Demonstrated potential: A diverse population and investments in innovation lend the state much of its long-term strength

The farthest north-west state in the country, Baja California (BC) is young, both historically and population-wise, and its dynamic economy and natural beauty have drawn a cross-section of inhabitants and businesses from Mexico and abroad. BC has five municipalities – Tijuana, Mexicali, Playas de Rosarito, Ensenada and Tecate – and a total population of over 3.3m, amounting to about 3.5% of Mexico’s inhabitants. The median age of the population is 26 and almost 56% of inhabitants are under the age of 20. With its 951,000 students in 4400 schools, BC also has one of the highest public investments in the education sector. This commitment to industry, innovation and research is demonstrating its effects across the state’s economy.

ECONOMY: Migration to the state in the search for better work and opportunities has caused the economically active population, which was reported at 1.5m, to have one of the highest overall levels of participation in the economy, at 61% of the population over the age of 14. According to February 2014 figures from the Ministry of Economic Development (Secretaría de Desarrollo Económico, SEDECO), BC has an employment rate of 94.53%. At MXN424bn ($32.94bn), according to the National Institute of Statistics and Geography ( Instituto Nacional de Estadística y Geografía, INEGI), BC’s GDP would place it at slightly under 3% of the country’s total, making it the 11th-largest state economy nationwide. The state’s GDP saw a decrease of more than 8% in 2009 due to the economic crisis in the US and its strong interconnection to the US market.

Despite this setback, economic recovery has been under way since 2010 with a 2.2% recovery, 4.4% growth for 2011 and 4.2% for 2012, according to INEGI. The state’s main economic activities by GDP were manufacturing and commerce, with shares of 19.4% and 16%, respectively, according to the Ministry of Economy’s 2012 figures, the latest available at time of print. The total foreign direct investment (FDI) was reported at $192.4m for the last trimester of 2013, and at $771.1m for the year, growing 30% over 2012 figures.

Remittances have slightly increased and stand at $542m for 2013, according to SEDECO. BC is the state with the most industrial parks in Mexico: there are a total of 93 industrial parks, including two techno-parks, and one information technology (IT) cluster. The state ranks 10th in competitiveness as calculated by the 2012 state ranking by the Mexican Institute for Competitiveness (El Instituto Mexicano para la Competitividad, IMCO), moving up three places from 2010. IMCO emphasised that BC has the most efficient tax collection service and that the crime rate per 100,000 inhabitants decreased 20%, from 4.3 in 2008 to 3.4 in 2010, though violent crime remains a government priority.

INCENTIVES & TAX REFORM: The Mexican tax system is arranged in such a way that most of the taxes are still collected at a federal level. As such, the states and municipalities have limited room to offer fiscal incentives to attract investment.

In the case of BC, such incentives are offered in the form of possible reductions in payroll tax and utilities costs such as water, wastewater and so on. However, as the secretary of economic development, Carlo Bonfante, told OBG, the state is focusing on attracting investments with long-term factors such as the availability of competitively priced resources including natural gas, water and electricity.

BC and all of the border areas in Mexico have faced challenges due to the recent fiscal reform. The change in legislation brought a mark-up to the value-added tax in the border region from 11% to 16%. This is now steeper than to California’s and Arizona’s 7-9% taxes and may become a deterrent to visitors, affecting sectors such as tourism. The increase is estimated to have caused inflation of 0.34% in February 2014 alone.

INFRASTRUCTURE: The availability of multimodal transport, including rail, seaports, airports and highways, has made the state’s integration possible. Further integration is currently under way following the announcement of a 120-project infrastructure overhaul plan by the state’s infrastructure department (see analysis). The plan is not limited to transportation, but includes opportunities in sectors such as water desalination, sewage and energy generation, health care and mining. The total value of the infrastructure project pipeline amounts to MXN65bn ($5.05bn), from which the state will be looking to obtain more than 27% from private investments via public-private partnerships.

Three natural gas connections with the US give the state access to competitively priced energy resources. Sempra and InterGen both have privately owned electricity generation facilities for energy export that total more than 1000 MW. Additionally, BC is host to the largest geothermal energy facility in the country: Cerro Prieto, with over 540 MW installed capacity. It has also developed the first state-government-owned wind park, La Rumorosa, with a capacity of 10 MW. Wind and solar power could be some of the biggest growing sectors, according to recent developments and project announcements, with the newly passed energy reform aiming at opening the energy markets in the country. Generation, transmission and distribution of electricity added to water and gas sales by pipeline amounted to a GDP of MXN16.1bn ($1.25bn) in 2012.

AGRICULTURE & FISHING: The combined GDP of the agriculture and fishing industries adds up to MXN13.7bn ($1.06bn). The main productive agricultural valleys in BC are Mexicali, Guadalupe and San Quintin, which are host to most of the state’s harvest. The limited availability of water in the coastal zone has brought up investment opportunities in desalinisation and water-efficient high-tech agriculture. These opportunities would allow further expansion of the state’s already well established wine industry.

In fishing, a recent initiative to re-order the existing permits and strengthen connections with the federal government is part of the Secretary of Fishing’s plan to make the industry a more sustainable one. Additionally, recent attention to the fields of aquaculture, combined with advances in biotech and industrial biology, may bring important investment opportunities in an already growing sector.

TOURISM: With a diverse geography and long history in the sector, the state annually generates more than MXN50bn ($3.89bn) from the tourism industry, according to the Ministry of Tourism. Recently the focus has been on growing niches such as the meetings, incentives, conferences and exhibitions segment, where a MXN600m ($46.62m) investment brought the opening of the Baja California Centre, which hosted 150,000 people in its first year. Another sub-sector, health tourism, will also see expansion. The state aims at formalising it by creating a special directorate. The 510,000 patients a year calculated by the Health Tourism Cluster is foreseen to grow to 800,000 in 2014 from this decision, combined with rising US health care costs and a strong service-provider base (see analysis).

INDUSTRY: The state’s main industrial strength lies within its manufacturing industry, with a GDP of MXN87bn ($6.76bn) in 2013 (see analysis). The manufacturing sector has seen a steady recovery from the 2008-09 crisis in the past few years. With long-established industries such as electronics and home appliances, the manufacturing base of the state is strong. Other highly developed sectors include medical device manufacturing and automotives (see Industry chapter).

Home to the biggest cluster of aerospace firms in the country, with over 60 manufacturers, BC has seen steady growth of 20% in this sector over the past eight years. Current global industry trends indicate there will be high demand for additional productive capacity, pointing to even further growth. As research and development centres are opening, local tendencies mark a move towards bringing more engineering and design processes to the state. One of the challenges is supply chain integration, which the cluster organisation is actively endeavouring to overcome.

RESEARCH & TECHNOLOGY: Research institutions in BC have been an important part of this sector’s evolution. Advances in the areas of fish reproduction and farming have seen the possibility of regeneration for the almost extinct Totoaba population. Additionally, incubation and technology transfer programmes such as BajaInnova have seen achievements in sectors like the pharmaceuticals industry (see Education chapter). The alliance between the Centro de Investigación Científica y de Educación Superior de Ensenada and Silanes has created a high-tech research centre with nine patents under its belt.

A nascent player, IT has seen companies like Softek, Telvista, Samsung SDA and Gameloft settle in the state. It@baja, BC’s IT cluster organisation, has been supporting the industry’s growth. The opening of Tijuana’s Bitcentre, a 5000-sq-metre space, designed to host over 25 small to medium-sized companies in the sector, has shown that there is broad support for the IT industry among stakeholders.

OUTLOOK: Recent economic figures indicate that BC’s path is solid. Access to tangible resources – natural gas, water and electricity – and a prepared and abundant workforce, distinguish the state from other investment regions. If BC plays its cards right, by continuing to support education and industry integration, the state could see a shift from manufacturing to the development of an innovation- and research-driven market.