Mexico’s Latest Financial Crime Trends: A Perfect Storm of Violence and Investment

For over two decades, Mexico’s criminal dynamics have had a devastating impact on foreign investment and job opportunities in the country. A new report has revealed the shocking truth behind this phenomenon, providing valuable insights for other countries facing similar issues.

The Study’s Findings

The report, “Organized Crime and Foreign Direct Investment: Evidence From Criminal Groups in Mexico,” published in the Journal of Conflict Resolution, analyzed foreign direct investment trends in Mexico from 2000-2018. The study was sparked by the apparent contradiction between the power and violence wielded by Mexico’s criminal groups and the willingness of foreign businesses to invest there.

Three Main Conclusions

1. Criminal Monopolies Can Be Beneficial for Business

According to the report, powerful and dominant criminal organizations do not necessarily scare off foreign investors. In fact, when a single group controls an area with no competition, levels of violence tend to be lower, creating a positive impact on investment opportunities.

The case of Mexico’s southern state of Campeche is cited as an example. When the Zetas were the dominant criminal group in the mid-2010s, Campeche received an average of $117 million in new foreign capital flows annually. However, when multiple groups fought for control, the state’s yearly investment from abroad dropped to just $44 million.

2. The “Kingpin” Strategy Can Harm Foreign Direct Investment

The report found that a higher capture or kill rate for top criminal leaders is associated with lower levels of FDI the following year. This is because the power vacuum created within a group stripped of its leaders can spark internal conflict and encourage rival groups to take advantage of the situation.

3. Attacks on Foreign Firms Are Underreported

Predatory crimes targeting foreign businesses may appear rare in Mexico, but according to the report’s authors, such attacks are likely underreported due to the parties involved having an interest in keeping things secret. Businesses often prefer to pay off extortionists rather than reporting incidents to authorities, and the Mexican government seeks to encourage foreign investment by downplaying reported incidents.

Lessons for Other Countries

The findings of the study could be replicated in countries outside of Latin America, such as Italy, where data on crimes like extortion is more reliable. The report’s conclusions hold lessons for other countries with multiple organized criminal groups, including Colombia and El Salvador, where state interventions and the business landscape share similarities with the Mexican case.

Governments can benefit from understanding the economic consequences of organized crime, particularly which types of crimes are most detrimental to foreign direct investment. Additionally, the kingpin strategy might be reconsidered or governments that use this approach should prepare for possible economic consequences.

Conclusion

Mexico’s experience serves as a stark warning for other countries facing similar issues with organized criminal groups. By understanding the complex dynamics between crime and investment, governments can make informed decisions to promote economic growth and stability.