Foreign Direct Investment In Mexico (FDI) Essay

Length: 1893 words

INTRODUCTION

Mexico is the top trading nation in Latin America and the ninth-largest economy in the world. No country has signed more free trade agreements – 33 in all, including the two biggest markets in the world, the US and the EU. Altogether these signatory countries make up a preferential market of over more than billion consumers. Much of the FDI in Mexico is attracted by the country’s strategic location within the North American Free Trade Agreement, which has positioned it as a springboard to the US and Canada. Other attractions are competitive production costs and a young, skilled workforce, together with political stability and an open economy.

As a result, the number of foreign companies established in Mexico has risen to more than 16,000. The opportunities for investors are numerous, particularly in sectors such as automotive, electronics, information and communication technology, agribusiness, chemicals and pharmaceuticals, biotechnology, financial services, water and power generation. As part of the Mexican government’s campaign to attract FDI, the 44 overseas offices of the Mexican Bank for Foreign Trade (Bancomext) operate as trade commissions that offer advice and assistance to potential investors.

Mexico has long been one of the more attractive

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nations in which to make an investment, whether in manufacturing or infrastructure FDI. The large population, inexpensive labor pool, stable political environment and proximity to the US have given it significant advantages over other potential recipients of FDI.

Mexico is a showcase of how emerging markets can attract foreign capital flows into their economies. In 1999, Mexico remained the third main destination of FDI among emerging markets only after China and Brazil.

On a worldwide basis, Mexico ranks 15th among FDI recipients accounting for 1.3 percent of total investment flows. During the first three months of 2000, Mexico received US$3 billion in FDI and it is expected that the year will end at US$12 billion.

In addition to Mexico’s economic reforms and liberalization processes, an important element in making Mexico a very attractive market for foreign investors has been the negotiation of bilateral investment treaties (BITs).
To this date, Mexico has established these kinds of agreements with 13 countries (Argentina, Austria, Benelux, Denmark, Finland, France, Germany, Italy, the Netherlands, Portugal, Spain, Switzerland, and Uruguay).
It has concluded negotiations with Sweden, Greece and South Korea, and is currently negotiating with Cuba, the United Kingdom, Israel and Japan. Ireland is on Mexico’s list for a future BIT.

ECONOMIC INFORMATION

Population: 102.3m
Population growth: 1.45%
Population density (people per sq. km): 54
UN Human Development Index ranking: 53/177
Gross national income (current US$): $637.2bn (2003)
Gross national income per capita: $6,230
PPP Gross national income: $915.4bn
PPP Gross national income per capita: $8,950
GDP growth: -0.1% (2003)
GDP breakdown Agriculture: 4.1%, Industry: 26.39%, Services: 69.57%
Inflation (12-month average): 6.49 (2003)
Gross capital formation as % of GDP: 19.83%
Final consumption expenditure as % of GDP: (growth) 81.8% (2.9%)
Exports of goods & services as % of GDP: 28.4%
Top 3 export markets: US, Canada, Germany
Local industries: Food & beverages, tobacco, chemicals, iron & steel, petroleum, mining, textiles, clothing, motor vehicles, consumer durables, tourism
WEF Growth Competitiveness ranking * : 48/104
WEF Business Competitiveness ranking ** : 55/103
WEF Quality of the Business Environment ranking : 56/103
Transparency International Corruption Perceptions ranking: 64/145
Languages: Spanish (official)

FDI INFORMATION

Region: Central America

No. of projects (Jan-Sep 2004): 298

Market-share of projects in the region: 65.8%
Value of projects relative to GDP: 4.8%
Top 3 destination sectors: Metals/mining, hotels, tourism & leisure, consumer electronics
Top 3 business functions: Manufacturing, retail, extraction
Top 3 source countries: US, Japan, Canada
Top 3 investors: Ford, LG, Electrolux

FOREIGN DIRECT INVESTMENT

Foreign Direct Investment (FDI) is an investment made by foreign individuals or companies that establish operations in Mexico; it represents a contribution to the initial capital stock of the new society, an increment of the same capital in already established companies or the price of real estate trusteeships. All the previous include fixed assets and labor capital investments to perform trade activities in Mexico.

The liberalization of policies in Mexico during the 1990s have been highly successful in promoting trade and in attracting greater flows of foreign direct investment (FDI). FDI and exports are currently the driving force behind economic growth and job creation. In the last five years, the rate of employment in firms with FDI has grown twice as fast as the national average. FDI has also played a key role in creating new and better paying jobs. The Commerce and Industrial Promotion Secretariat (SECOFI) promotes and regulates foreign investment, directing it to Mexico and contributing to national development.

Investments involved in asset transference made by Mexican investors to foreign investors are also considered foreign investments, through them DFI totally or partially acquires Mexican societies already established. The network of free trade agreements and market oriented policies has made Mexico one of the most attractive countries for national and foreign direct investment (FDI). Manufacturing activities have especially benefited from increased foreign capital inflows, accounting for more than 75 percent of total FDI in Mexico: 57 percent went to the production of metal goods; machinery and equipment; 16 percent to food and beverages; and 9 percent to chemicals and plastics

FOREIGN DIRECT INVESTMENT IS GROWING

Mexico’s opening to the world economy reaffirms the conviction of attaining a better world linked by the opportunities free trade offers to nations and peoples. Foreign direct investment in Mexico is expected to reach US$12.4 billion, almost 25 per cent more than in 1999.

Together the free trade agreement with Israel and those in effect with eight countries in the Western Hemisphere, the Free Trade Agreement with the European Union will place Mexico in a unique position in world trade in the 21st century.

The President of Panasonic de Mexico, Yoshihisa Toki, commented that his company intends to make a significant contribution to employment creation and will transfer administrative responsibilities to local employees. It will also encourage the development of business ventures compatible with Mexico’s environment in order to create a truly innovative industry. Likewise, Mr. Toki mentioned his interest in supporting the development of Mexico’s industry. Meanwhile, the Director of Corporate Development, Sales and Marketing of Magna International, Wilfried F. Bartsch, remarked that this Canadian group is extremely interested in investment opportunities in Mexico. This is mainly the result of the possibilities generated by the North American Free Trade Agreement for the automotive and auto-parts industries.

President Vicente Fox mentioned that the Mexican people want an economy that generates the resources required to bring education and health care to more people, and increase the coverage of housing programs, electricity, drinking water and drainage networks to overcome backwardness and give Mexicans the chance to break the circle of poverty through their own efforts

INVESTORS LEGALLY PERMITTED

Foreign individuals or companies carrying out commerce activities in Mexico and Foreign Investors’ offices established in the country.
Mexican Societies with foreign participation of any kind in DFI’s.
Trust Institutions participating in real estate trusteeships from which rights that favor foreign investors emerge.

LEGAL FRAMEWORK

The Foreign Investment Law was published in the Federation’s Official Gazette the 27th of December of 1993 and reformed by decrees published the 24th of December of 1998 and the 23rd of January of 19998.

The Foreign Investment and National Foreign Investment Records Office Regulations were published the 8th of September of 1998 and came into effect the 7th of September of the same year.

In the dispositions of such regulations it is established that foreign investments may participate in any proportion of the capital stock of Mexican societies, acquire fixed assets, enter new fields of economic activity or manufacture new lines of products, open and operate establishments and enlarge or move those already existing.

The Mexican Government defines the following activity groups specifically regulated:

     State’s exclusive activities.
Mexican citizens’ exclusive activities.
Activities having limited DFI percentages.
Activities having a previous resolution of the National Foreign Investment Commission which makes DFI participate.

STATE’S EXCLUSIVE ACTIVITIES

Article 5 specifies the following strategic areas in which neither foreigners nor Mexican societies may participate, that is, these areas are exclusively for the Mexican government:
Oil and other hydrocarbons     basic petrochemical activities
electricity     nuclear energy generation
radioactive minerals     satellite communication
mail services     rail roads
bill issuing     coining
control     supervision and vigilance of ports
telegraphs     radiotelegraphy

ACTIVITIES EXCLUSIVELY RESERVED FOR MEXICAN CITIZENS
Article 6 mentions the societies and economic activities exclusively reserved to Mexican citizens or to Mexican societies (excluding foreigners):

National terrestrial passenger transportation; tourism and load transportation, not including shipping services; retail sale of gasoline and liquefied gas distribution; radio broadcasting services and other radio and television services (except cable TV); credit unions; development banking institutions (under the terms of the applicable law); and the rendering of professional and technical services expressly established by current legal dispositions.

For no reason may the DFI directly participate in activities and societies mentioned by this article; nor even through trusteeships, agreements, social or statutory treaties, pyramidal schemes or through any other mechanism that gives them some kind of control or participation.

AREAS WHERE FDI CAN PARTICIPATE WITH AN ESTABLISHED PERCENTAGE

Article 7 details the following economic activities and societies in which DFI may participate with the following percentages:
10% and Up in Cooperative Production Societies.
25% and Up in National Air Transportation, aerial-taxi transportation and specialized Air Transportation.
49% and Up in Financial Group controlling Societies; Multiple Banking Institutions; Stock Markets; stock exchange transaction Specialists; Insurance Institutions; Money Exchange Offices; General Deposit Warehouses, Financial Lessee; Retirement Funds Administrators; explosive, fire arm, ammunition and fireworks manufacturing and commercialization (not including the purchase and usage of explosives and the elaboration of explosive mixtures for industrial and extractive activities); and the printing and publication of journals exclusively for the national territory.

NATIONAL FOREIGN INVESTMENT REGISTRY (RNIE)

The Commerce and Industrial Promotion Secretariat (SECOFI) is in charge of this registry which is under the direction of the Executive Secretary of the Foreign Investment National Commission.
The RNIE is divided in three sections where persons, societies and trusteeships are to be subscribed, according to article 32 and which denominations are:
First Section: Individuals and Foreign Corporations
Second Section: Societies
Third Sections: Trusteeships

REQUIREMENTS TO ENTER THE RNIE

A written application using the official format must be presented in original and two copies and the following documents must be annexed: Incorporation papers, contract or any other establishing documents; the statutes by means of which the corporation is governed; the legal representative’s power of attorney given before a notary public and evidence of rights payment as established in the Federal Rights Law.

Whenever it is needed the applicant must obtain a favorable resolution from the Commission in order to participate in a given activity, such resolution must be previously negotiated and annexed to the application.
All documents presented in a language different to Spanish must come with a translation made by an expert translator.

SECTORS WHERE THE FOREIGN DIRECT INVESTMENT IS DIRECTED TO

     Manufacture Industry participates with 79.0%
Transportation and Communications with 3.0%
Financial Services with 2.9%
Construction with 0.4%
Extractive Industry with 0.3%
Farming with 0.1%
Electricity and water with 0.1%

COUNTRIES FROM WHERE THE FOREIGN DIRECT INVESTMENT COMES FROM

Direct Foreign investments made in Mexico come mainly from the United States, Holland, Germany, Canada, Spain, the United Kingdom and Japan.

FDI has enabled Mexico to acquire new technologies, improve infra-structure, stimulate productivity, and increase competitiveness in world markets. Today, Mexico is a major producer and exporter of automobiles, TV sets and laptop computers.

More and more, foreign companies are participating in Mexico’s development and have become a key element in Mexico’s industrial transformation. Fresh capital has contributed the remaking of its industrial base, turning the country into what Business Week has called a new “industrial powerhouse.”

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