Chapter 2. Towards a more prosperous and competitive Hidalgo

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

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

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)

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

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

Source: INEGI (2018[11]), Mortality: Deaths by Homicide, http://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

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

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.

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

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

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

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.

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.

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

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

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

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).

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.

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).

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.

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).

…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.

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.

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).

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.

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).

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.

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

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.