Why invest in Mexico? Strategic destination

22/10/2020

Three decades ago, Mexico embarked on a path towards greater economic openness, emphasizing the liberalization of international trade and the attraction of investment flows. Throughout this period, free trade agreements were signed with some of the world's most important economies. A consistent, solid, and stable macroeconomic framework was also achieved, which has provided certainty to investment decisions of national and foreign companies.

Today the country has an attractive business environment, legal certainty, one of the largest networks of free trade agreements in the world, economic sectors with broad development, and a highly competitive cost profile. In addition, there have been important advances in infrastructure matters -which are making Mexico a world-class logistics platform- and deregulation, which increasingly facilitates the operation of businesses in the country.

Political and administrative organization of Mexico

Mexico is a representative, democratic, and federal republic, located in North America, made up of 32 states. There are three levels or spheres of government in the country: municipal, state, and federal.

The federal government and the state governments are organized in the Executive, Legislative and Judicial branches. The Federal Executive is represented by the President of the Republic - elected every six years - and, in an auxiliary manner, by the Secretaries of State. The Federal Legislative Power resides in the Congress of the Union, divided into the Senate and the Chamber of Deputies, which are renewed every six and three years, respectively. The Federal Judicial Power is vested in the Supreme Court of Justice of the Nation - made up of eleven ministers proposed by the Executive and elected by the Senate - and in a group of lower and specialized courts.

The economic outlook in Mexico

Main macroeconomic indicators

Gross Domestic Product (GDP)

Because of its size, the Mexican economy is among the fifteen largest economies in the world, and enjoys a recognized strength and sustained growth.

Gross Domestic Product per capita

An example of the strength of the Mexican economy is its per capita GDP calculated on the basis of purchasing power parity, which shows a growth trend that makes the country a highly attractive destination.

Inflation

Mexico's monetary policy has allowed it to reach stable and significantly low inflation levels. According to estimates by the International Monetary Fund (IMF), between 2016 and 2021 the variation in consumer prices will be close to 3%.

Exports

According to data from the Bank of Mexico (Banxico), merchandise exports from Mexico totaled 380.6 billion dollars, equivalent to 33.3% of the country's GDP. Based on IMF estimates, Mexican exports of goods and services are expected to maintain sustained growth in the coming years.

Unemployment rate

It is expected that in the coming years formal employment will maintain a growth trend, while the unemployment rate will drop to levels below 4%.

Exchange rate

Since 1996 Mexico has maintained a flexible exchange rate policy that is solely driven by market forces.

Foreign Direct Investment

According to figures from the Ministry of Economy (SE), Mexico received 32 billion dollars of Foreign Direct Investment (FDI); most of that amount was destined for the manufacturing industry.

Domestic Market

Consumption

Mexico is an attractive market. Based on IMF and IHS data, it is estimated that total domestic market consumption will represent more than 75% of GDP.

Population

The INEGI estimates that the Mexican market was made up of 121.5 million potential consumers. According to the National Population Council (CONAPO), the average age of the Mexican population is 30.1 years old. According to INEGI's figures, the Economically Active Population (EAP) in Mexico was 53.8 million people, of which 49.8 million were employed.

Labor Force

Demographic bonus

Mexico has a demographic bonus that, according to CONAPO's projections, will be maintained during the next two decades.

Population structure

The working-age population represents 66% of the country's total population. It is estimated that in the next two decades the population of the working-age in Mexico will be more than 80 million people - more than 60% of the total population.

Talent

According to the National Association of Universities and Higher Education Institutions (ANUIES), more than 115,000 engineering, manufacturing, and construction students graduate in Mexico each year.

Competitiveness

International positioning

World Economic Forum

Mexico was ranked 51st out of 138 countries in the World Economic Forum's (WEF) Global Competitiveness Report, which ranked the country 51st in the macroeconomic environment pillar (which considers five variables: public finances, national savings rate, inflation, public debt, and credit rating).

International Monetary Fund

According to the International Monetary Fund (IMF), Mexico has no solvency problems; the country's public debt as a percentage of GDP is 54%, far below that of countries such as India, Brazil, Spain, and the United States. Similarly, the government balance is managed responsibly, shows a slight deficit in relation to the size of the country's economy, and performs better than countries like Brazil and India.

Competitive exchange rate performance

The country's exchange performance opens new business opportunities in the short and medium-term for companies that consider Mexico as an alternative to establish an operation and export base, and that seeks to increase their profitability and better position their products in international markets. It is estimated that in the coming years Mexico will have a better exchange performance than Brazil and China in the foreign exchange markets of the United States, Europe, and Japan.

World Bank

The procedures and time needed to open and close a business, as well as the procedures and time required to obtain construction permits, are critical factors in the success of the international business. According to the World Bank (WB) Doing Business report, in Mexico, it takes only 8 procedures and 8.4 days to open a business, while to obtain a construction permit it takes 13 procedures and 86.4 days. These indicators place Mexico in a better position than countries such as Brazil, Russia, India, and China.

Additionally, in Mexico, it takes only 1.8 years for creditors to recover their claims, with a recovery rate of 68.9 cents per dollar invested. These indicators are significantly better than those recorded in countries such as Brazil, Russia, India, and Chile, among others.

Among the factors that have an impact on operating costs and, therefore, on the profitability of companies, are the tax rate and the number of tax payments that must be made annually (which has an effect on administrative costs). In Mexico, the corporate tax rate is lower than that applied in India, China, and Brazil. With respect to the number of taxes to be covered in a year, only six types of taxes are required to be paid in Mexico, which places the country in a better position than countries such as Russia, Brazil, and India.

In Mexico, only 20 hours are required to carry out the necessary procedures to export, while only 44 hours are required to import goods into the country. These calculations include the time for obtaining, preparing, and presenting documents during port or border handling, customs clearance, and inspection procedures.

Wage and manufacturing costs

Mexico offers important savings in labor costs compared to other investment alternatives in America, Europe, and Asia. In addition, according to KPMG's Competitive Alternatives study, which compares 100 cities in 10 countries, manufacturing costs in the country are 22.5% below the U.S. baseline.

United Nations Development Programme

In the United Nations Development Programme (UNDP) report, Mexico ranked 71st out of 187 countries on the human development index.

Human capital and talent

According to figures from the United Nations Educational, Scientific and Cultural Organization (UNESCO) and ANUIES, in Mexico, there are 26% more graduates per capita from careers related to engineering, manufacturing, and construction than in the United States.

Geographic location

Borders

The border between Mexico and the United States is more than 3,000 kilometers (km) long. To the south, the country shares a 960 km border with Guatemala and 251 km with Belize. During the year, 5.5 million cargo vehicles and 74.2 million automobiles crossed through 54 border ports between Mexico and the United States. On the southern border, Mexico has eight formal border crossings with Guatemala and one with Belize.

Travel Times

Thanks to Mexico's proximity to some of the world's major consumer centers, companies operating in the country can respond more quickly to changes in demand and reduce their inventory costs.

Time Zones

In Mexico three time zones have been adopted: Pacific Time (UTC-8), Mountain Time (UTC-7), and Central Time (UTC-6).

Infrastructure

Mexico has excellent communication channels. The country's extensive road network and its railway system communicate it internally from east to west, connecting the ports of the Gulf of Mexico and the Caribbean with those of the Pacific Ocean, and from north to south, forming connections between the borders with the United States and with Guatemala and Belize. In addition, the country has several interior distribution terminals connected to the main maritime ports, which allows for cost reduction and expedites the entry and exit of goods.

76 airports (63 of them international)

117 seaports (49 coastal and 68 deep-sea ports)

27,000 kilometers of railroad tracks

More than 370,000 kilometers of roads

In the Infrastructure pillar of The WEF's Global Competitiveness Report, Mexico ranked 57th out of 138 countries, a better position than countries like Brazil and India. According to the United States Central Intelligence Agency (CIA), Mexico is among the 20 best-positioned countries in the world in terms of infrastructure and telecommunications.

International Agreements

Free Trade Agreements

Mexico has signed free trade agreements (FTAs) and trade agreements with 46 nations, making it one of the most open countries to international trade, with preferential access to more than one billion potential consumers who represent more than 60% of the world's GDP.

Economic Complementation and Partial Scope Agreements

Mexico has signed six Economic Complementation Agreements (ECA) and two Partial Scope Agreements (PSA), which complement and strengthen its network of trade agreements.

Agreements for the Promotion and Reciprocal Protection of Investments

The Agreements for the Promotion and Reciprocal Protection of Investments (APPRI) provide legal certainty to Mexican and foreign investors and strengthen the protection of foreign investment in Mexico, as well as Mexican investment abroad. In general, APPRIs cover the following areas: definition of investment, the scope of application, promotion and admission, treatment of investments, expropriation, transfers, and investor-state and state-state dispute resolution. Mexico has signed 30 agreements of this nature with 31 countries.

Additionally, some of the trade agreements signed by Mexico -such as the FTAs with the United States and Canada, Chile, Colombia, and Japan, among others- include an investment chapter similar to an APPRI.

Agreements to avoid double taxation

Through the signing of agreements to avoid double taxation, it is sought to prevent participants in the Mexican market from being taxed by two or more tax jurisdictions for taxes of a comparable nature and in the same period.

Participation in multilateral and regional organizations and forums

Mexico actively participates in various multilateral and regional organizations and forums, including the World Trade Organization (WTO), the Asia-Pacific Economic Cooperation (APEC) mechanism, the Organization for Economic Cooperation and Development (OECD), the Latin American Integration Association (LAIA), and the Pacific Alliance.

Business Environment

The Mexican market presents great business opportunities; in order to take advantage of them, it is essential to know some cultural aspects of the country. Having information on how Mexicans relate to and operate in the business world is an advantage for the development of successful businesses in Mexico.

Mexico's business structure is strongly based on micro and small businesses; these represent 98.7% of the total number of companies operating in the country, while medium-sized companies make up 1.0% and large companies 0.3%.

Most of the companies with majority Mexican capital are family businesses of a paternalistic type in which, in general, the owner is the one who heads the structure and who defines the hierarchy of the other members of the organization.

Mexican entrepreneurs are flexible and open to business opportunities within the country, so they will seek to generate the necessary conditions for the healthy development of their partners' investment.

To develop successful businesses in Mexico it is important to build a good interpersonal relationship with business agents. For Mexicans, trust is the basis of any business relationship, so investing time in developing a personalized and professional relationship with Mexican counterparts should be conceived as an asset that, among other advantages, facilitates decision making and implementation.

In Mexico the separation between the private and professional spheres is not very clear; both spheres are in constant interaction. Thus, it is common for Mexicans to express their emotions and try to build warm and close professional relationships.

The family occupies a fundamental place in the daily life of Mexicans, so it is recommended that companies show interest in the family environment of their workers as a way to achieve greater labor productivity.

Source: ProMexico