Approximately two-thirds of the trade between the United States and Mexico is intrafirm. Most of this occurs within the context of Mexico’s special export pro- cessing sector, called the maquiladora industry. Orignially limited to its border with the United States but later expanded to the whole country, the maquiladora industry began in 1965. The original purpose of the government was to generate employment along Mexico’s northern border. In the long run, the maquiladora industry became a major source of manufacturing activity, a major employer, and one of the country’s main sources of exports.
The maquiladora industry is an example of an export processing zone （EPZ）. In EPZs, both domestic and foreign firms produce goods for export without paying tariffs on the parts and materials they import. This allows domestic and foreign firms such as General Motors and Sony to set up in Mexico and pay no tariffs on the inputs they bring into the country from abroad, as long as they export the output.
The number of firms in the export processing industry grew slowly but steadily and by 1980, fifteen years after the initial legislation, there were 620 plants with 120,000 workers. Nevertheless, the export processing industry was an exception to the dominant trend in Mexican manufacturing that remained firmly focused on production for the domestic market. Until the middle of the 1980s, Mexico’s development strategy was inward looking and most firms found that it was less profitable to export than to produce for the home market since goods sold domestically were protected from competition and goods sold abroad were not.
In 1982, a financial crisis struck Mexico and policymakers began to rethink the country’s development model. Up until then, the focus on production for the domestic market caused most firms to locate near Mexico City or one or two other major urban areas such as Monterrey or Guadalajara. The choice of locations reduced their transportation costs by locating production near their final market, and allowed them to take advantage of their internal economies of scale since they operated out of only one or a small number of plants. In an unforeseen way, Mexico’s development model during the 1950s, ’60s, and ’70s caused Mexico City to grow into one of the world’s largest cities and resulted in a very high proportion of the population becoming concentrated in the country’s largest urban centers.