Doing Business in Mexico Doing Business in Mexico
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Issue: Doing Business in Mexico Doing Business in Mexico By: Christina Hoag Pub. Date: September 14, 2015 Access Date: October 1, 2021 DOI: 10.1177/2374556815608835 Source URL: http://businessresearcher.sagepub.com/sbr-1645-96878-2693503/20150914/doing-business-in-mexico ©2021 SAGE Publishing, Inc. All Rights Reserved. ©2021 SAGE Publishing, Inc. All Rights Reserved. Is the climate welcoming for international companies? Executive Summary Seeking to improve its economy and the standard of living for its 122 million citizens, Mexico is undergoing a massive transformation as it courts foreign investors and an array of trade partners. It has embarked on an ambitious agenda of domestic reforms—opening the oil sector to private investors for the first time in 76 years, breaking up telecommunications monopolies and modernizing education, as well as overhauling outdated infrastructure and cultivating a portfolio of free-trade agreements. The result has been a boom in trade and investment in the world's 11th largest economy. But the country faces notable challenges, chiefly high rates of violent crime, endemic corruption, a wide gap in wealth distribution and an underskilled workforce. Experts say Mexico's potential as an economic powerhouse will continue to go unfulfilled unless those pressing social issues can be reined in. Among the questions of concern for international business: Is labor cost-effective in Mexico? Is it safe to operate there? Does Mexico offer investors sufficient and reliable infrastructure? Overview March 18, 1938, is a proud date in Mexican history, memorized by generations of schoolchildren along with the dates of the country's independence from Spanish and French rule. March 18 was the day President Lázaro Cárdenas nationalized the oil industry, seizing oil fields from U.S. and British companies and enshrining Mexico's vast petroleum reserves as a national patrimony, belonging to the people for the benefit of the people, in the constitution. 1 Over the following decades, under the stewardship of the sprawling state- owned conglomerate Petróleos Mexicanos, commonly known as Pemex, Mexico became one of the world's top 10 oil producers, and petroleum profits funded a third of the nation's annual spending. 2 So in 2012, when President Enrique Peña Nieto of the Institutional Revolutionary Party, or PRI, proposed allowing private companies, including foreign ones, to again extract oil profits from Mexican soil, the nationalistic opposition was fierce. During one debate in the Mexican congress, an In April, with Mexican President Enrique Peña Nieto on hand, opposing legislator dramatically stripped to his underwear to illustrate his Toyota announces it will build a $1 billion automobile plant to point that the administration was “stripping” the nation of its natural wealth. 3 make Corollas. The plant is scheduled to open in 2019 in Guanajuato and will create some 2,000 jobs. (Alfredo Peña Nieto noted that production had been falling for eight years under Estrella/AFP/Getty Images) Pemex and said limited private investment would nearly double oil output to 4 million barrels a day by 2025. Privatization, he argued, would attract $20 billion in new investment, create badly needed jobs and bring new exploration and exploitation technology to Mexico. He won the fight, and in December 2013, Mexico's constitution was amended to allow private companies to develop the world's largest unexplored crude reserves after the Arctic Circle. 4 If any move epitomizes Mexico's transition into the 21st-century global economy, it's the “oil opening,” which allows companies from around the world to bid on exploration rights to dozens of mostly offshore blocks. After decades of protectionism, Mexico has turned 180 degrees. Trade liberalization and foreign investment now form the cornerstones of an outward-looking economic policy aimed at raising the standard of living for Mexico's 122 million people. The country is attracting billions in foreign capital—in industries ranging from manufacturing to financial services, creating thousands of jobs and expanding the middle class. “There's an openness that wasn't there before,” says Scott Miller of the Center for Strategic and International Studies, a Washington think tank on business and politics. “They're open to trade and made it easier to invest. Mexico has made a lot of progress over the last 20 years.” Yet for foreign investors, there are still many worries, including widespread poverty, high rates of violent crime and narcotrafficking, feeble law enforcement, graft and low educational attainment. Experts say the country's progress will ultimately hinge on how well it can resolve those long-entrenched issues. “The fundamentals are there,” says Jerry Haar, a Florida International University professor who has written more than a dozen books on Latin American business. “But there's a level of unevenness.” Page 2 of 25 Doing Business in Mexico SAGE Business Researcher ©2021 SAGE Publishing, Inc. All Rights Reserved. Mexico is a federation of 31 states plus the Federal District, better known as Mexico City, the nation's sprawling capital of 21 million people. Each state has its own legislative, judicial and executive branches. States run their own investment promotion programs, with industrialized states in central and north Mexico being more active than in the rural south. Investors usually deal with state and municipal governments, rather than the central government. Map: States and Major Cities of Mexico A rig drills for oil in the Gulf of Mexico. Under Pemex, a state- owned conglomerate, Mexico has been one of the world's top 10 oil producers. However, with production falling, the government in 2013 decided to end Pemex's monopoly and allow private firms to drill. (Omar Torres/AFP/Getty Images) Page 3 of 25 Doing Business in Mexico SAGE Business Researcher ©2021 SAGE Publishing, Inc. All Rights Reserved. Source: Google Maps Mexico consists of 31 states, plus the Federal District of Mexico City, and is home to 122 million people. The Federal District and northern and central states, such as Nuevo León, Coahuila and Jalisco, are more industrialized than those in the rural south. Latin America's second-largest economy after Brazil, Mexico is often considered by analysts to be a second-tier nation—more industrialized and advanced than the poorer developing countries sometimes called the Third World, yet burdened by low wages and high poverty that prevent it from achieving wealthier status with the United States, Japan and other leading economies. Centrally located Mexico City serves as a dividing point. The region north of the capital tends to be more industrialized, where domestic and foreign firms such as General Motors, Hewlett-Packard and Whirlpool have located to be close to the U.S. market and a more skilled workforce. Southern Mexico, with a large indigenous population that relies on subsistence farming, has long seen less investment. Some investors, however, see southern Mexico as untapped terrain. German automaker Audi is locating a $1.4 million plant in Puebla, a poor state just south of Mexico City, drawn by easy access to the Atlantic port of Veracruz and to parts suppliers. 5 Many of Mexico's coastal regions, including Quintana Roo in the Yucatan peninsula, rely on tourism, as well as shipping and commercial fishing. Mexico's economy is export-oriented, sending $407 billion worth of products abroad in 2014. With oil and oil products providing about a third of the government's revenue, the economy is highly susceptible to the global oil industry's boom and bust cycle, yet it has succeeded in diversifying exports by manufacturing more automobiles, electronics, computers, mobile phones and LCD displays. Agriculture (fruit, vegetables, coffee and cotton) and silver are other key exports. 6 Mexico's Top Exports Total value of Mexican exports, by product, in $U.S. billions, 2012 Page 4 of 25 Doing Business in Mexico SAGE Business Researcher ©2021 SAGE Publishing, Inc. All Rights Reserved. Source: “Products exported by Mexico (2012),” Observatory of Economic Complexity, Massachusetts Institute of Technology, accessed Aug. 27, 2015, http://tinyurl.com/nd6hsga Mexico exported nearly $46 billion in crude petroleum products and a combined $48.2 billion worth of cars and delivery trucks, its second- and eighth-highest exported products, in 2012. Computers and video displays both also accounted for nearly $19 billion. Mexico's chief trade partner remains the United States, which buys about 80 percent of Mexican exports and is the source of half of Mexico's imports, such as machinery. China and Japan are also key trade partners, but to a much smaller degree, accounting for 16 percent and 4.5 percent of imports, respectively. 7 Economists say Mexico's reliance on the United States is inevitable with the world's largest consumer market located on the doorstep of a country offering a vast pool of low-wage labor. The North American Free Trade Agreement (NAFTA), which abolished tariffs and other trade barriers among Mexico, the United States and Canada starting in 1994, has increased that dependency. “Viewed exclusively as a trade deal, NAFTA has been an undeniable success story for Mexico, ushering in a dramatic surge in exports. But if the purpose of the agreement was to spur economic growth, create jobs, boost productivity, lift wages and discourage emigration, then the results have been less clear-cut,” Jorge G. Castañeda, a New York University professor of politics and Latin American and Caribbean studies, wrote in Foreign Affairs. 8 Because of NAFTA's mixed impact and the emergence of China as a low-wage rival, Mexico is focusing on luring technology-driven investors, such as automotive and aerospace, that require higher skills and pay better wages. A key part of the government's plan is boosting trade, in large part by looking for new markets for exports and enticing companies to come to Mexico.