Two Mexican States, Same Industries, Different Outcomes: Local Institutions & Industrial Policy
Two Mexican states locked into radically different industrial policy styles for 40+ years show why copying "best practices" often fails - local institutions shape which economic upgrades actually work
As countries scramble to build high-tech industries and escape middle-income stagnation, Alberto Fuentes and Seth Pipkin's research on "Sticky industrial policies and divergent value chain upgrading patterns" reveals a critical blind spot: sticky local policy styles determine success more than technical merit, even when industries face identical global opportunities. Their study of Querétaro and Jalisco challenges the conventional wisdom that governments can simply select the "right" policy from a menu of options.
The evidence: Researchers tracked four industries across Jalisco and Querétaro from the 1980s through 2010s, conducting dozens of interviews and analyzing firm-level data across electronics, ICT, automotive, and aerospace sectors.
Tale of two states
By the numbers:
Jalisco electronics (late 1990s): 76,000 workers, 70% of state exports
Jalisco ICT (late 2010s): Shifted from 3 export products → 30+ including laptops, semiconductors, routers
Querétaro automotive (late 1990s): 260+ firms, wages 16% above regional average
Querétaro aerospace (late 2010s): 30+ Tier 1 suppliers, 23% of state exports
Patent applications per 100k workers: Jalisco ranks #1, Querétaro #5 among Mexican states
Jalisco's "Business-guided" playbook:
Private sector designs and often implements policies
Business associations like CANIETI Occidente and CCIJ drive agenda
Government provides support but never "carries the baton"
Policies shift dramatically between administrations
Focus: Tax exemptions, deregulation, land grants, horizontal infrastructure
Querétaro's "State-guided" approach:
Government leads but consults extensively with business, labor, academia
Creates long-lasting institutions that outlive administrations
Explicitly rejects tax competition for investment
Focus: Specialized training programs, quality infrastructure, industry-specific public goods
The electronics boom and bust
Jalisco's electronics rise (1980s-1990s): The transformation was dramatic. Major players like HP, Motorola, Kodak, and IBM arrived first, followed by contract manufacturers Foxconn, Jabil, and Flextronics. These companies established over 30 corporate R&D centers, marking Latin America's most concentrated high-tech cluster. HP Guadalajara pioneered touchscreen production while designing memory components. IBM's Programming Lab experimented with software development. The arrival of TD Com and Freescale crowned Jalisco as Latin America's semiconductor design leader.
The IBM deal that changed everything (1985): Federal rules required foreign firms to partner with Mexican majority owners, but IBM wanted full control of its new Jalisco plant. The state government stayed completely absent from negotiations - a telling sign of its hands-off approach. Despite competitor protests about changing the "rules of the game," local business associations backed IBM's exemption request. IBM won 100% ownership in exchange for export commitments and promises to invest in semiconductor R&D. But when HP came calling later, they got the same ownership deal without any of IBM's obligations. The precedent was set: Jalisco would compete by removing barriers, not imposing conditions.
CADELEC reality check: Created by CANIETI Occidente with UN, state, and federal funding, CADELEC aimed to strengthen local suppliers for multinational OEMs. The reality proved far more modest. "We taught suppliers how to generate business quotes and present their numbers to OEMs. These were basic things," explained one program engineer. Rather than building deep capabilities, CADELEC focused on helping firms clear basic entry hurdles - perfectly aligned with Jalisco's business-guided philosophy of reducing barriers rather than building competencies.
Software dreams meet harsh realities
Jalisco's ICT pivot (2000s-2010s): China's WTO entry and the US recession devastated Jalisco's electronics sector, forcing a dramatic shift to software and ICT services. Oracle, Tata, and Intel arrived alongside Mexican startups like Interlatin and Sigtao. These firms targeted diverse markets - government, healthcare, aviation, insurance, entertainment, finance - showcasing impressive product variety. Yet the harsh reality emerged quickly: less than half of the ICT firms in the researchers' sample survived past 2015. The proliferation strategy that defined Jalisco's approach created quantity without sustainability.
Plan Vallarta genesis: In the late 1990s, managers from IBM and HP began meeting with officials from ITESM's business development office. This private sector group hired consultants to diagnose the industry's needs, presenting their findings at a conference in Puerto Vallarta - hence the plan's name. Their recommendations followed the classic business-guided template: export promotion, labor market flexibilization, and grants for small firms. The state government adopted these proposals wholesale, creating COECYTJAL and launching the PROSOFT grants program, all designed to ease market entry rather than build lasting capabilities.
IJALTI's struggles: The Jalisco Institute of Information Technology epitomized the state's approach. Though formally public-private, business held the majority of board votes and appointed the director. The institute closed after just one year due to internal disagreements, reopening in 2004 with even less public influence. Its current director describes IJALTI's main function starkly: when CISCO needed 150 engineers to establish a facility, IJALTI supplied them by "merging 5 or 10 small local companies." Rather than building local capacity, the institute simply reshuffled existing resources to meet multinational demands.
Policy graveyard: Jalisco's government created a Secretary of Innovation without a budget in its first year, eventually housing it in space provided by a private business association. Failed initiatives accumulated: CIPIS, Technopolis, and the Multimedia Park in Chapala all collapsed. The state's priority industries shifted wildly - IT to biotech to automotive to fashion to aerospace to pharmaceuticals - sometimes within the same administration. Governor RamĂrez-Acuña initially rolled back support for electronics and IT in 1995, only to reverse course two years laterafter IBM and HP executives took him on a tour of competing clusters in Singapore, India, and China.
The quality infrastructure advantage
Querétaro's automotive transformation (1980s-1990s): The Total Quality Management revolution began with firms like Tremec and Singer operating through CANACINTRA, eventually spreading throughout the sector. Tier 1 suppliers like Kostal, Dana, and Clarion led the charge as production evolved from simple transmission components to complete steering, braking, and suspension systems. Yet despite this sophistication, Querétaro attracted zero final assembly plants while neighboring states landed GM and Nissan facilities - a telling limitation of the state-guided approach.
Building the ecosystem: In 1986, state actors repurposed a tripartite commission originally created to manage labor tensions. Through this state-business-labor body, the Palacios administration created CONCYTEQ, a public institution serving multiple industries. Five hundred workers received technical skills scholarships in the early years alone. The state then built a training pipeline through Universidad TecnolĂ³gica de QuerĂ©taro and Universidad TecnolĂ³gica de San Juan del Rio, while attracting elite institutions like UNAM's Juriquilla campus and CINVESTAV-IPN for materials research and engineering.
Quality infrastructure network: CIATEQ and CIDESI focused on process-oriented R&D, responding to business requests for technical assistance. One administrator described helping a firm solve paint durability problems by testing new formulations and application methods, then integrating these improvements into the production line. CENAM provided metrology standards while IMT handled transportation-specific research. This network of specialized centers - publicly funded and coordinated - contrasted sharply with Jalisco's reliance on siloed corporate R&D.
Aerospace ambitions
Querétaro's aerospace ascent (2000s-2010s): The Bombardier coup in 2006 brought a $200 million investment and 1,500 promised jobs, leading to federal designation as one of Mexico's two "strategic poles for innovation." Today, the industry includes three OEMs plus over 30 Tier 1, 2, and 3 suppliers and MRO providers, employing everyone from trained assemblers to engineers with post-graduate degrees.
The airport gambit: The Loyola administration (1997-2003) built an international airport that the business community derided as "costly and irrelevant." But the Garrido administration (2003-2009) made it the centerpiece of Querétaro's Bombardier pitch, promising to establish the publicly-funded Querétaro Aeronautics University (UNAQ) adjacent to the airport. This wasn't an empty promise - Querétaro had already proven its ability to deliver customized training through its automotive programs. The strategy worked, and UNAQ opened as scheduled, followed by aerospace programs at CONALEP, CECyTEQ, ITQ, UAQ, and UPQ. Safran Group and Aernnova Aerospace soon followed Bombardier, attracted by the same state-coordinated training infrastructure.
The R&D ecosystem: GE established what it calls its "most important aviation engineering center outside the United States" in Querétaro. LabTA emerged as a joint project of three national science labs. Specialized centers proliferated: CENTA, RIIAQ, CIAT, CEDIA, CICATA-IPM, and CFATA-UNAM, all focusing on incremental improvements like heat-tolerant chemical treatments and ergonomic workstations to boost production efficiency. This patient, process-focused innovation enabled dramatic results - OEMs transferred entire production lines for the Q400 and Global Express jets from Japan and Canada to Querétaro, citing superior production efficiency.
Patterns of success and failure
Jalisco's upgrading strengths: The numbers tell a story of explosive diversification. Electronics exports grew from 3 products to over 30 in just 20 years. The state then pivoted successfully into software, AI, biotech, media, and financial services. Over 30 corporate R&D centers in electronics alone marked genuine innovative capacity. The ICT sector saw 50 new firms in the researchers' database, mostly founded between 2000 and 2019, showcasing entrepreneurial dynamism.
Jalisco's persistent weaknesses: Yet beneath this proliferation lay troubling patterns. Researchers documented "scarce spillovers" to local firms due to their "lack of competitiveness." High turnover meant constant firm entry and exit. Small firms either stayed small or got acquired by multinationals. Despite the R&D presence, most activity remained focused on assembly rather than deep integration into global innovation networks.
Querétaro's upgrading strengths: The state achieved world-class efficiency in targeted sectors through systematic workforce upskilling via public institutions. Its firms mastered continuous improvement in existing products, moving from simple components to sophisticated systems. Most importantly, these capabilities proved durable - programs and institutions survived multiple political transitions, providing stability that attracted long-term corporate commitments.
Querétaro's persistent weaknesses: This laser focus came with costs. Product diversification remained limited compared to dynamic economies. Local firms could master aerospace certifications through state programs but lacked capital to win supplier contracts. The state completely missed the auto assembly boom that enriched neighbors like Guanajuato. Innovation, while constant, stayed incremental - improving existing products rather than creating breakthroughs.
Political continuity, policy persistence
Both states transitioned from PRI to PAN rule in the mid-1990s and experienced multiple party alternations since. Yet their industrial policy styles remained unchanged across administrations, suggesting institutional momentum stronger than partisan politics.
Jalisco's shifting priorities illustrate this instability within continuity. In 2003, the state prioritized IT, multimedia, and microelectronics. By 2004, biotech joined while IT disappeared. In 2006, agro-food, tourism, automotive, and fashion entered the mix. By 2007, the state returned to its original three sectors plus aerospace. Then in 2013, everything changed again to agroindustry, pharmaceuticals, and creative industries. Each shift maintained the same business-guided approach - private sector leadership, barrier reduction, short-term programs - while constantly searching for the next big thing.
Querétaro showed the opposite pattern: consistent sectors with consistent methods. The state simply repurposed its automotive support infrastructure for aerospace. The same tripartite consultation model that built CONCYTEQ in 1986 guided UNAQ's creation in 2006. Public institutions adapted to new industries rather than being replaced. This stability attracted firms seeking long-term partnerships rather than just incentive packages.
Comparative context
Why structure doesn't explain outcomes: Both electronics and automotive industries underwent similar globalization and de-verticalization in the 1980s and 1990s. Both ICT and aerospace shifted toward relational governance modes requiring close buyer-supplier collaboration in the 2000s and 2010s. Each industry pair offered entry points ranging from simple assembly to sophisticated R&D. Yet Jalisco and Querétaro extracted completely different upgrading patterns from these identical opportunities.
Other Mexican aerospace clusters demonstrate that Querétaro's pattern isn't structurally determined. Baja Californiafocused on basic parts like radio modules and rotors that require certification but not deep process innovation. McGuire's research identified product upgrading as the norm in Mexican aerospace - making Querétaro's process and functional upgrading focus an outlier requiring explanation.
Global electronics comparisons make Jalisco's pattern equally puzzling. Taiwan, Korea, and Singapore achieved significant process and functional upgrading in electronics during the same period, despite facing similar GVC governance structures. Ernst documented how Asian electronics clusters moved from assembly to design, while Jalisco largely remained stuck at assembly despite hosting numerous R&D centers. The difference lay not in global value chain positioning but in local institutional approaches.
Bottomline
Path dependence in practice: Resource availability didn't determine policy choice - both states had similar access to federal programs and international investment. Industry characteristics didn't dictate upgrading patterns - the same aerospace opportunity drove process upgrading in Querétaro but product innovation in Baja California. Political ideology didn't alter approaches - PRI and PAN governors maintained their states' distinctive styles. Instead, local policy styles shaped both tool selection and ultimate outcomes, creating self-reinforcing patterns that persisted for decades.
Three uncomfortable truths:
Sticky styles limit options: Even facing new challenges, policymakers recycled familiar tools. Jalisco kept cutting taxes and funding individual firms even as sustainability problems mounted. Querétaro kept building training centers and research institutes even as product diversification lagged.
Each style has built-in blind spots: Jalisco couldn't deepen expertise despite hosting 30+ R&D centers because its policies emphasized entry over capability building. Querétaro couldn't diversify despite world-class capabilities because its policies emphasized deepening over broadening.
Success reinforces limitations: IBM's exemption spawned a race to the bottom in investment conditions. Bombardier's recruitment created aerospace-specific infrastructure that couldn't easily serve other industries. Early wins locked in approaches that later became constraints.
What's next: This 40-year natural experiment suggests industrial policy needs radical localization. Technical merit matters less than institutional fit. The same aerospace opportunity that drove process upgrading in Querétaro sparked product innovation in Baja California, while identical electronics GVC conditions produced diversification in Jalisco but deepening in East Asia.
For policymakers: Map your local style first, then adapt global best practices to fit. Fighting institutional momentum wastes resources; working with it might limit options but improves execution. The choice isn't between Jalisco and Querétaro's models - it's about recognizing which one you're already in and maximizing its strengths while compensating for its weaknesses.