Mexico’s criminal dynamics have negatively affected foreign investment and job opportunities in the country for over 20 years, and its experience could give insights into how other countries may handle this problem, according to a new report.

The report, “Organized Crime and Foreign Direct Investment: Evidence From Criminal Groups in Mexico,” published in the Journal of Conflict Resolution this month, examined foreign direct investment (FDI) trends in Mexico from 2000-2018 to judge the impact of organized crime. 

Brian J. Phillips, a co-author of the report, told InSight Crime that he and his co-author Ana Carolina Garriga became interested several years ago in the apparent contradiction between the power and violence wielded by Mexico’s crime groups and the willingness of foreign businesses to invest there.

SEE ALSO: Is Northeast Cartel Expansion Driving Killings of Police in Nuevo León, Mexico?

“We saw on the one hand this massive amount of violence, organized crime, and security presence everywhere. But on the other hand, we saw that foreign investment was increasing in Mexico every year. And that’s why we started looking into it,” Phillips said.

Below, InSight Crime analyzes the report’s three main conclusions and how those findings might inform similar studies in other countries.

1. Criminal Monopolies Are Good for Business

One of the report’s main findings was a positive correlation between foreign investments and criminal hegemony. Counterintuitively, powerful and dominant criminal organizations do not necessarily scare businesses away.  

When a single criminal group controls a specific area with no competition, levels of violence tend to be lower, which can have a positive impact on opportunities for investment.

“In some situations where you have a dominant criminal group, FDI is not affected and can even be encouraged because of the stability that one dominant group could provide,” Phillips said.

The case of Mexico’s southern state of Campeche, analyzed in the timespan 2000-2018, is cited in the report as a noteworthy example. When the Zetas were the criminal mainstay in the state in the mid-2010s, Campeche received an average of $117 million in new foreign capital flows annually. When multiple groups were fighting it out in the state, Campeche’s yearly amount of investments from abroad dropped to just $44 million.

Dominant criminal actors rarely target foreign businesses, according to Phillips. But when the criminal landscape fragments, smaller groups often turn to kidnapping, as well as extorting and robbing businesses, which can drive foreign investors away. 

2. The ‘Kingpin’ Strategy Hurts FDI

A major pillar of the “war on drugs” in Mexico has been going after the kingpins. But the report found that a higher capture or kill rate for top criminal leaders is associated with lower levels of foreign direct investment the following year.

This explanation also relates to competition: the power vacuum created within a group stripped of its leaders can spark internal conflict and encourage rival groups to try to strike while their enemies are weak.

“I think there’s enough evidence now … that arresting or killing the leaders of the criminal groups often just leads to more violence through the resulting fragmentation and infighting,” Phillips told InSight Crime.

SEE ALSO: An Extradition (and a Fentanyl Prohibition) as Mexico Tries a Counterdrug Reset

However, high violence levels alone don’t scare off foreign businesses, the report found. Instead, the deterrent effect stems from other consequences of the fragmentation, particularly the direct targeting of businesses as smaller groups seek new sources of revenue.

In addition, the kingpin strategy may backfire and cause criminal organizations to follow the arrests of their leaders with outbursts of public attacks

There have also been more recent examples of this outside of the study timeframe. In the northern state of Tamaulipas, after the arrest in late 2022 of Heriberto Rodríguez Hernández, a top leader of the Northeast Cartel (Cartel del Noreste – CDN), major clashes between criminals and the Mexican military happened in the border city of Nuevo Laredo. The economic impact was immediate. In the first six months of 2023, new investments from foreign countries reached only $17.5 million, falling from $132.9 million in the final three months of 2022.  

3. Attacks on Foreign Firms Are Underreported

At first glance, predatory crimes specifically targeting foreign firms may appear relatively rare in Mexico. But according to the authors of the report, such attacks are likely underreported.

For businesses, it’s often more efficient to pay off extortionists rather than denouncing them to the authorities. And for the Mexican government, which seeks to encourage foreign businesses to invest in the country, the fewer reported incidents, the better.

“In Mexico, I think it’s in the interest of a lot of parties to sort of keep things secret. We know that there are many kidnapping experts and specialists who deal with getting people out of situations where they’ve been kidnapped, paying the ransom, moving on, doing it quietly,” Phillips said.

At the same time, especially brazen attacks by criminal groups can have serious consequences for foreign direct investment.

In 2015, a PepsiCo executive was kidnapped in the southern state of Guerrero, and Coca-Cola blamed criminal groups for extorting it and hijacking its trucks. In the following years, both PepsiCo and Coca-Cola scaled back operations in Guerrero, laying off hundreds of workers citing the lack of safety conditions. 

Looking Beyond Mexico

The authors of the study suggested that this type of analysis could be replicated also in countries outside of Latin America like Italy, where data on crimes such as extortion are more reliable, in order to understand if the same trends are present elsewhere. 

The findings of the report can hold lessons for other countries where multiple organized criminal groups are present, such as Colombia and El Salvador, where state interventions and the business landscape have some points in common with the Mexican case. 

On a first note, governments can be interested in understanding the economic consequences of organized crime, in particular, which type of crimes associated with organized criminal groups are the most detrimental for foreign direct investment. 

Secondly, as the report suggests, the kingpin strategy might be reconsidered, or governments that use this approach should be prepared for possible economic consequences.

“If this was the silver bullet that some governments seemed to think it is, then more of them would be seeing success and there would be less organized crime in countries like Colombia, El Salvador, and other places. But it hasn’t worked as governments might have expected,” Phillips told InSight Crime.

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