Financing constraints and investment decline in Mexico

To what extent can financing constraints, which have been so central to foreign-debt-related explanations of investment decline in heavily indebted economies, account for low investment rates in Mexico after 1982? In order to investigate the implications of the financing constraints hypothesis on investment decisions, this study employs a cost-of-adjustment model of investment and annual panel data of Mexican manufacturing industries covering the period 1970-90. It is found that some of the debt crisis effects on investment, identified in the earlier literature, may be due to binding financing constraints in Mexico.