Innovation, Finance, and Institutional Differences: US vs. Mexico

Key Insight

The Industrial Revolution, originating in England, spread to the United States, fostering innovation and entrepreneurial activity. The US patent system, protecting property rights in ideas, allowed individuals from diverse backgrounds—not just the wealthy elite—to secure patents and build fortunes, as exemplified by Thomas Edison. Between 1820 and 1845, only 19% of US patentees had professional or major landowning parents, and 40% had primary schooling or less, highlighting the democratic nature of innovation in the US.

Crucially, the US offered accessible capital for inventors to start businesses. The banking sector expanded rapidly, from 338 banks with $160 million in assets in 1818 to 27,864 banks with $27.3 billion in assets by 1914. This intense competition ensured capital was available at low interest rates. This widespread access to finance allowed individuals with good ideas to transform patents into profitable enterprises, underpinning rapid industrial growth and innovation.

In stark contrast, Mexico's financial sector in the 19th and early 20th centuries was highly concentrated and monopolistic. In 1910, only 42 banks existed, with two controlling 60% of total banking assets. This lack of competition enabled banks to charge high interest rates and primarily lend to the privileged and already wealthy, hindering broader economic participation. This structure was a direct result of Mexico's post-independence political institutions, where leaders like Porfirio Díaz, similar to earlier conquistadors, violated property rights and granted monopolies to supporters, demonstrating how political institutions shaped vastly different economic environments for innovation and capital access in the two nations.