Mexico is in a transition from a closed economy with one party rule into a more democratic country with pluralist democracy and an important player in the global economy. The major reforms in the legal, political as well as economic platforms are transforming Mexico into a major investment hub. The current global financial crisis has affected Mexico in several ways as highlighted in this paper. Mexico has also put in place economic policies that have positive effects in cushioning the emerging economy from an economic slowdown. This is demonstrated by the increased interest U.S investors are having in investing in the resort industry as well as in the real estate industry in Mexico (Myers 1).
Mexico is also referred to as the United Mexican States. It has thirty one states as well as a federal district. Mexico, as is the case with the rest of the world economies has been hit by the massive decline in demand owing to the global economic crunch. The World Trade Organization (WTO) forecasted a 9% decline in exports in terms of volumes in 2009. 10% decline in export was predicted in 2009 in the developed economies. As for the developing economies the decline was forecasted to be 2% to 3%, this is by virtue of their developing economies reliance on trade for economic growth. Although there was a 2% growth in world trade in terms of volumes in 2008, this growth cannot be compared with the 6% volume increase experienced in 2007. The production of a majority of products is outsourced and hence a multiplier effect is felt when overall demand falls. In the developing and emerging economies like Mexico, the lack of adequate trade financing contributes immensely to a sharp fall in the flow of trade (WTO 1).
According to WTO (1), there has been a notable synchronizing of global trade slowdown demonstrated by decrease in imports and exports in the major developing economies like Mexico as well as in the developed economies such as the U.S. According to the WTO global trade will resume its growth trend but this will be after a period of recession. A 9% decline in terms of volume is expected in the global trade in merchandise. Developing economies such as Mexico are forecasted to experience a 2% to 3% decline in exports. Mexico’s prospects for trade in 2009 are pegged on the performance of the global recession that has its genesis in the U.S. This recession has severe eroded business and consumer confidence as well as creating a pessimistic feedback between the larger economy and the financial sector in Mexico. This is expected to continue for the greater part of 2009.
The organization for Economic Cooperation and Development (OECD), projects a high likelihood of persistent down turn in economic activity. The Mexican government, as is the case with governments around the world has implemented several measures to mitigate the effects of the global financial crisis on the economy. This global crisis has disturbed the Mexican financial sector by disrupting the usual banking structure and denies firms and investors access to adequate credit. This has a negative impact on households’ access to better housing and other assets as they endeavor to reconstruct their savings (WTO 1).
Overview & Demographics of MexicoMexican rich history dates back to 1500 B.C. Mexico has an area of 1,964,375 sq km, and lies 86° W-118° W/ 14° N-32° N. However modern Mexico according to the year 2000 statistics has a population of above 97.5 million as compared to 25.8 million in 1950, 48.2 in 1970, and 81.2 million in 1990. This steady growth in population explains Mexico’s high rate of population increase. In 2003, Mexico’s GDP was $626.1 billion compared to Canada’s $891.7 billion, while the U.S had $11 trillion. In 2003/2004 Mexico’s GDP growth rate was 4.4%, while in 2002 the per capita income was $5,910 compared to Canada’s $22,300 and the U.S. $35,060. The current account deficit in 2003 was $1 million while the U.S was $530 billion. The 2004 inflation rate in Mexico was 5.1%. The oil reserves in Mexico in 2005 were 20 billion barrels. According to statistics available in 2005, Mexico was receiving approximately 20 million tourists per year (Pisani 1).
The infant mortality rate is 25 deaths per 1,000 live births. It has a high literacy level of 90.5% with a school going rate of children between 6 yrs and 14 years being 92.3%. Mexico’s infrastructure is as follows; paved roads are 253,666 km, railways are 26,656 km, it has 57 airports, national airports are 28, and seaports are 108. The major economic sectors are Agriculture, fishing and forestry accounting for slightly above $30 billion. This translates into a Gross Aggregate Value of 5%. The industrial sector accounts for approximately $152 billion or a Gross Aggregate Value of 25%. The food, tobacco and beverages account for 28% while chemical substances, plastics, oil and oil derivates account for approximately 14%. The main manufacturing industries such as equipment and machinery, and metal products account for slightly above 30%. In terms of trade and investment, exports at 2000 were $158 billion while the imports were $163 billion. The Foreign Direct Investments inflows in the year 2000 were $13 billion. The major sources of the FDI inflows were; U.S accounting for approximately 79%, the Netherlands accounting for slightly above 13%, while Spain accounted for slightly below 13% (Zimmerman 21-23).
Political and Legal EnvironmentMexico is a federal republic whose federal government is composed of the legislative, executive, and judicial branches. Mexico practices a civil law system under which fundamental legal principles are mostly codified in commercial, civil, judicial, criminal and procedural codes. The judicial patterns are not necessarily binding except in the case of decisions emanating from the federal courts in some circumstances (Baker & McKenzie 1-2). In ensuring that the economy maintains a competitive niche above other world economies, the Mexican government enacted has enacted several laws.
Foreign Investment LawThe enactment of the Foreign Investment Law (FIL) in 1993 changed the economic scenario in Mexico by allowing more foreign investments. Among the benefits of the FIL was allowing foreign investors to; own 100% equity of companies in Mexico, buy fixed assets in Mexico, engage directly in the production of new goods and services, open new companies or even relocate companies or establishments that are already existent. (Baker & McKenzie 3). However according to Richard Schaffer et al, the FIL had some restrictions to the foreign investors
Competition LawThe Mexican government enacted the competition law in 1998. This law seeks to regulate and restrict economic concentrations as well as monopolistic practices that are detrimental to a free competitive economy. According to this legislation, monopolistic practices in Mexico are categorized into two broad categories. These categories are relative monopolistic practices and absolute monopolistic practices (Baker & McKenzie 8).
Monopolistic PracticesThe relative monopolistic practices prohibited in Mexico apply if the investor commands substantive powers in relation to the relative market. The terms substantive powers and relative market are distinguished in the competitive law. They entail the market barriers, substitutability of the goods, input and distribution costs, and the investor’s market share in relation to the competitors. The relative monopolistic practices are those trade agreements which would unfairly prevent access to the market to third parties or provide exclusive advantage that demonstrate partiality. The absolute monopolistic practices are the agreements that are made between specific competitors for the purposes of fixing prices, dividing the markets, limiting the distribution or production of goods and services, or manipulating public bids. The Mexican competition law declares these agreements inconsequential (Baker & McKenzie 8).
Economic ConcentrationsThe restricted economic concentrations in Mexico are those concentrations such as mergers and acquisitions that are created for the purposes of preventing free market competition. In the case of these concentrations, the Mexican Federal Competition Commission has the mandate to declare such concentrations null and void or order for a restructuring of the same. (Baker & McKenzie 8). The Mexican Federal Competition Commission is mandated to enforce the competition law. Non- compliance of the Commission’s orders attracts both criminal and civil penalties according to Richard Schaffer et al.
Company LawThe Mexican government has the Mexican General Law of Commercial Companies (GLCC). The GLCC is mandated to provide guidelines concerning the different structures of business organizations operating in Mexico. The main forms of the business organizations in Mexico are; limited liability companies, corporations, and partnerships. The major business structure in Mexico is corporations. Corporations in Mexico are required to have a mandatory capital stock of a minimum of $50,000 whereby 20% of this capital contribution must be in cash. The number of mandatory shareholders is two (Baker & McKenzie 15).
The GLCC permits both Mexican as well as foreign shareholders. The management structure of the corporation may be vested in one or more directors, although the GLCC may impose statutory limitations in a corporation’s management structure. The GLCC has provision for the appointment of a statutory examiner, who is mandated to protect the interests of the shareholders. All Mexican corporations are required to hold annual general meetings not later than 30th April of any given year (Baker & McKenzie 15).
In the case of a limited liability company, it is required to have a mandatory capital stock of a minimum of $30,000 whereby 50% of the contribution must be paid in full upon incorporation. Mexican law requires that the capital in such a case be divided into equity quotas. The GLCC requires that the minimum number of members required to form a limited liability company is two while the maximum is set at fifty. The members may be of foreign or Mexican origin. The management of the company should be vested in one or more managers. The GLCC may impose statutory limitations in a limited company’s management structure. The members of the limited company are required to meet at least once in every year (Baker & McKenzie 18).
TaxationThe Mexican government is a signatory to several agreements and treaties that facilitate investors avoid double taxation. The treaties institute different regulations for taxation of permanent businesses and of Mexican sources of income obtained by residents of countries that are signatories of such treaties. The income tax law applies where such a treaty is non-existent. The income tax law requires Mexican based companies to pay income tax at a rate of 28% on its global net income (Baker & McKenzie 18).
No withholding tax is required from dividends that are distributed by the Mexican companies. A rate of 25% is levied on license fees or royalties that are paid to a non-resident of Mexico for technical assistance, software or unpatented technology. In case of sale of shares the relevant Mexican taxation laws apply, the location of the sale of shares notwithstanding. Other taxation laws that apply in Mexico’s economic scenario include are assets tax, and value added tax.
Intellectual PropertyMexico is an aggressive signatory of several treaties and conventions that are concerned with Intellectual Property Rights (IPRs). It maintains an insistent policy in this regard. In 1991, Mexican government enacted the Industrial Property Law. This law was later amended in 2006. Mexican patents are protected for duration of twenty years. The IPL requires registration of patent licenses or assignments of patent rights to be done by the Mexican Industrial Property Institute (MIPI) (Baker & McKenzie 37). Other concerns of the IPL are trade secrets, utility models, trademark protection, and copyright.
The Economic EnvironmentMexico endeavors to enhance its competitiveness in global trade by use of international trade agreements as a strategy. Mexico is ranked as the seventh biggest global exporter and is the most rapidly growing trading economy in the world. In the period 1190 to 1998 Mexico’s foreign trade growth rate exceeded 200%. Liberalization of imports and reduction in import duties have contributed immensely in the growth of trade in Mexico according to Richard Schaffer et al. Its aggressive signing of Free Trade Agreements FTAs had resulted in ten FTAs by the year 2001. The signing of these FTAs provides Mexico with preferential access to duty as well as ensuring investor confidence in the case of foreign investors. The FTAs signed by Mexico do not limit the quantity of trade between member countries as the investors can produce and export as much goods as they would afford to do. There are no discriminatory requirements among the trading partners. The transfer of capital is guaranteed, as well as fair administration of justice (Baker & McKenzie 23).
The FTAs provide for intellectual property rights protection, provisions for anti-trust, as well as an improved threshold for procurement by the Mexican government. Since the FTAs require standardization of the custom documentation, it simplifies the export-import transactions. Mexico’s strategic signing of international trade agreements generates a competitive niche above other world economies (Baker & McKenzie 23).
Economic Financial and Market RiskMexico is in a region that is regarded as having an unpredictable business environment. Other than this perception, Mexico has an enormous potential for economic growth. It is rich in natural resources and is endowed with a growing population. Its economy is largely market oriented with vibrant equipment leasing and financial sector (Castillo-Triana 4). In the view of the above, it is prudent to investigate the economic risk in Mexico’s economy. Economic risk should be assessed in relation to the macroeconomic occurrences that would jeopardize the economic gains of an investment according to Richard Schaffer et al. These risks are categorized into financial and economic factors. The financial factors will entail factors that would cause difficulties in the conversion of currency or current account deficits. While the economic factors will entail factors like inflation, government finances, government restrictions on the rights of creditors’ or foreign investors, sudden or higher taxation (Castillo-Triana 6).
According to a 2003 economic and financial risk survey carried out by the PRC Group, Inc, in Latin American countries, Mexico’s economic rating was 77.0 while the financial rating was 60.0. These ratings mean that the financial and economic risk in Mexico as per the 2003 ratings was average (very low risk was rated as from 80 to 100 points while very high risk was 0 to 49.5 points). The components considered in the financial risk rating are foreign debt expressed as a percentage of the Gross Domestic Product, current account expressed as a percentage of exported goods sold, foreign debt service expressed as a percentage of exported goods sold, the stability of the exchange rate and net liquidity expressed as months of import cover. The components considered in the economic risk ratings are the annual rate of inflation, the current account as a percentage of the GDP, the budget balance expressed as percentage of GDP, the GDP real annual growth, and the GDP per population head (Castillo-Triana 7).
The ability of the Mexican government to finance its foreign obligation is the primary basis upon which its economic risk can be assessed. The sensitivity of international capital markets is measured by the Emerging Market Bond Index Plus (EMBI+). In event that the Mexican government faces financial constraints, it would most probably increase taxation. The leasing firms in Mexico are vulnerable to changes in taxation. Most leasing firms in Mexico enter into joint ventures with local firms in order to benefit from consolidated tax. The increase in taxation imposed on the leasing firms has greatly affected revenue and hence the pricing of the leases thus diminishing their attractiveness as economically viable means of financing. Mexico is well endowed with talented human resources. In Latin America, it ranks the highest in the labor cost per worker Fitch rankings of 2004 and has one of the most highly productive labor forces in the Latin American economies according to the World Development Indicators database (Castillo-Triana 7-14).
The market potential of the Mexican economy can be assessed by the use of several indicators such as the general investment level, importation level of equipment, the GDP, as well s the population. The GDP and population ranking should be similar as the other factors are held as equal. This should be as the related economy grows at par with the living standards. Mexico in this case has grown to be the largest economy in Latin America. In rating the market share, tangible size of the economy and the growth potential Mexico was rated in 2002 the largest with GDP of $ 637,205,282,816.00 and a market share of 38%. The population in Mexico in the same year was 100,921,480 and a 19% potential for growth (Castillo-Triana 17).
Several strategic planners have erroneously drawn a correlation between the GDP and population in the assessment of the growth potential of a market. In the case of the Mexican equipment leasing sectors, factors such as the capital expenditure should be considered. Mexico and Brazil comprise of 52% of the population in Latin America and produce 65% of the Latin America’s entire GDP. To consider Mexico as an expected strategic market is erroneous since such a huge market that attracts rigorous investments rapidly become saturated as severe competition cut profit margins while at the same time resulting in increased marketing costs (Castillo-Triana 17).
OpportunitiesAs the Mexican government endeavors to deal with the effects of the global recession, numerous investors particularly from the U.S are cautious of continuing with their investment plans. However, the growth potential of the Mexican economy is positive considering Mexico’s rapid population growth and high quality of its human resource base. The literacy levels in Mexico are reasonably high and capable of further training. This potential is demonstrated by the opportunities that have been opened up by the North America Free Trade Agreement (NAFTA), which seeks to further open up the Mexican economy to increased investments. The economic prospects for Mexico appear prominent in the long-term regardless of the current global financial crunch (Myers 1).
In Mexico, the industrial and commercial sector of the economy remains vibrant regardless of the impact of the global financial crisis. Towards the southern parts of Mexico, the manufacturing sector is booming although for the Mexican companies which are servicing loans in dollars while earning their revenues in pesos, the reverse applies. Due to increased interest rates, companies are finding it increasingly difficult to meet their respective loan interest payments in dollars while at the same time maintaining their cash-flow in pesos. The Mexican resort sector has not been had hit by the global recession bearing in mind that the resorts are reporting increased growth. U.S investors such as Koll International Hotel Resorts have invested in two major resorts in Mexico and are considering expansion (Myers 1). The devaluation of the Mexican peso has been to the advantage of U.S investors in Mexico. Several U.S companies are investing in the Mexican resort sector. This is primarily because the favorable rates of exchange are a major boost to the tourism sector
Foreign investors in the retail industry, mainly from the U.S, Canada and Spain, continue to demonstrate interest in investing in the Mexican economy. U.S firms such as J.C Penney and Dilliard have not shelved their retail business expansion in Mexico. A company like Sak’s Fifth Avenue is in the course of its plan to construct a major store in Mexico. The changes in Mexican legislation have continued to open up the Mexican economy to foreign investments particularly in the real estate industry. The U.S investors who intend to invest in the real estate industry in Mexico can now start Mexican corporations. This enables the foreign investor to directly own property in Mexico (Myers 1). However the greatest opportunity for investment in Mexico is the fluctuations in exchange rates which are in favor of dollar-based transactions.
The Mexican government is implementing strategic reforms in the energy sector. These reforms are meant to lead to increased opportunities as the market opens up. There is a forecasted increase in the demand for energy in Mexico as the economy continues to experience growth. There is an emergence of big upper and high income earners n Mexican metropolitan regions. The disposable incomes of this class of Mexicans are high and they have low price elasticity. This creates open business opportunities for high class quality goods and services (Zimmermann 49).
Cultural IssuesIn Mexico trust is fundamental in any business transaction (Pisani 1). In the business environment, it is paramount that one understands the cultural differences that may exist between different people. The lack of such understanding may result in a lost opportunity for business. As is the case with Mexican executives a business meeting does not brain storm directly into the pertinent issues at hand but rather stars off with light conversations. This is unlike the American culture whereby business meetings are supposed to address the critical matters at the onset of the meeting. This requires understanding and patience on the part of the U.S executive. Access to business executives for the purposes of first contact may become discouraging to an American executive since Mexican executive secretaries must censor the call before allowing access to the executive (Hernandez 1).
Business hours in Mexico are very different from the same in the U.S. it is within the wider culture of Mexico that business commences at 9:00 am and ends at 7:00pm. The difference is in a two hour lunch between 2:00 pm to 4:00 pm in Mexico. According to Mexican culture messages or calls left, in the event one is unable to make direct contact, are seldom acted upon. The way dates are written is different in both countries. While in the U.S the month is written first followed by the day, in Mexico, the day of the month precedes the month. Meal times are also typically different in the two countries. Dress codes for business meetings are usually formal, with the exception of extremely hot location. Use of names is also different in the two countries. Mexicans find the use of their first names in a business meeting an insulting casualness, unlike in the U.S where the first name can be used in a business meeting without problems. Selling property in Mexico is usually done through direct interpersonal communication between the interested parties. This is the preferred communication medium in Mexico. In the distribution of goods, Mexicans rarely commit themselves on the exact date and time of expected delivery, unlike in the U.S where delivery of goods have an exact date and mostly time of expected delivery. The understanding of the cultural differences however, must not hinder business transactions between people of diverse cultures (Hernandez 1).
Trade Policies towards the U.SThe Mexican external trade has a major emphasis on the U.S as its main trade partner. This has been greatly affected by the financial crisis that started in the U.S in that it has led into a decrease in economic activity in Mexico. Mexico has Free Trade Agreements as well as Mutual Protection and Promotion of Investment with the U.S as well as with other countries. 88% of Mexican exports are destined to the U.S, while 67.6% of Mexican imports come from the U.S. In terms of Foreign Direct Investments (FDI) inflow, two thirds of Mexican FDIs inflows from 1996 to 2000 were from the U.S. Many of the Swiss companies with business interests in Mexico, prefer investing through subsidiaries in the U.S. (Zimmerman 43-46)
U.S investors in Mexico may incorporate a limited liability company since this structure of business organization does provide limited liability to the partners and also provides particular advantages for U.S tax purposes (Baker & McKenzie 15).
Applicable Workers’ Protection LawsIn order to provide protection to workers, the Mexican Federal Labour Law (FLL) is mandated to regulate the relationships between employees and the employer. The FLL is universal to all employees residing in Mexico, their nationality not withstanding. This law addresses issues such as mandatory employee benefits, social security, and severance payments. Compulsory Employee Benefits
The compulsory employee benefits highlighted in the law are profit sharing, paid holidays, Christmas bonus, training, vacation premium, employer housing contributions, maximum working hours and overtime, minimum wage, paid maternity leave, and health and safety. In profit sharing, the employer is required to equally distribute 10% of pre-tax among all employees in the course of sixty days after the date the employer is obliged to file the end of year income tax returns. 50% of the amount is commensurate to the wages of individual employee while the other 50% is commensurate to days the employee has worked in the year. The Christmas bonus must be paid to all employees. This amount must be proportional to a minimum fifteen days of the employee’s wages (Baker & McKenzie 24).
There are legal paid holidays in Mexico during which an employee who is required to work should be compensated. The compensation in such a case is three times the employee’s wages inclusive of salary. To ensure that the Mexican labor force is marketable Mexican law requires that all employees be provided with appropriate training. The training must comply with the government standards. Mexican law requires all employees to be paid a minimum of 125% of their wages for the vacation days. Mexican employers are required by law to pay to the Federal Workers Housing Fund (INFONAVIT) 5% of the employee’s wages. The employee is required to work for a maximum of forty eight hours per week. In the excess of this the employer must pay 200% of the employee’s regular pay in overtime for the first nine hours and 300% for additional hours. Health and safety of workers in the work place must be guaranteed by the employer (Baker & McKenzie 24-25).
Social Security and Severance PaymentsMexico enacted the social security (SSL) in 1942. According to the 2001 modification, all employees must be registered with the Mexican Social Security Institute (IMSS). The IMSS is mandated by law to provide life insurance and disability pension, old age and retirement pension, as well as insurance for old age unemployment, maternity and health insurance, among other benefits (Baker & McKenzie 29). In the case of unfair termination of employment the Mexican law provides for reinstatement and appropriate compensation. If an employer is unable to prove in a court of law that the employee’s dismissal was unjust, then the following penalties may take effect; the employer pays three months equal to employee salary, a seniority premium that is equal to twelve days of salary for each year worked, back date the salary from the dismissal date to the date the payment is made and pay the employee the benefits accrued (Baker & McKenzie 27).
ConclusionIn the light of the issues covered in this paper, Mexico can be said to be on the right path towards economic growth. The economic, political and legal reforms as well as the international free trade agreements as well as treaties have transformed the Mexican economy from the closed economy it used to be (Zimmermann 42). These treaties and agreements have helped to modify particular sections of the Mexican law thus encouraging more foreign investments (Baker & McKenzie 1). As Mexico endeavors to position itself as a preferred international centre of production and trade, it must continue reviewing its laws as well as the international trade agreements and treaties in order to remain relevant in the highly competitive international economy.
Works CitedBaker., and McKenzie. “Latin America, Doing Business in Mexico”, 2006.
Castillo-Triana, Rafael. “Managing the Risks of Doing Business in Latin America”, The Alta Group 2004.
Hernandez, Ignacio. “Doing Business in Mexico, Business Etiquette, Understanding US Mexico
Cultural Differences”. 2009.
Myers, David, W. “Doing Business in Mexico, Despite Some Problems, Opportunities Exist for Cautious Investors”. CCIM Institute. 1995
Pisani, Michael, J. “Doing Business in Mexico: Business Opportunities and Cultural Challenges”. 2005.
Schaffer, Richard, Earle Beverly and Agusti, Filiberto. “International Business Law and its Environment.” Fifth Edition. West 2002.
World Trade Organization. “World Trade 2008, Prospects for 2009”. 2009 Press Releases.
Zimmermann, Thomas, A. “Doing Business in Mexico”. Zurich: ISBN, 2002.