilities are key to identifying local strengths; aligning policy actions, building critical mass, developing a vision and implementing a sound strategy.

Openness to other regions. The specialisation strategy of regions should take into account that other regions are also involved in knowledge creating activities and that duplication might lead to lower effectiveness and finally failure. Hence, co-operation with other regions with complementary capabilities and strategies is important.

Source: OECD (2016[14])OECD Territorial Reviews: Peru 2016http://dx.doi.org/10.1787/9789264262904-en.

The smart specialisation strategy also rejects the common norm of “picking winners” on an industrial basis (Capello and Kroll, 2016[59]). The strategy calls for “entrepreneurial discovery” out of a public-private partnership that adopts a bottom-up approach based on the self-discovery of entrepreneurial capability. It is thus required an exercise to identify local strengths and relevant policy actions to be aligned with these local specificities.

This strategy advocates a consistent match between investments in knowledge and human capital and the present industrial and technological vocations of territories. It, therefore, favours a policy that fosters growth in a manner that is realistic and adapted to the context concerned and can be explicitly applied in the regional context. As such, a collaborative rather than competitive perception of neighbouring regions is to be adopted, where policy takes into consideration other regions to avoid duplication and to maximise complementarities

A smart specialisation approach to the current economic strategy of Hidalgo

Hidalgo’s Economic Development Strategy and its State Development Plan have both characteristics of a smart specialisation strategy. The co-ordination process of the economic strategy conducted by SEDECO, supported municipalities in the definition of smart specialisation strategies, it is a step in the right direction to enable scientific, technological and innovation progress based on the economic vocations and capabilities of each municipality.

However, some aspects of the economic strategy can be improved to effectively link the efforts of establishing new strategic sectors, attracting big foreign firms and linking them with the local assets and needs.

The four main pillars guiding the state’s economic strategy (conductive business environment, strengthen existing economic activity, promote new investments and promote entrepreneurship) should be better integrated with a territorial development policy. It involves adapting the economic strategy to the specificities affecting the many distinctive realities in the state and its different communities.

The entrepreneurial discovery process means that Hidalgo should not focus on prioritising the specific four strategic sectors in its economic strategy. In smart specialisation, prioritisation is no longer the exclusive role of the state planner (top-down) but involves an interactive process in which the private sector is discovering and producing information about new activities and the government provides conditions for the search to happen (OECD, 2013[60]).

Therefore, more than targeting the five strategic sectors (energy, agro-industry, electric mobility and pharmaceutical), the administration should target activities to create an enabling environment. These activities can be tied to specific technologies or the technology mix, to specific capabilities, natural assets, etc. In general, what is discovered as future priorities are those activities where innovative projects complement existing productive assets. In this case, the example of Lapland with the development of activities around its mining industry or Andalucia with the classic guitar industry can guide Hidalgo (Box 2.18).

Box 2.18. Examples of bottom-up initiatives to foster entrepreneurial discovery

Kemi Digipolis: Kemi, Lapland (Finland)

Lapland is a sparsely populated region in northern Finland with a specialisation in mining. Lapland is a good case of how to build partnerships to promote innovation in this regional context. Kemi Digipolis originated as a science park in 1986 to connect ICT capability at the local university, Kemi-Tornio University of Applied Science, to the significant number of industrial firms in the vicinity. Today the park hosts SMEs in the areas of industrial services, electronics, information technology, environmental technology, corporate and training services and low-temperature and winter technology.

Digipolis has expanded well beyond the traditional role of a university science park. It is now exploring opportunities to connect large local firms engaged in mining, forestry and steel production and their local supply chains in possibly shared environmental concerns with energy efficiency, recycling and generating new by-products. In addition, it is engaged in cluster promotion and development in the Lapland region, in helping local firms penetrate export markets in Scandinavia and in working with municipalities to support business expansion. It also has a conference hosting capacity and provides office management services to firms in the science park.

The Digipolis example identifies the importance of developing links between academic expertise and local firms, but it also shows that in small remote places it is not possible to have as specialised an entity as a conventional science park. Because of the lack of complementary institutions. Digipolis had to broaden the types of things it does to provide a more complete array of support services. Arguably, this may create a more integrated package than might be the case in a large metropolitan area where different entities perform more specialised functions. However, it may also be the case that there are too few resources available to be very good at all in the things Digipolis is currently engaged in. In reality, there is no choice in rural regions but to adopt the Digipolis approach.

Sources: OECD (2012[61])OECD Territorial Reviews: Skåne, Sweden 2012https://doi.org/10.1787/9789264177741-en; OECD (2017[62])OECD Territorial Reviews: Northern Sparsely Populated Areashttps://doi.org/10.1787/9789264268234-en.

Alicante (Spain)

In Alicante a civil society organisation has emerged proposing projects focused on radical specialisation where a discovery is followed by a firm compromise of a critical mass of citizens who become actors then protagonists, followed by authors then co-authors. As an example, one of these projects is focused on the development of a classic guitar culture, where at least ten closely-linked sub-projects have emerged, proposing different business opportunities related to education, tourism, performance, guitar building, museum, recording, research or publishing.

This citizen and business-driven initiative is the consequence of the severe impact of the crisis in Spain, which has brought to a collapse of the traditional business models, highly subsidised in the past: tourism, construction and industrial production.

These citizen- and business-driven initiatives propose a radical change of paradigm, where public investment is located only where a consolidated project is already in place, strictly following a low-cost philosophy. Projects are structured following a “neuronal” approach, where different private and business stakeholders assume direct responsibility on specific sub-projects and a platform provides full information on the development of the different initiatives. Results are measured upon the degree of cross-fertilisation amongst the projects and the potential and actual market, and job opportunities created, while the role of the public institutions is limited to provide support and co-operate in the creation of the minimum structures needed.

Sources: OECD (2012[61])OECD Territorial Reviews: Skåne, Sweden 2012https://doi.org/10.1787/9789264177741-en; OECD (2017[62]),  OECD Territorial Reviews: Northern Sparsely Populated Areashttps://doi.org/10.1787/9789264268234-en; OECD (2013[60])Innovation-driven Growth in Regions: The Role of Smart Specialisationhttps://www.oecd.org/innovation/inno/smart-specialisation.pdf.

A greater customisation of the economic strategy can reduce the socio-economic disparities in the state. Income, education, health and labour opportunities are much more accessible in Hidalgo’s southernmost region, which borders with the state of Mexico. Taking into consideration local specificities means that the implementation of Hidalgo’s economic strategy must differentiate between territories. If the economic strategy is applied uniformly and without spatial localisation, the southern areas stand to be the main receptors of the bulk of the economic development efforts behind Hidalgo’s reforms. Therefore, a concrete action for Hidalgo would be to conduct a differentiated strategy for northern municipalities based on their local assets (i.e. natural capital and indigenous knowledge).

Applying the smart specialisation also requires bringing the private sector and other key actors of local development on board with the unified economic vision. In this sense, the administration has already rallied a wide variety of social and economic agents as well as stakeholders around a common strategy for the future. Promoting information sharing mechanisms with better communication with the private sector and other stakeholders will help to generate alternative perspectives on the economic strategy as well as consolidating a common vision for growth. Keeping this consensus and information exchange is not necessarily an easy task to accomplish. It often takes years, even decades, to create a bottom-up communication channel to integrate a growth policy strategy (see Box 2.19). The short-term costs and efforts are worth it in the medium to long run to attain a sustainable and inclusive development.

Box 2.19. Promoting bottom-up endogenous growth strategies

The OECD has highlighted the qualities of the LEADER approach as a tool for generating an endogenous development process with the active participation of rural communities. The basic principles driving the LEADER are: i) territorial approach: local development; ii) participatory approach; iii) ascending, bottom-up approach; iv) multi-sector approach; and v) integration through networks and co-operation. After over two decades of experience, many of the originally intended social aims of the initiative are finally beginning to spur in Spain’s rural society. The process is truly a long-term venture, but one that has provoked some of the most significant development and change within rural areas of the EU. Despite having required relatively marginal investments with respect to total budget (EAFRD funds – Pillar II – and – Pillar I – funds), LEADER funds have made a significant difference where they were truly oriented to the intended objectives and under the intended principles.

In countries such as Spain, that have made an important use of the LEADER methodology, the true impact of the LEADER initiatives has taken over 15 years to be authentically felt in the communities where it has been implemented. Of course, there has been a multitude of small businesses and community projects that have been assisted throughout these years, and these have contributed to adding competitiveness, diversification, economic growth and employment to their local economies. But the critical impact of the LEADER initiatives in rural communities of Spain is more qualitative in nature and has provoked substantial observable spill-over of LEADER impact outside the initiative’s boundaries. These are:

  • Creation of a culture of local governance and community self-initiative.

  • New participation space.

  • Building local pride by giving value to and reintroducing local heritage and customs.

  • Good use and multiplier effect of resources.

  • Less dependency culture and more self-sufficiency.

  • Multitude of experiences and accumulation of best practices.

  • Proximity and territorial coverage.

  • Spill-over effects.

  • Opportunities for young people and women.

  • Greater appreciation of rural areas.

  • Gradual acceptance of agrarian sector.

Source: OECD (2009[63])OECD Rural Policy Reviews: Spain 2009https://doi.org/10.1787/9789264060074-en.

The placed-based approach for the strategy of internationalisation

FDI and internationalisation are cornerstone elements of the regional development strategy of Hidalgo. This resonates well with the existing academic literature highlighting both conceptually and empirically the crucial role of global FDI connectivity for regional economic development. However, FDI on its own is not a guarantee of economic development. If an FDI attraction strategy is not matched with the existing capabilities and local assets of a territory, it will not produce a sustainable economic and social outcome.

The state’s economic strategy has begun by creating the environment for business. Attracting and retaining investments, by enhancing the climate for small businesses for example, requires that its administration adopts a place-based rather than a sector-based policy approach. A place-based policy approach takes a more holistic view of the interrelations between policy challenges affecting a particular territory: the different aspects that affect the development of a particular territory are considered in a comprehensive way in coherence with an overall strategic vision for the future of the area.

Hidalgo must use this attractiveness as a basis for development. To retain investment, and attract ideas and people will require foresight and appropriate planning supports. Rather than courting FDIs and business investments on a case-by-case basis, making Hidalgo attractive holistically is much more likely to have a lasting impact on promoting economic development activities and improving the living standards of local residents

To optimise the FDI attraction potential of Hidalgo’s competitive advantages, the state must make them better known to the FDI market. Hidalgo’s existing strengths are little known by investors, especially foreign ones. The state should, therefore, communicate these competitive advantages, but in a manner that is perceived as credible. To do so Hidalgo should:

  • Identify first the segments of the FDI market that most values what Hidalgo can potentially offer better than other comparable regions (safety, pro-active government action, environment, connectivity and cost). The state should avoid getting distracted in its FDI attraction efforts towards luring segments of the market that may appear appealing, but whose needs are not well matched by what Hidalgo has best to offer.

  • Benefit from giving itself as a stronger trademark. At the moment, Hidalgo is not associated with industry or investment opportunity. The state’s investment potential and attractiveness for FDI is unduly receiving little recognition. Hidalgo’s competitive advantages for business must be projected to existing and potential investors. Therefore, a new strong and credible trademark based on its core advantages (mentioned above) would better grab the attention of investors.

Additionally, helping local firms to internationalise is as important as attracting FDI. Internationally active SMEs show higher average returns and employment growth levels, as well as greater innovation rates than their non-internationalised counterparts (Lamb, Sandberg and Liesch, 2011[64]). Therefore, a successful regional development strategy should target both passive (FDI inflows) and active internationalisation (Crescenzi, Pietrobelli and Rabellotti, 2014[65]). Domestic firms should be encouraged and supported in their exploration and expansion into a diverse set of foreign markets

Smart specialisation policy approach should also capitalise the potential gains from GVCs integration. To do so, Hidalgo must concentrate on what lies within its existing or predicted future capability frontier. The strategic choices driving the state’s positioning within the GVC must be made with a medium to a long-term perspective where spill-overs can be achieved and where local businesses and entrepreneurs will be capable of seizing these opportunities locally. In this sense, a concrete action should be:

  • Consolidate the textile industry as a key international player and place it high as a strategic sector for the economy. This sector has a long history in the state and involves a wide number of business and communities. The state encompasses handcrafted production of t-shirts made in the north by indigenous communities to more sophisticated industries that elaborate pieces for external markets. Hidalgo should keep supporting the sector in order to encourage local textile industries to increase productivity and competitiveness through an active participation in the Council of Science, Technology and Innovation of Hidalgo.

Building effective clusters

Industrial clustering is especially apt for territorial economic development as an implementation mechanism of smart specialisation strategies. Nevertheless, clusters are rarely effective when artificially stimulated through policy (OECD, 2010[66]).

Clusters can help generate critical mass and knowledge spill-overs necessary for competitiveness and growth within a determined local or regional territory (OECD, 2010[66]). Agglomeration benefits can be generated when certain industries cluster within the same geographical area. This proximity and critical mass that is built around a single value chain tends to generate and consequently attract complimentary industries and services. It also creates a stock of trained and industry-specific skilled human capital. Knowledge transfers and spill-overs are more common, and benchmarking becomes much more frequent across local competing producers. This often helps install a special dynamism as well as a local business mindset of “co-opetition” within the cluster whose synergies tend to favour the competitiveness of those producers involved.

Policy should be a facilitator for the generation of industrial clusters. While clustering of innovative activities and productive resources is a dominant feature of highly developed and economically successful places, there is no evidence that when clustering is induced by means of public policies it is conducive to measurable economic benefits (Crescenzi, Nathan and Rodríguez-Pose, 2016[67]). The clusters that are being provoked are more likely to end-up becoming agglomeration of firms that compete for the attention and favour of the administration and its institutions. In such a scenario, it is very unlikely that the expected benefits from industrial clustering will be produced. Therefore, to boost productivity and complementarities within the productive chain of certain industries, policy should focus on creating a sound business environment that facilitates the workings and collaboration between firms, the administration and academia (see Box 2.20).

Box 2.20. Cluster policies

Clusters are generally understood to be geographic concentrations of interconnected firms and related actors such as specialised service providers, universities and others. Clusters serve to support the dynamics of market and knowledge exchanges among firms and other actors in the region and in the international value chain networks, serving as nodes in global networks.

According to Crescenzi, Nathan and Rodríguez-Pose (2016[67]) clusters should not be induced by public policy, rather facilitate cluster-type relations in terms of university-industry collaborations or global FDI connectivity.

The purpose of cluster policies is to strengthen a particular regional economy. A cluster policy is an intersection of more than one policy stream given their increasingly shared goals. Policy streams commonly promoting cluster-type policies include regional economic development policy, science and technology and innovation policy, industrial policy and higher education.

Cluster policies should build on the competitive advantages of the region. Fostering cluster formation around a foreign company entails the risk of limiting the positive spill-over effects in terms of building up local competencies and knowledge. One way of enhancing spillover effects from foreign companies is by defining requirements regarding minimum levels of local content in operations. This can be done in terms of the use of local labour or a certain fraction of the final product being produced locally.

Beyond policies to address framework conditions in terms of the regional environment, regulation and finance, commonly used instruments in cluster policies also tend to support:

  • Engagement of actors: host awareness raising events (conferences); offer financial incentives for firm networking organisations; sponsor firm networking activities: map cluster relationships.

  • Collective services and business linkages: brokering services and platforms between suppliers and purchasers; establish technical standards; assistance to inward investors in the cluster; supply chain linkage support; collect and disseminate labour market information; specialised vocational and university training.

  • Collaborative R&D/commercialisation: support joint projects among firms, universities and research institutions; technology transfer support services; overcome barriers to public sector incentives in commercialisation.

The Copenhagen Cleantech Cluster is a good example of cluster policies. The cluster is part of a series of initiatives to support innovative cleantech solutions that will help achieve the ambitious goal of becoming independent from coal, oil and gas in 2050. The Copenhagen Cleantech Cluster project was launched in 2009 to ensure smart growth and innovation. The vision of the project was also to develop the Capital Region of Denmark and the Region Zealand into one of the world’s leading cleantech clusters by creating networks involving a wide range of participants including knowledge institutions, industry promoters, leading cleantech companies and public authorities. During the project, Copenhagen Cleantech Cluster was established as a private association and in 2014, the Copenhagen Cleantech Cluster merged with the Lean Energy Cluster whereby the national cluster CLEAN was established. Today, CLEAN is Denmark’s green cluster with more than 170 members from the entire Danish cleantech sector including companies, regions and research institutions.

Sources: OECD (2010[66]), “Cluster policies”, Innovation Policy Handbookhttp://www.oecd.org/innovation/policyplatform/48137710.pdf; Crescenzi, R., M. Nathan and A. Rodríguez-Pose (2016[67]), “Do inventors talk to strangers? On proximity and collaborative knowledge creation”, Research Policy, Vol. 45(1), pp. 177-194; European Commission (2016[68])A Clean Sweep for Tech Growth in Denmark, EU Regional and Urban Development, http://ec.europa.eu/regional_policy/en/projects/denmark/a-clean-sweep-for-tech-growth-in-denmark.

The state has had some initiatives around clustering firms, although these have not completely taken off. Pachuca City of Knowledge and Culture (Pachuca Ciudad del Conocimiento y la Cultura) seeks to capitalise the academic and scientific structure of the state to collaborate with firms that have value added through R&D. This platform has a textile vocation with collaboration among the National Polytechnic Institute, the Autonomous University of Hidalgo and the national chambers for textile and dress industry (Canaintex y Canaive).

In the economic strategy, the administration aims to promote clusters around the five strategic sectors. In the case of electric sustainable mobility, the intention is to promote a cluster around the expertise and spill-over gains from the establishment of the Chinese company JAC Motors in Ciudad Sahagún and the auto manufacture DINA that is already developing electric buses.

For the strategic sector of renewable energy, the government seeks to foster collaboration among the newly created State Energy Agency (Agencia Estatal de Energía) and renewable energy firms that have invested in Hidalgo, such as Atlas Renewable Energy. The current Law to Promote Hidalgo’s Sustainable Energy Development is a step forward in establishing clear rules for a dynamic energy sector in the state by allowing companies to benefit from the opening of the energy market in Mexico. The current energy infrastructure in the state would allow not only the production of renewable energy but its transport and storage it as well.

The economic strategy includes policy objectives that are coherent with establishing the appropriate institutional and business ecosystem for the potential development of industrial clusters (i.e. strengthen current economic activity and improving regulation). Hidalgo’s public administration should keep with the role of facilitator rather than the driver of local industrial clustering. Clustering is something that innovative activities tend to do, but the reverse does not hold true. Hidalgo should thus also be aware that clustering economic activities is not the only way to stimulate innovation. Therefore, it might be worth further exploring actions and tools (not necessarily within the strategic sectors) to facilitate cluster-type relations, in terms of university-industry collaborations (Crescenzi, Filippetti and Iammarino, 2017[69])) or global FDI connectivity (Crescenzi and Iammarino, 2017[70]) for example. The example of the transition from a cluster policy to smart specialisation in Laphi, Finland, can guide Hidalgo in identifying the strategic policies that complement local characteristics (Box 2.21).

Hidalgo can also promote the presence of knowledge-intensive business service firms (KIBS) within its industrial parks. It has been found to facilitate the workings of the industrial districts and helps generate the benefits of clustering. Together with the right co-opetition mindset and the presence of an informal system of knowledge diffusion, proximity with KIBS is an essential part of effective clusters; and especially knowledge-based industry clusters that are dependent on innovation (Horváth and Rabetino, 2018[71]). Although the impact of KIBS does not necessarily depend on volume, but rather the bonds they hold with local industry, their presence in Hidalgo is marginal. Excluding financial services from the tally, business services represent less than 2% of the state’s GDP in 2015 (INEGI). Hidalgo is in dire need of a greater local supply of business services, especially knowledge-intensive services, if it is to generate any of the synergies and knowledge benefits associated with the clustering of industries.

The policy to facilitate clustering can further focus on the northern part of the state. While the state is developing cluster in these regions, special attention should be given to the right integration with local business and infrastructure in order to best benefit local communities. Many rural areas in the north do not have a dominant industry, and if they do, local firms do not sufficiently complement each other by covering enough of any industry’s value-chain functions. Supporting the entrepreneurial activity in these areas and creating complementarities between established SMEs and new investments (i.e. agro-industry) is a way to build the path for clustering spark in the area.

Box 2.21. From cluster policy to smart specialisation: The case of Lathi in Finland

The synchronisation process of Finnish national and regional innovation strategies had the overall aim of increasing the competitiveness of the Finnish economy. In the Päijät-Häme (Lahti) region, the concern was to find the cross-cutting competencies and industries that could create the most competitive value for a low-level R&D activity area such as Lahti.

For the past two decades, Päijät-Häme has been seen as a declining industrial region relying on a tight cluster strategy, without a university of its own. These characteristics have been reflected in weaker competitiveness and a lower level of education compared to the national level.

In the Päijät-Häme case, the combination of inefficiency caused by the isolating nature of the cluster strategy and low R&D input eventually led to a new action model in the region that might be described as a form of smart specialisation. It comprises an understanding of the wide range of innovation as well as concentration on practice-based (not scientific-based) innovation and the spearheads of expertise serving all industries and clusters, namely environment, design and practice-based innovation. This model of thought enabled the collaboration of all the strategies, plans and bodies in the region.

Since the industry structure was skewed to low-technology industries, the potential has resided in the ability to renew based on the ability to utilise cross-disciplinary competencies and identification of changes in lead markets. Through a series of workshops and with the participation of representatives from regional authorities, universities, polytechnics and private companies, the region defined its regional strategy profile. The final result outlined competitive industries, core cross-cutting competencies and strategic lead-market themes for the development of its innovation ecosystem and industrial outlook in the future. Based on cross-cutting competencies, lead market themes, supporting industries and demanding test markets, the process led to the definition of three thematic top expertise areas: environment, design and practice-based innovation.

To build upon these areas, Päijät-Häme generated a new, internationally high-quality network of research and development and innovation, a “meta-platform” that combined the three expertise areas with regionally strong clusters and industries in a unique way. It helped to identify innovative business potential in border-crossing expertise areas and industries. The framework of the platform is presented in Figure 2.16.

Lessons earned and conclusions for policy in the region were:

  • Abandonment of the strategic cluster emphasis: The first phase of smart specialisation consisted in the abandonment of the strategic cluster emphasis.

  • Experimentation: The strategic combination of the new practice-based innovation philosophy with the top three areas of expertise led to a novel innovation environment, that could perhaps be renamed as a preliminary phase of smart specialisation.

  • The role of innovation in each region: The Lahti example indicates that a region poor in research and development resources may also show a high proportion of innovativeness. The number of innovations in Finnish regions related to their added value by 2007, showing Päijät-Häme as the most relatively innovative regions in Finland despite very low research input.

Figure 2.16. The regional platform of innovation in Lathi
Figure 2.16. The regional platform of innovation in Lathi

Source: Adapted from OECD (2013[60]), Innovation-driven Growth in Regions: The Role of Smart Specialisation, https://www.oecd.org/innovation/inno/smart-specialisation.pdf.

Making the most of special economic zones

Special economic zones (SEZ) are an increasingly popular mechanism adopted in a growing number of countries to attempt to stimulate the conditions required for effective industrial clustering. Many OECD counties, including Mexico, include SEZs as part of their economic development policy. The objectives of the SEZ are mainly to: i) spur economic development; ii) facilitate the local transfer of technology; and iii) stimulate the benefits coming from increased local economic activity. In practice, SEZs have been promoted with the intention of boosting exports, diversifying the economy and generating direct and indirect jobs. Developed economies have also resorted to SEZs as a way to foster economic development in their lagging regions.

The way that SEZs operate relies heavily on regulatory and public-private facilitation of economic activity. The main tools used within an SEZ are a regulatory incentive, infrastructural investments and the development of local support services that will all contribute to stimulating economic activity and investment.

The Mexican SEZ

Mexico has adopted the SEZ methodology in order to stimulate the economic and industrial development of its economically lagging regions. The goal behind the implementation of SEZs in Mexico is to support development in less developed states and give the potential to attract investment, improve infrastructure and reduce regulatory barriers in these regions. The motivation behind the introduction of SEZs by the Mexican government came out of the growing disparities observed among states and sectors in Mexico. The implementation of the SEZ in Mexico is, therefore, to contribute towards the elimination of the poverty gap from the bottom.

The development of these new industrial clusters is meant to build upon existing industrial base, rather than create districts from scratch. The SEZs are also meant to be the product of effective multi-level co-ordinated efforts between the various governance structures. As such, the administrations have given themselves the Mexican SEZ Law that defines and delimits the conditions by which an area can be designated an SEZ and depicts the functioning and monitoring that is to be implemented within each Mexican SEZ. The Mexican SEZ Law considers an influence area, formed by the SEZ’s adjacent communities, which requires efforts in training, transfer of technology and territorial structuring. Through this innovative case, the benefits linked to a SEZ are expected to be magnified, creating greater attractiveness for the area and additional demand for goods and services produced in the area.

The basic criteria that an area must fulfil in order to be eligible to apply for the SEZ status are the following:

  • Be among the ten Mexican states with the highest incidence of poverty and extreme poverty.

  • Have a strategic geographic location that facilitates the integration between different modes of transport and enhances connectivity with other national and international markets.

  • Foresee the installation of productive sectors that enhance their comparative advantages and their present or potential productive vocation.

  • Have a population of between 50 000 and 500 000 inhabitants.

The incentives offered to firms that choose to locate their operations within a SEZ are of both a fiscal and non-fiscal nature as well as the opportunity to access special SEZ financing programmes. The fiscal incentives are both offered by the federal and state authorities.

In the case of the federal fiscal incentives, they include:

  • A 100% income tax discount during the first 10 years and a 50% discount during the following 5 years.

  • An additional 25% deduction for training expenses related to technical or scientific knowledge linked with the firm’s SEZ-related activity.

  • A fiscal credit against their income tax in order to cover part of their social security fees.

  • Significant value added tax (VAT) discounts, including 0% VAT on all international trade to or from a SEZ.

  • SEZ firms also benefit from a special customs regime.

Local fiscal incentives mostly take the form of payroll tax, property tax and real estate transaction tax exemptions or discounts, while the non-fiscal incentives offered to firms established within SEZ are mostly linked to support or assistance programmes for entrepreneurs, initial investments, worker support, industry-based support, innovation, training, competitiveness enhancement, and financing programmes. The preferred SEZ funding programmes offer: i) competitive interest rates; ii) extended terms; iii) flexible payment schemes; and iv) lines of credit for local purchases.

At the time of writing this report a total of three SEZ had been officially declared (Lazaro Cardenas, Coatzacoalcos, Puerto Chiapas), two have been approved and are awaiting declaration (Salina Cruz, Progreso), while two more are in the process of being approved (Campeche, Tabasco). A total of nine areas from nine different states have signed letters of intent and have passed state SEZ laws, which represents a key initial step to the establishment of a SEZ. Hidalgo is one of the states that has passed a SEZ law and is currently undergoing the pre-approval appraisal.

The Hidalgo state’s SEZ

The aim of the SEZ programme in Hidalgo is to install a special economic zone that contributes to close the socio-economic gap of the territory, through the arrival of investments and the establishment of specialised industries of high added value, that position Hidalgo within the international markets.

Horizontal, cross-secretariat, discussions and accords about the SEZ led to consensus and general support for the SEZ in Hidalgo. The same is true amongst the different presidents of the municipal governments falling within the area of influence of the SEZ and their secretariats of public works and zoning. The state and municipal secretariats in charge of public education and social development were also involved in the planning and development of Hidalgo’s SEZ.

The flagship industries that have been chosen for Hidalgo’s SEZ are founded on existing industrial bases already in place in the area: sustainable mobility, renewable energy and pharmaceuticals. From these main industries, several related complementary value-chain industries have been identified as a priority for Hidalgo’s SEZ (Figure 2.17). Out of these sectors, specific vocational skills have been identified as essential for the development of the industrial dynamics required for the effective internal function of the SEZ. These skills are mostly associated with the following fields: plastic, machinery and equipment, logistics, electric, automotive and auto-parts industries.

There is a great opportunity to work with the higher learning institutions in order to adjust their offer to those skills that are expected to be most in demand from the firms active within the SEZ and throughout the SEZ’s area of influence. For instance, training programmes in the mechanical industry, automotive mechanics and metalworking and electrical-electronic should be enhanced. In particular, the high school curriculum lacks mechatronics and logistics fields (Secretary of Economic Development of Hidalgo, 2016[7]).

Figure 2.17. Complementary areas of the flagship sectors for Hidalgo’s SEZ
Figure 2.17. Complementary areas of the flagship sectors for Hidalgo’s SEZ

Source: Secretary of Economic Development of Hidalgo (2018[15]), Presentation of Economic Development.

The final financial model for the SEZ project in Hidalgo proposes an economic investment split into 2 items: private investment that represents MXN 4 553.4 million and public investment that includes MXN 5 767 million, for a total of MXN 10 300.4 million. The item with the greatest amount of investment is an investment in infrastructure followed by investment in construction. These investments are judged necessary to give the SEZ in Hidalgo the required infrastructure that will guarantee its operational effectiveness and good functioning.

Apart from all the mentioned federal and state incentives offered to firms that establish their operations within the SEZ, the SEZ must be attractive in itself. The state should focus on improving amenities, social capital and operational effectiveness. There will soon be over half a dozen different SEZs throughout Mexico, all offering similar incentive packages, together with non-SEZ industrial districts offering their own particular differentiated comparative advantages. The SEZ in Hidalgo must surpass all of these in effective and quality service provision so as to make sure that those firms that are the best match for Hidalgo’s specificities and smart specialisation will naturally be drawn to locate and grow in the region.

Seizing the opportunities from the SEZ

To achieve this, infrastructural and construction investments are of course needed, but the managerial and administrative talent of the SEZ in Hidalgo is probably even more important. Community management, the promotion of social capital formation and the development of a strong sense of belonging amongst the entrepreneurs, firms and agents involved in the SEZ Hidalgo is also essential.

Despite having very detailed pre-feasibility and impact studies, the mechanisms to achieve and monitor the outcomes should be further clarified. This is especially evident taking into consideration the highly qualitative nature of the overarching objective that is said to drive the SEZ project in Hidalgo: contribute to close the socio-economic gap of the territory. Specific goals will help make the most of these projects.

Similarly, more can be said in regard to the social impact study concerning the probable displacement and agglomeration effects that will be generated in the event that the SEZ does achieve its projected economic success. How these displacements are managed in order to best contribute to closing Hidalgo’s socio-economic gap can be further explained. With clear and concrete social objective and consequent measures for the SEZ project, Hidalgo will maximise the positive impact for the population living in the area of influence of the SEZ and beyond.

From a co-ordination point of view, Hidalgo should carefully observe and learn from the experience of the other SEZs in Mexico that have preceded Hidalgo. Benchmarking their successes and avoiding the repetition of possible errors committed by other SEZs can save Hidalgo many concerns as they develop their own project. In this aspect, not having been part of the initial round of Mexican SEZs may be to its advantage if Hidalgo can capture the learning economies generated by their homonyms from other states.

Greater co-ordination and exchange of experience across the different SEZs at a national level could help to stimulate the sharing of experiences and learning. Such collaboration would be to the benefit of all SEZs involved, especially the new ones that are still in their planning stages, such as Hidalgo. It may be up to the federal administration to establish such a co-ordination body. In that sense, all the past and current efforts with regards to SEZ should be well balanced with a cost-benefit analysis when it comes to the final decision about the implementation of the project.

Together with collaboration structures, Hidalgo should implement policy learning devices so as to implement an efficient knowledge management system for the SEZ. Such instruments should document and create an SEZ institutional memory. This will help improve its policies and their impact and will add to the management control systems of the SEZ. Greater knowledge management devices can also contribute to more effective management, efficient operations as well as an innovative and strategic development of the SEZ.

The critical points for the establishment of a well-functioning SEZ are similar to what was already discussed in the previous section on industrial clustering. Contrary to the traditional sources of location advantages (i.e. agglomeration economies, market access and labour market conditions), SEZs rely more on innovation and socio-institutional drivers of investments and economic activity. In this way, the potential agglomeration economies result from the value chain configuration and complementary functions rather than from any specific sector. These new functional agglomerations are emerging across OECD countries.

Another critical point for the success of the SEZ and the development of functional agglomerations is the existence of adequate regional socio-economic and institutional conditions. Only with the appropriate endowments and favourable ecosystem will investment and venturing initiatives be attracted and take hold within the most sophisticated knowledge-intensive stages of the industrial value chain.

Finally, physical infrastructure, including connectivity, is also critical for the prosperity of the SEZ. Adequate infrastructure is not only a point of attractiveness, but it is also a source of greater potential outcome multiplier out of the local resources and capital injections made. The appropriate infrastructure can act as an enabler of development, knowledge transfers and socio-economic impact within a SEZ. The key here is having appropriate infrastructural assets that are well-adapted to the needs of the SEZ and that favour the development of a well-functioning local innovation system. This is more important than purely technological assets (Ascani, Crescenzi and Iammarino, 2016[71]).

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