Investment in Mexico
One of the greatest allures of the Mexican economy is its size – according to the World Economic Forum, in its latest Competitiveness Report, we are the eleventh largest economy in the world, as measured in dollars in Purchasing Power Parity (PPP).
Trade liberalization turned out to be a very important encouragement for foreign companies to establish departments or branches within Mexico in order to expand their niche market. The deprecation of a model and the wish to integrate countries into blocks – with the most well-known examples being the NAFTA for North America or the relationship that exists in the European Union – resulted in the arrival of foreign capital to one of the most solid economies in the world. This aperture was strengthened in the last few years by structural reforms, in the form of the arrival of foreign oil companies (energy reform) or the entry of telephony competitors (telecommunications reform).
Tax-wise, Mexico has lower rates than the rest of OECD countries. After adding all taxes, the average tax rate is 10.8%, far from OECD’s 25.5% average, and from the leader, Belgium, with 40.7%.
Mexican wages are another incentive for investment – it is so low when compared to other countries, that it implies a lower labor cost for foreigners. In 2015, the average base salary estimated by the IMSS was 293.28 pesos per day, and as a consequence of the rampant illicit work existing in the country, legal jobs become very sought-after, in exchange for a compensation that is convenient for the investor.
But there are significant cons within the Mexican market that discourage both national and foreign investment, and that is its high interest rates. Since it is an emerging country that is more susceptible to external shock, in order to maintain macroeconomic stability (inflation, avoid high exchange rate increases, prevent capital flight) the Banxico increases its target rate, leading to a rise in the interest paid by risk-free assets (Cetes and government bonds), which means that the risk premium for the investment may not compensate the risks undertaken.
State control ends up inhibiting, instead of encouraging, business – its burden is #120 out of 137 countries, while in the costs related to crime and violence in business it is #131, and #51 in investor protection, as stated by the WEF. The significant weight of the institutional precariousness and the absence of a strong rule of law are two significant cons that prevent businesses, investments and the generation of jobs and decrease in poverty in Mexico from prospering with greater fluidity.
The country possesses many strengths and niche opportunities to exploit across different industries in regard to internal capital investment and foreign allure. However, its sensitivity to what takes place abroad with the United States and its frail institutional framework will hardly elicit the trust one of the eleven largest economies on the planet should.
Schwab, K. (2017). The Global Competitiveness Report 2017-2018. September 26, 2017, by the World Economic Forum Website: http://www3.weforum.org/docs/GCR2017-2018/05FullReport/TheGlobalCompetitivenessReport2017%E2%80%9320...
Riquelme, R. (2017). ¿En qué países se pagan más impuestos? July 15, 2017, by El Economista Website: https://www.eleconomista.com.mx/sectorfinanciero/En-que-paises-se-pagan-mas-impuestos-20170715-0006....
N/A. (2016). Wages. January, 2016, by the Comisión Nacional de Salarios Mínimos Website: https://www.gob.mx/cms/uploads/attachment/file/63027/11_SalariosEne2016.pdf
PhD. in Finance by the Sonora University