Thanks to its proximity to major consumer markets and a rapidly developing manufacturing-based economy, Mexico is an intriguing candidate for outside investment. The country's economy, which has grown more diverse in recent years, is now Latin America's second largest, trailing only Brazil in size. The Mexican consumer market is also quite large. Roughly the size of Saudi Arabia, it sustains five times the population, while producing only about a quarter as much oil.
Healthy trade relationships are essential to Mexico's economy, and the country shares deeply entrenched trade links with its wealthy northern neighbor, the United States. Mexico ranks second among U.S. export markets and third in total trade, a category that includes imports plus exports. This tight economic integration makes the trade relationship between Mexico and the U.S. critically important for both nations.
Despite these figures, political questions surrounding the future of the North American Free Trade Agreement (NAFTA) have created some uncertainty among investors, some of whom are delaying key decisions until the situation achieves more clarity.
Overall, Mexico's growth is somewhat analogous to another nation associated with low-cost manufacturing—China. It should be noted, however, that Mexican labor costs have remained stable over the last decade, while Chinese labor costs have skyrocketed, increasing by 64 percent since 2011.
As with most large, complex nations, the Mexican legal, financial and regulatory landscape may be somewhat opaque or confusing to outside investors or businesses. Having experienced contacts in the market who are well-versed in local culture is often an essential tool when navigating complex or overly bureaucratic processes.
The benefits of doing business in Mexico
Mexico has a welcoming posture toward outside investment. According to the United Nations Conference on Trade and Development's 2016 World Investment Report, Mexico ranks 15th globally in terms of foreign direct investment. These numbers have fluctuated in recent years, with outside investment falling from $33 billion to $26 billion from 2015 to 2016. The specter of NAFTA renegotiation is looming large in the minds of investors, restraining growth in gross fixed investment, particularly with regard to the manufacturing industry.
Mexico has also committed to making significant improvements to its infrastructure, a development that has made the country more appealing to investors. Further infrastructure development is planned, including major airport and aviation upgrades. This infrastructure development has been instrumental in making the Mexican telecommunications, energy and transportation sectors globally competitive. The Mexican government is also planning the creation of new industrial hubs in Chiapas, Oaxaca and Guerrero, a development that should further stimulate foreign investment.
Proximity is also a natural advantage for Mexico, as it maintains deep links with large consumer markets to the north and south. The country has free trade agreements with 46 nations (equal to 90 percent of all national trade) and formed the Pacific Alliance trade bloc with Peru, Colombia, and Chile in 2012. Overall, Mexico's largest trade partners are the U.S., China, Brazil, and Canada, with Japan, Guatemala, Colombia and Europe also playing key roles. Mexico's trade agreements have been one of the primary factors underpinning its recent economic success.
The challenges of doing business in Mexico
While there are many advantages to the Mexican market, there are also significant hurdles to negotiate. First, the country ranks only 47th globally in the World Bank's ease of doing business index, down two spots from 2016. Mexico ranks even lower (93rd worldwide) for ease of starting a new business, with a registration process that takes roughly nine days to complete. That ranking (down 21 spots from 2016) reflects the fact that starting a new enterprise in Mexico can be a complex and difficult process for those without the benefit of local expertise.
Registering with the Mexican Social Security Institute can be particularly challenging for outside businesses and investors. Roughly 81 days are required to secure proper construction permits in Mexico, though that number is significantly lower than in many other Latin American or Caribbean nations. Water and sewer hookups may take more than one month to secure, and the process of securing even one zoning permit for a specific land use purpose can be a time-consuming and arduous task.
While Mexican infrastructure has seen dramatic improvement in many areas, electricity remains a challenge. The country is ranked just 98th by the World Bank and IMF in terms of ease of securing electricity, making it one of the most difficult places in the world to access a power grid. This is largely because the process is extraordinarily bureaucratic, requiring the submission of applications, the securing of federal certificates and the passing of inspections before any work may be done.
On average, the process for registering property takes 46 days—far higher than the average time required in other OECD countries (which average just 22 days). All new businesses must be certified by water service officials, secure all required zoning approvals and coordinate with the Public Registry of Property of the Federal District.
It should be noted that Mexican authorities are aware of these hurdles and have made efforts to streamline bureaucratic procedures. These efforts have borne fruit, with Mexico improving its ease of registering property ranking 10 spots from 2016 to 2017 (the country now ranks 101st globally in this metric). The conversion of land records from paper to digital and the upgrading of Land Registry infrastructure have also combined to make property registration more efficient.
While Mexico requires only six annual tax payments, the process is complex and labor-intensive, requiring 286 company hours to complete. Mexico has a 30 percent corporate tax, and satisfying this requirement takes roughly 122 hours each year. Social Security and Value Added Taxes also require significant time commitments.
Finally, countries in this region have historically experienced major political, economic and regulatory shifts as governments change. Mexican President Enrique Peña Nieto's six-year term ends in 2018. Because he is constitutionally term-limited from running again, there is greater uncertainty with regard to future policymaking, something outside investors should give due consideration.
Conclusion
The challenges of operating in a new country are often daunting—regulations are constantly evolving and no business landscape remains static. Without a solid grasp of the issues at hand, businesses are exposed to tax penalties and even the prospect of civil or criminal litigation.
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