“dollars and scents: alternative currency acceptance in artisanal markets in guadalajara mexico”

“DOLLARS AND SCENTS: ALTERNATIVE CURRENCY

ACCEPTANCE IN ARTISANAL MARKETS IN GUADALAJARA

MEXICO”∗

Michael J. Pisani

Central Michigan University Mt. Pleasant, Michigan, USA

Luis Fernando Cruz Perez, Marıa Nitzaye Hernandez Corona,and Jesus Eduardo Godınez

ITESO, Guadalajara, Mexico

Abstract

The recent globalization of tourism has connected international con-sumer and local artisan directly and more intensively. As foreign buyerand artisan seller interact, a variety of payment options and mechanismsmay be considered, including cash transfers in the buyer’s home currency.In this article, we report the findings of a June 2012 survey (n = 97) ofU.S. dollar acceptance within inland artisanal markets in Guadalajara,Mexico. Even though the Mexican regulatory environment for U.S. dol-lar usage in Mexico has thickened since 2010, we find that a majority ofMexican firms located in traditional artisanal zones in the Guadalajarametropolitan area willingly accept the U.S. dollar in retail transactions.These small-scale artisanal enterprises accept U.S. dollars in payment, onoccasion substituting the U.S. dollar in place of the local Mexican peso fortransactions, because U.S. dollar acceptance drives higher sales volumesand the opportunity to earn a premium on the currency exchange. We findthat the determinants of Mexican firm-level U.S. dollar acceptance includebusiness maturity, higher levels of foreign patronage, and focused artisanalproduction.

IntroductionThe contemporary number of international tourist arrivals is stag-

gering; in 2010 the World Bank reported more than 940 million foreignarrivals (World Bank, 2013). While this number may be somewhat inflated

∗This article was previously presented at the 60th Annual SECOLAS Conference held inPanama City, Panama, March 6–9, 2013. The authors would like to thank the conferenceparticipants attending the panel on “State and Society in Post-Revolutionary Mexico”, aswell as the anonymous reviewers, for their constructive and helpful comments.

Contact Author: Michael J. Pisani, Ph.D. Professor of International Business & Jerry and Fe-licia Campbell Endowed Professorship for Research 204C Smith Hall Central Michigan Uni-versity Mt. Pleasant, Michigan 48859, USA Tel.: 989–774–1499; E-mail: [email protected]

C© 2014 Southeastern Council on Latin American Studies and Wiley Periodicals, Inc. 29

The Latin Americanist, March 2014

by multiple trips by the same traveler, heightened international tourismis part and parcel of the present globalization era of world commerce. Inthis present era, Mexico receives more than 22 million annual visits fromabroad, mostly visitors from the United States. These North Americantourists bring with them U.S. dollars to spend where the present historicalmoment captures the globalization of markets, the frequent movement ofU.S. dollars, and the interchange between the two forces.

Within Guadalajara, Mexico’s second largest city with more than fivemillion inhabitants in the metropolitan area, two large artisanal commu-nities produce and sell their traditional wares daily to locals and touristsalike. The clustering of artisans is common in Mexico, providing dynamicand creative artisanal spaces (Cowen, 2005). Indeed, these distinct artisanalcommunities of Tonala and Tlaquepaque are destinations where visitorsmay watch artisans at work throwing pottery, may hear musical troupesplaying mariachi music, and may see traditional pre-Colombian dance infull costume. Food and drink are abundant everywhere.

Many artisans in Tlaquepaque specialize in pottery, textiles and hand-blown glass. The downtown plaza is closed off to vehicle traffic, facilitat-ing a pedestrian mall with both inside and outside markets and retailers.Tonala offers visitors the opportunity to view the production of artisanalcrafts at the physical location of artisan production where a visitor mayobserve artisans painting, chiseling, molding or firing their handiwork.Additionally, the market at Tonala is augmented twice weekly by aninflux of itinerant merchants in street fairs (known locally as tianguis).Because of their unique retail and artisanal offerings, both Tlaquepaqueand Tonala attract many international tourists, primarily from the UnitedStates. International tourists and consumers are commonplace in thesetwo artisanal retail districts. Many of the retailers are especially adept inpersonal selling techniques targeted to North American shoppers. Onesuch in-store retail adaptation is the acceptance of the home currency(as a medium of exchange) of the primary international tourist—the U.S.dollar1—particularly when these customers are short of Mexican pesos.

Recently, the Mexican government has modified the rules surroundingthe acceptance of U.S. dollars within its economy. The Mexican govern-ment has done so in order to reduce money laundering, particularly as-sociated with organized crime, drug trafficking, and informal trade. Thischange in the law does impact local dollar denominated currency transac-tions. Since September 2010, tourists exchanging U.S. dollars are allowedto exchange up to a maximum of $1,500 per month. Mexican businesses op-erating within tourist zones may exchange through their regular bankinginstitutions $7,000 U.S. dollars per month into Mexican pesos. IndividualMexicans, through their regular banking institution, may exchange $4,000U.S. dollars per month into Mexican pesos and up to $300 U.S. dollarsper day (at either a bank or casa de cambio [or exchange house]).2 Withinthe present Mexican banking system, foreign currency deposits or dollarsconstitute less than ten percent of total bank deposits (Cartas, 2010).3

30

Pisani et al.

This article explores the acceptance of the U.S. dollar in retail transac-tions in Tlaquepaque and Tonala derived from field surveys conducted inJune 2012, nearly two years after the new U.S. dollar rules took effect. Priorto the governmental changes in U.S. dollar exchange, previous researchconducted in a U.S.-Mexico border location in Nuevo Laredo, Mexicofound universal retail acceptance of the U.S. dollar (Pisani, Yoskowitz, &Brusa, 2008). However, this paper seeks to identify whether the universalacceptance of the U.S. dollar at the U.S.-Mexico border is representative oftourist locations far from the border, such as the interior west-central studysite in Guadalajara, Mexico. Additionally, the recently changed Mexicanregulatory (institutional) environment with regard to U.S. dollar exchangemay have impacted Mexican retailer operations’ engagement with U.S.dollars.

The remainder of this article is organized as follows: section two re-views the relevant literature, section three describes the methodology,section four presents the results, and the last section concludes the paper.

Literature ReviewThe retail acceptance of the U.S. dollar differs substantially from gov-

ernment decisions to dollarize. The retail decision is made by owners andmanagers at the individual store or store chain level, whereas national cur-rency adoption and usage are sovereign issues decided upon by nationalgovernments and national leaders. Essentially, national policy dictates theeconomic framework for which currencies may be generally accepted asa medium of exchange, and it is within this framework in which businessmaneuvers. Niskanen (2000) argues for a step approach toward dollar-ization (i.e., the use of the U.S. dollar as the de facto national currency)for Latin American countries, if necessary, and argues against a regionalor optimal Western Hemispheric currency zone. Where national leadershave failed with their own national currencies, Niskanen (2000) is sympa-thetic toward dollarization; however, some experiments with some formof dollarization in Latin America have been more successful than others.4

The cash payment mechanism investigated in this article is the use ofthe U.S. dollar for retail purchases in the artisanal zones of Tlaquepaqueand Tonala located within the greater Guadalajara, Mexico metropolitanarea. The use of an alternate currency in place of the standard nationalcurrency at the retail level has been referred to as currency substitution(Yoskowitz & Pisani, 2002) and may be observed in many parts of theworld.

Handa and Bana (1990) argue that only when the absolute values ofthe yields on these payments exceed the transaction costs of handlingforeign currency is there an enticement to switch between currencies. Sim-ilar points regarding the role of transaction costs as determinants of cur-rency substitution are also made by Williamson (1975, 1996) and Uribe(1997). Inflation differentials and information asymmetries about foreigncurrencies can also influence business decisions in this regard. In both

31


cases, exchange rate and transaction cost uncertainty result, complicatingthe pricing decisions faced by owners and managers.

Moving beyond the exclusive act of currency exchange, there also maybe positive trade-offs or a dual-use atmosphere of currency substitution,such as between currency substitution and growth in retail sales, currencysubstitution as a store of value, security, or as an inflation hedge, andbetween currency substitution as a cash link to business operations andsupplier networks. Hence, currency substitution may permit and facilitateother important business actions outside of the singular currency exchangeprocess.

Today, partial dollarization of the Mexican economy allows U.S. con-sumers to make purchases in Mexico without using pesos in border com-munities and beyond. Both dollarization and reverse dollarization (the useof alternate currencies in U.S. dollar zones) occur within the retail segmentsof the border areas between the United States and Mexico and the UnitedStates and Canada (Pisani & Yoskowitz, 2006). Approximately 20 percentof Texas border retail firms accept Mexican pesos, while 70 percent ofAmerican border businesses farther north regularly accept Canadian dol-lars (Yoskowitz & Pisani, 2002; Pisani & Yoskowitz, 2006). In both borderenvironments, U.S. retailers not only accept the cross border currency, theydo so at a favorable or profit making exchange rate. In essence, these bor-der retailers generate additional retail sales and earn a premium (profit) onthe currency transaction. And the impact of currency substitution is not in-consequential, for U.S. retailers along the Canadian borders’ average saleswere enhanced by more than 3.0% of total sales while earning a 7.7% cur-rency exchange premium on each sales transaction (Pisani & Yoskowitz,2006). Along the Texas border, U.S. retailers on average increased theirsales by 6.0% and earned a 2.5% currency exchange premium through theacceptance of Mexican pesos (Pisani & Yoskowitz, 2006) and as sales vol-umes grow, retailers are more likely to give a little back on the currencyexchange rate premium (Munoz, Pisani, & Fullerton, 2011). Interestingly,microenterprises on the U.S.-Mexico border in El Paso, Texas are muchmore engaged in peso acceptance than other sized firms in the area andmicroenterprises are doing so with more profitable currency exchange ratemargins (Pisani & Fullerton, 2013).

With regard to the use of the U.S. dollar in Canadian and Mexicanborder retail establishments, Pisani, Yoskowitz and Brusa (2008) offer thefollowing insights. Canadian border retailers like their U.S. counterparts,on average increased sales by 3.4% and earned a premium of 2.1% per U.S.dollar transaction by accepting U.S. dollars as a substitute for Canadiandollars. Nearly all (98.5%) Canadian retailers accepted the U.S dollar. In theborder city of Nuevo Laredo, Mexico, Pisani, Yoskowitz, and Brusa (2008)found that 100% of retailers surveyed accepted the U.S. dollar. U.S. dollarsales were a large and important component of total sales for Nuevo Laredoretailers averaging 23.7% of total sales. However, acceptance of the U.S.dollar occurred at a currency exchange rate loss of nearly 1% to Mexican

32

Pisani et al.

retailers. This loss, the first recorded in the literature, suggests currencysubstitution trade-offs at work. These trade-offs most likely resulted fromthe eagerness to switch from pesos to dollars to access north of the bordermarkets, as well as maintain a stable foreign currency reserve.

Over the past forty years, greater monetary instability in Mexico hascontributed to the acceptance rate difference (Patrick & Renforth, 1996).Cultural ties, language, proximity to a port of entry, and business rela-tionships with the bordering country may help reduce uncertainties as-sociated with accepting foreign currency payments (Yoskowitz & Pisani,2007; Fullerton, Molina, & Pisani, 2009). However, these uncertainties mayalso make some retailers more risk-averse and influence them to shy awayfrom accepting payments in foreign currency. An example would be U.S.retailers that held pesos during turbulent periods of unexpected currencyweakness in Mexico, such as September 1976 or December 1994. From amicroeconomic perspective, awareness of the profit enhancing opportu-nity of maintaining a premium on currency exchange helps offset the costsof engaging in dual currency sales operations (Pisani & Yoskowitz, 2006).

Omitted from the literature cited above is the impact of distance awayfrom the focal area of the border. Borders are unique spaces where in-tense interactions may be commonplace; less so further away from theborder (Clark, 1994). In a preliminary study of currency substitution onthe Guatemalan border and inland from Belize, Cal, Pisani, and Cal (2009)uncovered a spatial dimension to currency substitution whereby salesvolumes declined and exchange rate premia increased from the borderinland. Nonetheless, previous research has not effectively studied the im-pact that spatial distance contributes to currency substitution. The theoryof distance decay (rooted in central place theory) suggests that incidence offirm-level currency substitution ought to erode as distances increase fromthe border (Losch, 1954; Krugman, 1997). Hence the incidence of firm-levelparticipation in the acceptance of the U.S. dollar within interior of Mexicoought to be lower and more costly to the consumer than that observed onthe U.S.-Mexico border.5

The contribution of this article extends the previous currency substi-tution literature on Mexico to an important inland artisanal location in apost-dollar currency exchange regulatory environment.

MethodologyDuring the summer of 2012, 97 businesses from Tlaquepaque (n =

46) and Tonala (n = 51) were surveyed as to their strategic choice ofaccepting the U.S. dollar. In all, 117 businesses were approached with97 agreeing to participate in the survey.6 The surveys were conductedby three trained undergraduate Mexican business students from ITESO(based in Guadalajara) and conducted on the weekend of June 9th and 10th

to maximize the number of businesses present (the same weekend as thetianguis). A small pilot study was undertaken before the launch of the fieldsurveys to facilitate survey understanding and harmonize data collection

33


routines. On average, the surveys took ten minutes to complete at thebusiness site. In Tlaquepaque, the five most densely populated streetswith businesses located off the main plaza were targeted for survey. Thesestreets stretched for about four blocks and every third business was askedto participate in the study. Similarly in Tonala, three streets from the centerof business activity were surveyed with interviewers targeting every thirdbusiness.7

The survey instrument was derived from six previous studies con-ducted by the first author of this study. The survey instrument was trans-lated into Spanish and back translated into English, as suggested by Brislin(1980), to ensure readability and clarity for the Spanish survey. The surveyconsisted of ten firm-level demographic questions, including such ques-tions as the number of employees, firm type, sales, and firm age. Eachfirm representative was asked whether their firm accepted U.S. dollars.For firms indicating that they engaged in currency substitution, fifteenfollow-up questions (e.g., “Does accepting U.S. dollars enhance sales?”and “Does the business conduct any type of advertisement or promotionwith regards to its acceptance of U.S. dollars?”) were asked concerning themechanics of accepting U.S. dollars. Firms that rejected payment in dollarsanswered five “No” follow-up questions. These questions asked whetherthe firm had considered accepting dollars, whether they believed accept-ing dollars was too complicated a process, and where the decision to rejectU.S. dollars organizationally originated. The peso-dollar exchange rate forthe weekend survey period was 14.0351 pesos per dollar as reported bythe Banco de Mexico.8

ResultsIn this section, we report the descriptive statistics for the respondent

businesses in our survey and distinguish between firms that accept theU.S. dollar in business transactions and those that do not via univariateand multivariate analyses.

Descriptive Statistics- All Firms:

Table 1 reports the descriptive statistics for firms in our survey. For themost part, respondent firms were small with three employees on averageand nearly no unpaid family staff assisting in business operations. Onaverage, respondent firms had more than a decade of business experience.About eighteen percent of all respondent firm customers were foreigners,most likely American. Just over twenty-two percent of employees had theability to speak English and nearly forty percent of respondent firms hadat least one staff member able to speak with customers in English. Weeklysales numbers are problematic because only 28.9% of respondent firmsanswered this final survey question. Tentatively, weekly sales averagedapproximately $925 during the survey period. There was some diversity inbusiness establishments—just more than half are artisanal with food and

34

Pisani et al.

Table 1: Descriptive Statistics for Respondent Businesses (n = 97)

Variable Value

Mean Number of Paid Employees (std. dev.) 3.04 (5.42)Mean Number of Unpaid Employees (std. dev.) 0.30 (0.70)Mean Years in Operation (std. dev.) 11.42 (12.67)Percent of Staff that Speaks English – Mean (std.

dev.)22.18 (31.58)

Percent of Firms with at least 1 Staff Memberthat Speaks English

39.2

Mean Percent of Clients who are Foreigners (std.dev.)

18.23 (22.11)

Mean Weekly Sales in Mexican Pesos (std. dev.) 13,002.08 (13,952.17)Retail Category (%)

Artisan 50.5Restaurant/Food or Drink Stand/Candy Store 15.5Tile/Glass 6.2Liquor Store 6.2Art/Painting 5.2Clothing/Leather Accessories 7.2Furniture/Curtains/Linens 5.2Other 4.1

Percent of Firms Accepting U.S. Dollars 59.8

drink establishments the next largest group. In all, 59.8% of respondentfirms accepted the U.S. dollar in various market transactions.

Within comparative context for Mexico, 100% of Mexican retail firmsfrom Nuevo Laredo accept the U.S. dollar at the border. Hence, distancefrom the currency home in this case seems to matter within Mexico. Thatis, the universal acceptance of U.S. dollars by Mexican retailers in ourstudies declines with distance from the border. Yet, the prevalence of U.S.dollar acceptance in the artisanal zones within the greater Guadalajarametropolitan area is similar to peso acceptance on the U.S.-Mexico borderin Nogales, Arizona (U.S.), and Canadian dollar acceptance on the U.S.-Canada border in Port Huron, Michigan (U.S.) (Pisani & Yoskowitz, 2006).

Descriptive Statistics- By Acceptance Decision:

All but one of the base descriptive statistics was significantly differ-ent between respondent firms that accepted the U.S. dollar in market ex-changes and those firms that did not accept the dollar. Accepting firms onaverage were larger based upon number of employees, more establishedor older in terms of firm age, had a greater capacity to speak English,and catered to more foreign clients than non-accepting firms. Only thenumber of unpaid staff was insignificant between accepting and

35


non-accepting firms (see Table 2, Panel A). The acceptance decision byretail category is presented in Panel B1 of Table 2. The largest categories—artisans and food/drink—had the greatest numbers of non-acceptingfirms. Interestingly, artisans also had the greatest number of acceptingfirms. A broader classification of artisanal firms including artisans, tile,glass, and leather shops appears in Panel B2 of Table 2. This groupingperhaps more closely exemplifies artisans in the area, and a majority ofboth artisans and other establishments accept the U.S. dollar. Lastly, theartisanal site of Tlaquepaque had more accepting respondent firms (seeTable 2, Panel C).

All accepting firms took the U.S. dollar at a premium which averaged0.9091 pesos to the dollar and ranged between 0.0351 and 3.0351 pesosto the dollar. This translated to an average exchange rate of 13.1260 pe-sos to the dollar and an acceptance range of 11.00 and 14.00 pesos to 1U.S. dollar. In percentage terms, the average premium was 6.4773 per-cent per foreign exchange transaction, permitting dollar accepting respon-dent firms a secondary and positive revenue source beyond the sale oftheir respective good or service. The premium percent ranged from 0.25percent to 21.63 percent. In ascertaining the firm specific exchange rate,the newspaper (38.6%), bank (22.8%), casa de cambio (14.0%), central of-fice (12.3%), and a fixed rate (10.5%) were the information sources con-sulted to establish firm offered exchange rates. And U.S. dollars obtainedthrough firm sales were quickly exchanged back at banks (39.3%) andcasa de cambios (42.9%) within the same day (38.5%) and within two days(23.1%).

More than seventy percent (70.7%) of firms accepting the U.S. dollarnoted that the decision to do so increased sales. For the group, sales inU.S. dollars ranged for nearly none at all to 70% of total sales, and averagesales for accepting firms in U.S. dollars was 7.7% of total sales or about$72 per week in U.S. dollar sales for the firms providing sales data. Manyfirms had been accepting U.S. dollars for a very long time with nearly halfof accepting firms doing so for more than a decade, and two firms hadaccepted the U.S. dollar for over fifty years.

Firms that chose not to deal with U.S. dollars cited various reasons,including lack of demand for such a service, that the exchange processwas too complicated and risky, and that they lacked previous experi-ence in such an exercise. Together, these reasons coalesced into the be-lief that dealing with foreign currency exchange rates was simply toocostly and unpredictable. Nonetheless, a majority (53.8%) of non-acceptingfirms thought that firm sales would increase if they dealt with U.S.dollars as a payment mechanism. The acceptance decision lay almostexclusively in the hands of the local owner. However, for this group,the owner, while acknowledging the existence of a potential businessopportunity, believed that the aversion to risk in foreign currency ex-change outweighed the possible benefits of sales growth and exchange ratepremia.

36

Pisani et al.

Table 2: Comparison of Means and Cross tabulation of MicroenterpriseBusiness Demographics by Acceptance Decision

Accept Dollars?

Variable Yes No

Panel A: Demographics*Mean Number of Paid Employees (std. dev.) 3.79 (6.85) 1.97 (1.630)Mean Number of Unpaid Employees (std.

dev.)0.30 (0.71) 0.29 (0.69)

Mean Years in Operation (std. dev.) 14.05 (13.32) 7.39 (10.56)Percent of Staff that Speaks English – Mean

(std. dev.)28.1 (32.0) 13.6 (29.3)

Percent of Firms with at least 1 Staff Memberthat Speaks English

50.0 23.1

Mean Percent of Clients who are Foreigners(std. dev.)

24.1 (24.4) 9.8 (15.1)

*Categories in panel A in italics are statistically different for acceptingand non-accepting firms.

Panel B1: (Narrow Artisan) Retail Category (N)Artisan 22 27Restaurant/Food or DrinkStand/Candy Store

5 10

Tile/Glass 6 0Liquor Store 5 1Art/Painting 5 0Clothing/Leather Accessories 7 0Furniture/Curtains/Linens 6 0Other 3 1

Total 58 39Pearson Chi-square = 26.124,

df = 7, p = .000

Panel B2: (Broad Artisan) Retail Category (N)Artisan/Tile/Glass/Leather 30 27Other 28 12


df = 1, p = .086

Panel C: Artisanal Community Location (N)Tlaquepaque 34 12Tonala 24 27


df = 1, p = .007

37


Tab

le3:

Log

isti

cR

egre

ssio

nR

esu

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sA

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gth

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r(Y

es=

1)

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iab

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Coe

ffic

ien

tS

.E.

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Exp

(β)

Con

stan

t−

1.15

71.

237

.876

.349

.314

Num

ber

ofPa

idEm

ploy

ees

.085

.109

.605

.437

1.08

8N

umbe

rof

Unp

aid

Empl

oyee

s.2

66.4

07.4

25.5

141.

304

Yea

rsin

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ratio

n.0

48.0

273.

238

.072

*1.

049

Perc

ento

fSta

ffth

atSp

eaks

Engl

ish

.004

.016

.079

.779

1.00

4Fi

rms

with

atle

ast1

Staf

fMem

ber

that

Spea

ksEn

glis

h(Y

es=

1)−

.621

1.06

5.3

39.5

60.5

38

Perc

ento

fClie

nts

who

are

Fore

igne

rs3.

216

1.71

63.

513

.061

*24

.932

Ret

ailC

ateg

ory

(Bro

adA

rtis

an=

1)1.

116

.607

3.38

1.0

66*

3.05

2Lo

catio

n(T

onal

a=

1).2

54.5

73.1

96.6

581.

289

−2Lo

gLi

kelih

ood|

sign

ific

ance

leve

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|.001

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2 |N

agel

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8|.3

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itR

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(%):

Yes

|No

|Ove

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81.1

|73.

0|7

7.8

a Rep

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sign

ific

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atth

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<0.

10;†

P<0.

05;a

nd‡ P

<0.

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vels

.

38

Pisani et al.

Multivariate Analysis of Acceptance Decision:

Lastly, we employed logistic regression to determine the key variablesdistinguishing accepting and non-accepting firms in the U.S. dollar ac-ceptance decision. Logistic regression is the appropriate statistical toolwhen the dependent variable is dichotomous (i.e., acceptance = 1, non-acceptance = 0). Eight independent variables were estimated to assist inthe prediction of the acceptance decision. These eight variables includenumber of paid employees, number of unpaid employees, the numberof years in operation (or business age), the percent of firm staff thatspeaks English, firms with at least one staff member conversant in English(yes = 1), the percent of foreign customers to all customers by firm (orpercent of clients who are foreigners), retail category (artisan = 1, other =0), and location (Tonala = 1, Tlaquepaque = 0). The retail category wascollapsed into artisan versus other because of estimation constraints andthe small size of many of the remaining retail categories and the broadartisan category was used to best reflect the artisan grouping. Three vari-ables proved significant in the analysis: years in operation, percent offoreign customers to all customers, and retail category (see Table 3). Theinterpretation of these results suggests: 1) that for every additional yearof operation, a firm is 4.9% more likely to engage in the acceptance ofU.S. dollars; 2) that for every additional percentage point gain in foreigncustomers, a firm is 23.9% more likely to accept U.S. dollars; and 3) thatartisanal business operators are 2.052 times more likely to accept the U.S.dollar than other firms. The model diagnostics are acceptable (see bottomof Table 3) and the model predicts better than 1.25 times the proportionalchance criterion.9

The multivariate analysis suggests that firm experience, foreign clien-tele, and an artisan focus are the important determinants of the deci-sion to engage in foreign currency substitution or U.S. dollar acceptance.Years of experience in business seems to alleviate the risks and uncer-tainty associated with currency substitution. However, the key variableappears to be the impact of foreign buyers within a local marketplace.Where foreign consumers possess U.S. dollars and the wherewithal touse them, astute artisan shopkeepers cater to this consumer demand. Theconfluence of the global and local (or glocal) permits foreign buyers topurchase local Mexican artisanal treasures via multiple purchase mech-anisms including the use of the U.S. dollar in a faraway inland Mexicanlocation.

ConclusionThis article illustrates the extent and determinants of U.S. dollar accep-

tance beyond previously studied border environments in Mexico in thepresent age of globalization. A majority (59.8%) of respondent firms in theartisanal heart of Tlaquepaque and Tonala located in greater Guadalajara,Mexico have adapted their retail operations to serve foreign clients and

39


tourists wishing to purchase goods in U.S. dollars. While not the univer-sal rate of U.S. dollar acceptance found in Mexican retail shops on theU.S.-Mexico border in Nuevo Laredo, clearly most firms located in theartisanal districts of Guadalajara find purpose in accepting U.S. dollarsin many retail transactions. Perhaps distance from the border and the re-cent institutional changes in disposing of U.S. dollars within the formalMexican banking system have dampened U.S. dollar acceptance interestamong Mexican retailers located in Tlaquepaque and Tonala. Certainly,exchange rate risk and perceived complications associated with currencysubstitution curtailed some Mexican retailers in our study from engagingin dual currency transactions.

Hence, the acceptance of the U.S. dollar in retail transactions iswidespread and common in present-day Mexico.10 While this practicemay appear routine today, this is a recent phenomenon increasingly en-abled through Mexico’s integration into the global economy (i.e, GATT in1986) and inclusion in the regional North American economy (i.e., NAFTAin 1994). This integration within North America is nearly complete asMexico’s business cycle is closely synchronized with the United States,particularly evident since NAFTA (Miles & Vijverberg, 2011).

For firms in our study willing to accept U.S. dollars for payment, theseenterprises augmented sales by nearly 8% on average and earned on av-erage a 6.5% premium on the exchange rate transaction. More establishedartisanal firms with an important international tourist clientele are themost likely firms to engage in the acceptance of U.S. dollars. Of note, thiscurrency substitution phenomenon persists even in the changed regula-tory environment of the U.S. dollar economy in Mexico. Yet a large groupof firms (40.2%) have decided against retail transactions dealing in U.S.dollars even though most report dollar acceptance would increase sales.Nearly all of these firms report accepting dollars would be “too compli-cated”, and a clear majority of non-accepting firms believe they wouldlose money dealing with U.S. dollars. This aversion to operating in a dualcurrency environment for firms not participating in U.S. dollar acceptancemay diminish sales and prohibits the opportunity to earn exchange ratepremia, while allowing competitors willing to accept U.S. dollars enhancedprospects to cater to foreign clients and reap the twin benefits of enhancedsales and currency transaction gains. Simply put, firms rejecting paymentin U.S. dollars are leaving money on the table.

The implications for Mexican businesses, especially small retail busi-nesses, suggest engagement in currency substitution may enhance (e.g.,new sales) and even create new revenue (e.g., exchange rate premia)streams. This customer service of accepting U.S. dollars in retail transac-tions may provide a market niche and a means to differentiate competitiveenterprises with an in-store informational campaign as simple as a signin English indicating the acceptance of U.S. dollars or through personalselling (e.g., word of mouth), especially if business personnel has someEnglish language ability.

40

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In conclusion, we found that currency substitution follows the move-ment of global (U.S.) consumers in concentrated inland tourist zones inMexico. Astute Mexican business owners in these areas provide customer-demanded services (e.g., acceptance of the U.S. dollar) reaping dualrewards—enhanced sales and a foreign exchange premium. Perhaps otherresearchers may document similar findings in other such markets as theMercado Nacional de Artesanıas in Masaya, Nicaragua and shed further lighton the general acceptance of the U.S. dollar in retail transactions through-out Latin America while noting the possibility of distance decay from theUnited States.

Endnotes1 The U.S. dollar also serves as a store of value, a platform (or hard) currencyin international transactions, and as an international reserve currency.2 The official posting of the Mexican legal changes associated withU.S. dollar exchange (“Anuncia la SHCP Medidas para Regularizarla Entrada de Dolares en Efectivo al Sistema Bancario Mexicano”)may be accessed at: http://www. hacienda.gob.mx/SALAPRENSA/doc_comunicads_prensa/2010/Junio/comunicado_041_2010.pf.3 However, the degree of dollarization within Latin America hoversat about 30% of total bank deposits. Some countries have completelydollarized, such as El Salvador, Panama, and Ecuador. Other LatinAmerican countries hold few bank deposits in U.S. dollars. Examplesare Chile and Argentina who possess less than 20% of dollar denomi-nated bank deposits. On the other hand, several Latin American countrieshave substantial dollar deposits constituting over half of all bank deposits.These nations include Nicaragua, Bolivia, Uruguay, Peru, and Costa Rica(Cartas, 2010). For a primer on the pros and cons of dollarization, see Bergand Borensztein (2000).4 For example, Swiston (2011) argues that dollarization in El Salvadorhas significantly improved economic efficiency and promoted economicgrowth. On the other hand, the Argentine debacle using the dollar as areserve currency managed by a currency board failed in 2001–2002 (IMF,2003).5 Interestingly, this phenomenon of distance decay may be also studied andcontextualized between nations, as noted by one reviewer. For example,geographic distance away from the U.S. within the Western Hemispheremay influence the rate of use of the U.S. dollar (e.g., greater acceptance ofthe U.S. dollar in retail transactions in Central America and the Caribbeanvis-a-vis South America). Beyond geographic distance, other factors arealso important, such as the structure and performance of economies—where U.S. dollars find enthusiastic havens in unstable (e.g., Venezuela)and fragile (e.g., Bolivia) economies. We appreciate this reviewer’s insightand call upon ourselves and others to investigate this research question infuture research.

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6 Hence, 82.9% of contacted businesses agreed to participate in this study.7 For those readers familiar with these locations, the streets in Tlaquepaqueare: Morelos, Independencia, Juarez, Alfareros, and Herrera y Cairo, andthe streets in Tonala are: Cruz Blanca, Santos Degollado, and Tonaltecas.8 This rate reflects the political uncertainty surrounding the 2012 Mexicanpresidential elections held three weeks later on July 1.9 The proportional chance criterion is calculated as CPRO = p2 + (1-p)2

where p is the proportion of subjects in one group. In this model CPRO =.520 and 1.25 times CPRO is 65.0%. The model estimates well, with a hitratio of 81.1%.10 The U.S.-Mexico border has, for some time, been increasingly integratedand interdependent (see Martınez, 1994; Patrick & Renforth, 1996). Theintroduction of Mexico’s Border Industrialization Program in 1965, whichushered in the age of the maquiladora, is often mentioned as a key policyevent in this twin city integration. The first author of this article recalls thedifficulty of U.S. dollar acceptance at retailers throughout central Mexicoin the early 1980s that eventually eased throughout the period of Mexico’sintegration into the global and North American economies.

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