Site Selection: What is the impact of the recent change in Mexico's government, and coming changes in the U.S. government, on investment in the border area – and for the interior of Mexico?
   Peter Linneman: The change has less to do with change in the Mexican government than whether change in the U.S. government will have a big influence. I don't anticipate that the change in the Mexican government will make much difference either way. In the U.S., if a Democrat is elected, look for more rhetoric than actuality, but there will be an increase in rhetoric about being tough on companies that leave the U.S. with laws and so forth.
   But I don't think they will actually do it. The rhetoric is already there, and I'd like to think that's all it will be. I don't see the Mexican government doing anything harmful to investment on the horizon.

   SS: To what extent is security along the border an issue for investors?
   PL: I have not heard of security as being something companies are worried about. They are worried about labor force quality and turnover and capital availability, but not security.
   Gary Swedback: Security has traditionally been a benchmark to monitor in emerging markets. But in Mexico, we have never seen the levels of activity against foreign businesspeople that we have seen historically in Latin America.
   PL: It's more against locals in Mexico, and more common in proximity to the drug trade – not pharmaceuticals, but drugs. But it's really not an issue on the border.
   GS: Even in Mexico City, we have not seen Americans targeted for being American. They tend to be left alone, because there is a concern that if foreigners are targeted, they will engage the attention of U.S. security forces and subsequent activity the criminal elements don't want.

   SS: How is investing in the U.S.-Mexico border region different in 2008 than it was in 2005?
   PL: The biggest difference is a capital markets issue. Anyone getting ready to invest in real estate or to build a plant or other facility there is wondering whether the capital is available. That's not unique to Mexico. I don't see a big difference to the Mexico part of it. It's a much more accepted investment location than it was in 2005, but you take almost any accepted investment category today, and it is challenged by the capital markets. Investors are waiting for capital market clarity.
   GS: In the past three years, we have had a herd mentality of investors flowing into the market, and the border markets were the first markets. Five years ago, we had investment portfolios with 5-percent yields, and it was difficult to attract interest because of perception. Now, with changes in the U.S. investment market and the perception of stability in Mexico, we have seen investors switching from solely institutional players to private equity funds and groups of individuals with access to capital on the U.S. side. They do not need Mexican capital, the sources of which will be 200 or 300 basis points more than the U.S. capital sources for these projects.
   Also, as investment capital has slowed, we are seeing more sectors on the border. It used to be industrial. Now, we see sectors receiving capital for housing and retail. That wasn't the case in terms of U.S. investors three or four years ago. Institutions are looking for developers to partner with in these new sectors. That signals an amazing change in the perception of the market and the type of investor coming to the border. It's just that capital is tight right now.

   SS: What is happening in the U.S. border states in terms of their business and regulatory frameworks that is influencing cross-border foreign direct investment?
   GS: Arizona has passed a law to regulate business owners, especially small business owners, who hire non-documented workers. This is the toughest example of this in the nation. It creates severe penalties against business owners for the first time in any of the states. We're receiving calls at our offices in Mexico from Arizona business operators, saying, "If they're going to be this tough on me in Phoenix, I might as well move the company to Mexico."
   In California about two years ago, they raised the workers' comp contribution level to the point where it has created a steady flow into Mexico of "mom and pop" companies of 15 or 20 employees that are no longer competitive in California. That's a state-level development with a direct impact on the border. There used to be lots of small, 10,000-sq.-ft. (929-sq.-m.) buildings around on the Mexican side, but they're all leased up from these small companies, mainly from Los Angeles, and they are not becoming available.
   SS: As costs (labor, land) along the U.S.-Mexico border increase, how far into the interior are U.S. companies seeking to locate in order to gain real cost advantages?
   GS: Labor on the border is 10 to 15 percent higher than in central Mexico, and land can cost three to four times more per square meter or foot. So most firms with 15 to 20 years of experience on the border already are willing to move south. They have mid-level managers in their companies who may have come from central Mexico, and that may make a lot of sense. But it's not musical chairs.
   Most of the new firms are content with the savings on the border relative to costs in their home markets of St. Louis and Philadelphia and so forth. If they're paying $18 to $25 per hour to their worker, most of them are thrilled if they're coming to the border for the first time and they can reduce the labor content of their product to $3 or $4 per hour. If they don't have to move south, the newest companies are quite content with that savings.
   Some do have to move away from the border in order to have a competitive cost structure, as is the case with some supplier companies. So they have either been on the border for a while, or they are told that to be competitive, they must join other suppliers in a campus-like environment. The general decision for any company will be to have more affordable facilities and land in central Mexico and a labor differential, but if the long-term market is Europe or the northern and eastern U.S., then what are the transportation costs and how does that affect my occupancy costs in different location?
   PL: Another consideration for some is, "How much labor turnover and how much depth is there to the labor pool if I move farther in from the border?" They want net-net productivity as opposed to low wages per se.
   GS: Certain sectors serve as the early warning signs – they're the first to move because they are so cost sensitive. Those are the wire harness operations, garment manufacturers – the low-tech guys. They'll move before everyone else. We saw them moving off the border in the early 1990s. Some went to central Mexico, some to Central America. But for major sectors, there is a skill set and a pool of resources in most of the major cities in Mexico off the border with engineering schools and technical training schools. Those exist pretty much everywhere in Mexico now.

   SS: Which industrial sectors are newcomers? Why is this happening?
   GS: Besides the small operations we talked about, the sectors we're seeing now include medical device manufacturing, aerospace, some automotive and electronics that require a quick turn around to the U.S. In the case of medical devices, there are some intellectual property issues in that some of them don't want to be in China. We are seeing aerospace clusters in the Chihuahua and Baja California areas. Twenty years ago the defense contractors couldn't be here, but they are now. There's also a cluster for aerospace in central Mexico, where Bombardier is building its campus in San Luis Potosí. Most of the automotive, aerospace and medical device will locate near the border. Also, for a time, everyone thought all the electronics would go to China. That sector shrank significantly – about 30 percent to 50 percent of the jobs in that sector went away in the early part of this decade along the northern Mexican border. That was a big hit. Now, the companies that are still here are replacing products they were making then; some moved to China and have kept the border facilities as showcase facilities and turnaround facilities when they need quick turnaround to the U.S. It's good to see electronics rebound on the border again.

   SS: What role is the U.S.-Mexican border playing in the emerging North American free trade zone corridors north and south of the border? Is a specific role in the global supply chain emerging?
   PL: That role is slowly evolving as Mexico slowly becomes about more than just shipping things a few miles across the border. It is becoming, as the trade zones extend south, a bit of a transit point. There is not enough purchasing power south to make it a true logistics center, but that is changing. As for the ports, improvements are still being made.
   GS: That's right, especially along the border. While we're seeing new business coming through these Pacific ports at Lazaro Cardenas and Manzanillo, there are significant new infrastructure and port projects coming into play south of Ensenada at Punta Colonet, and of course the port of Guaymas south of Hermosillo in Sonora. These projects are still under development, but the lion's share of new product flowing from the Pacific Rim is flowing now through Lazaro Cardenas and Manzanillo; Wal-Mart is bringing in incredible amounts of Pacific Rim product, Toyota is using Lazaro Cardenas as a staging area for bringing in parts and vehicles.
   PL: Why would you want to land at Long Beach or Los Angeles if you don't have to? These new port projects are unproven but critical.
   GS: A second trend is that Mexico is rapidly becoming a logistics corridor in and out of North America. We saved a Korean company millions of dollars in their supply chain by moving containers through Manzanillo instead of Los Angeles.
   If you have a distribution center or market or factory anywhere east of Detroit, Chicago, Minneapolis or St. Louis, we've proved already that, using Mexico as a transportation corridor, we can get products from the Pacific Rim more efficiently through the Mexican West Coast ports than we can through Vancouver, Seattle and Los Angeles and land-bridging it. This means there will be fewer crossings at the gateway in Long Beach and Seattle and more at El Paso and Nuevo Laredo. In Mexico, it will either get trans-shipped straight up or modified in a free trade zone and then shipped up. But it will mean more volume at El Paso and Brownsville and McAllen.
   PL: This is happening much faster than everybody realizes.