General Country Analysis Essay

Executive Summary

A country analysis of Mexico focusing on the country’s political, legal, and economical transformation in relation to the global economy. Report looks at how suitable Mexico is for FDI (Foreign Direct Investment) and the possibility for an Australian company to enter the Mexican market. Focus is on no industry in particular, but is a generalized overview of the country’s compatibility for a possible investment in the future. Report looks at the shift in the political system of Mexico, strengthening of the legal system, protecting foreign investors, and the transition in the economy from a centralized economy to a free market economy.

The report also looks at the different trade agreements Mexico is in, and how it would benefit an Australian company to have a unit in Mexico. Information sources include International Monetary Fund (IMF), World Bank, Economist Intelligence Unit (EIU), United States country report, World Trade Organization (WTO) and various other business premier sources. Findings show that the economy is shifting from a centralized to a free market economy. GDP increased by 4.5% in 2006. Trade agreements outside North American Free Trade Association (NAFTA), include agreements with the European Union (EU). Findings conclude that Mexico would be a suitable option for FDI, and it would be feasible for an Australian firm to enter and establish themselves in Mexico. Critically assuming Mexico’s well-being in the future, the benefits that companies on the base of manufacturing and the other rising trend companies  would gain on investing in Mexico outweigh, the risks involved.

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Mexico an Introduction:

         Politically, Legally and Economically Mexico as a country is undergoing rapid change. The country has changed over its previous characterization as undemocratic. Mexico is a country of mammoth potential, covering an area the same size as Western Europe.  Mexico is the second  largest trading nation in Latin America and one amongst the world’s top ten ( UK Trade  &Investment August 11th 2007 ). With a population of over 105 million, it is the eleventh most heavily populated country in the world. The country stands witness to a strong total adult literacy rate at 91% (UNICEF August 11 2007  ).  It is the most populous Spanish-speaking country in the world and the second most populous country in Latin America after Portuguese-speaking Brazil and about 70% of the people live in urban areas (Economist Intelligence Unit  September 2006).

Politics:

       Mexico’s politics are hugely characterized with the great battle between three major political parties PRI, PAN and PRD for over 7 decades.  Vicente Fox’s victory in Mexico’s presidential elections of 2000 as the PAN party’s candidate signified the completion of a slow, smooth transition to democracy. Fox began his six-year term on December 1, 2000. His victory ended the Institutional Revolutionary Party’s (PRI) 71-year hold on the presidency. President Fox completed his term on December 1, 2006, when Felipe Calderon assumed the presidency ( Political Overview  Mexico Review 2007)

             Fox was taken over by Felipe Calderon of the PAN and Andres Manuel Lopez Obrador (AMLO) of the left-of-center Democratic Revolution Party (PRD) in the 2006 elections. Mexico’s federal republic of 31 states operates under a centralized government. The president is elected to, one six year term and generally controls education, national security, and national industries. The Union Congress consists of a 128-member Senate and a 500-member Chamber of Deputies, both elected by popular vote. Senators serve six-year terms and members of the lower house serve for three years (Bureau of Western Hemisphere Affairs , United States Of America February 2007)

Towards Democracy:

      After several years of dominance of authoritarian of a single party, the election of Fox as the new president is seen as a landmark in the countries history towards democracy (Bertelsman Transformation Index 2006).  This was a positive move en route for pluralism in Mexico’s political culture. Acts have been passed which show the democratic freedom in the country. The state holds control over all the hydrocarbon resources in the country. The country has shown great interest in private companies and democratic principles. Private companies represent the backbone of the Mexican economy, but in some strategic areas, ownership rights are reserved for the state (Economist Intelligence Unit September 2006).

Democrats and privatization :

        Despite the desire of the ruling National Action Party (Partido Accion Nacional)  to create an opening for private investors in the energy sector, significant changes on this front have been difficult, particularly considering the polarized Congress. Hence, the following sectors will probably remain in state hands: oil and other hydrocarbons; basic petrochemicals; electricity; radioactive materials; and nuclear energy. Other state-run sectors include the following: airports, seaports and heliports; postal service; telegraph; radiotelegraphy; minting and issuing of paper money; and certain mining areas.

Legal system :

        Mexico’s legal system is based on the civil law system. The civil law system is based on “written law,” that is, the codes or statutes that present the general principles governing broad areas of law. The judiciary in civil law countries such as Mexico does not play the central role in interpreting and “making” the law as it does in common law jurisdictions.  (Mexico trade  August 12 2007 )

All laws regulating commerce, investment and trade in Mexico are federal in nature and apply throughout the country to entities operating therein. The statutes or codes most relevant to firms doing business in Mexico are the Companies Law, the Civil Code, the Banking Law, the Competition Law, the Foreign Investment Law, the Labor Law, the Commercial Code, and tax laws, mainly the Income Tax Law and the Value Added Tax Law. ( Mexico legal system August 12 )

Monopoly and law:

         The Federal Law of Economic Competition, Mexico’s antitrust law, prohibits monopolies and monopolistic practices. It strictly prohibits price-fixing, restrictions of production and distribution, market division and concentrated bidding in public tenders. The law technically prohibits monopolies in practice, however, it focuses exclusively on abuses of monopoly power. The president of the Federal

Competition Commission (Comision Federal de Competencia—CFC) and  other

officials have made it clear that the law will be applied only against  companies that engage in prohibited practices, not against firms that merely have the potential to exercise monopolies.  ( Economic Overview 2007)

Licensing :

   Regulations added to the Federal Copyright Law (Ley Federal del Derecho de

Autor) in 1997 set out defined legal procedures. The legislation gave responsibility for enforcement to the IMPI, an independent agency that operates

under the patronage of the Secretariat of the Economy (Secretaria de Economia). It prolonged the definition of copyrightable materials and brought Mexico into a more defined shape with licensing. The State has increased penalties against any infringements and thus protecting companies and their works. (Economist Intelligence Unit  Septmeber 2006).

       There is no lawful ban or control on the autonomy of manufacturers to sell to whomever they wish. Manufacturers may sell the same goods to different dealers at different prices. An unconstitutional dealer or trader may not be prevented from selling merchandise that has been legally imported. Regulations passed in 1980, state that companies must obtain approval from the Secretariat of the Economy (Secretaria de Economia) for promotional campaigns offering “free” items (such as two items for the price of one). Certain promotions which are suspicious in nature are not accepted by the trade commission. Even offers which serve no consumer benefit are not permitted (Mexico Legal System August 12th)

Taxing and evasion:

The size of Mexico’s unofficial economy has created a deep-rooted culture of tax avoidance. Formal-sector workers, including outsized businesses, also engage in tax avoidance. Uneven collection is another barrier to a higher tax take; indeed, larger companies regularly complain of their disproportionate tax burden, since they are easier to find than smaller firms. The tax collector is the Tax Administration Service (Servicio de Administracion Tributaria—SAT) (Mexico Overview February 2007).

        Property rights, including those of foreign investors, are generally defined and safeguarded in principle. However, there are constrictions on the legal security of these rights, particularly at the state level and in the southern regions. Corruption is prevalent in various fields of the government organizations.

Corruption :

                The Mexican political situation also suffers from problematic levels of corruption( Transparency International  November 2006 ). One of President Fox’s most imperative reorganization was the passage and implementation of Freedom of Information (FOIA) laws that, by the end of 2005, were in effect for the federal government. These laws are a basis in Mexico’s fight against corruption. Mexico’s FOIA laws and enforcement mechanisms have been hailed as international models (Political overview  Mexico  2007)

Economy:

    Mexico’s economy has gone through fluctuating changes in the past decade. Mexico has made considerable efforts to reform its economy and open it to the world. In its dramatic shift from an inward-looking economy, Mexico is increasingly connecting itself, through the device of free trade agreements, with the other country groupings important to its integration into the global economy (daft, 2002).

The economy in the country has changed over time to mixed economy. The country maintains good relations with the North American countries to have a free trade through the signed treaty of NAFTA. Mexico has undergone a deep economic transformation since the mid-1990s as a result of economic liberalization and joining the North American Free Trade Agreement NAFTA (a free trade bloc with the U.S. and Canada) (Economic Overview 2007). There has been brisk and notable progress in building a modern, diversified economy, improving infrastructure and tackling poverty. Today, the country enjoys a more open economic and political system and is more integrated with the world economy.  The inflation rate and GDP growth from the IMF is a good proof towards Mexico’s growing economy.

Year
INFLATION (%)
2004
4.7
2005
4
2006
3.6
2007
3.9
2008
3.5

Year
GDP (%)
2004
4.2
2005
2.8
2006
4.8
2007
3.4
2008
3.5

(International Monetary Fund [IMF],  2007)

Mexico has strengthened its ties through the implementation of the EU/Mexico Free Trade Agreement signed in July 2000. Leading to the elimination of all tariffs on EU origin industrial goods.  With no import duties, UK exporters are now competing on equal terms to US and Canadian exporters who already enjoy favored access to the Mexican market (UK Trade ; Investment  August  12 2007). Over the past decade, policy changes and economic structural reforms have strengthened Mexico’s economic fundamentals and produced a stronger and more stable economy (Economist Intelligence Unit 2007)

Relation with United States and Economic growth:

        Mexico is now among the world’s most open economies but it is dependent on trade with the U.S., which bought 86% of its exports in 2005. Top Mexican imports to Mexico include electronic equipment, motor vehicle parts, and chemicals (Bureau of Western Hemisphere Affairs , United States Of America February 2007) .  Top Mexican exports to the U.S. include petroleum, cars, and electronic equipment. There is considerable intra-company trade. The result is that the Mexican economy is strongly linked to the U.S. business cycle. Real GDP grew by 3.0% in 2005 and soared up to 4.5% for 2006 with a boom in the automotive and oil sector (International Monetary Fund 2007 ).

      Mexico is an active and constructive member of the World Trade Organization (WTO). The county hosted the September 2003 WTO Ministerial Meeting in Cancun. The Mexican Government and many businesses support a Free Trade Area of the Americas. Trade disputes between the U.S. and Mexico are generally settled through direct negotiations between the two countries or via WTO or North American Free Trade Agreement (NAFTA) panels. The most significant areas of friction involve agricultural products such as sugar, high fructose corn syrup, apples, and rice (Bureau of Western Hemisphere Affairs , United States Of America February 2007). One industry where USA purchases extensive quality in crude oil. Proofed with the pie chart below.

        Mexico has stood witness to large FDI. The Mexican government has pursued an active policy of lowering entry barriers to investment from foreign multinational corporations (MNCs) in the hope that FDI will promote economic development through knowledge exchange and a faster growth of exports. In 2001, Mexico was the largest FDI recipient in Latin America with nearly two-thirds of the country’s exports coming from MNCs (UNCTAD, 2002). The country had become the second largest trading developing country in the world in recent times (WTO, 2001)

         Mexico has bilateral investment treaties with Spain (1997), Switzerland (1998), Argentina (1998), the Netherlands (2000), Denmark (2000), France (2001), Finland (2001), and Portugal (2001). The country also maintains good agreements with: Austria, Belgium and Luxemburg, Cuba, Germany, Greece, Italy, South Korea, Sweden, and Uruguay (Secretaria de Economia). In spite of these numerous agreements the main source of FDI inflows continues to be the US (UNCTAD, 2003)

          The main motive for foreign investors to locate operations in Mexico would be to take advantage of Mexico’s location in order to serve the whole North American market rather than to serve the domestic market by itself. The cheap labor in Mexico is another determinant that attracts US FDI flows to the country. These factors explain why Mexico is among the world’s largest recipients of FDI inflows and that, on average, more than 60 per cent of Mexico’s FDI inflows come from the US which is apparently the worlds largest economy.

          The country shows tremendous opportunity to have a cost efficient entry into the North American countries. The country on freeing barriers for trade in the country has granted (Investment Overview 2007) permission to most applicants for whom the company value falls within 25 million US$.  On exceeding US $25 million they require approval of the national foreign investment commission. The commission acts on applications within 45 working days. Criteria for approval include employment and training considerations, technological contributions, and contributions to productivity and competitiveness. The commission holds the right to reject applications to acquire Mexican companies as it says for national security reasons. It is mandatory to obtain permit from the secretariat of foreign relations must foreigner entities to establish or change the nature of Mexican companies. (Investment Overview 2007)

        On the whole the government being efficient has been fluctuating around with the policies and perceptions and different views while leaders experimenting with new amendments. They have changed in time to meet the demands and be a part of the growing global economy. The World Bank policy research has measured six governance indicators on Mexico in which it scored average governance points leaving it along side of the developing countries in the world along with India and China. (Political Overview 2007)

Environmental Overview :

     Although the country has shown tremendous change towards global economy one factor that needs to be looked at now is the environmental factor as they have had a drastic effect on many countries. Mexico endures certain environmental problems as follows.

Natural fresh water is scarcely available in the north.
Sewage waste can be found dumped in the rivers.
deforestation
Widespread erosion
Desertification
And the country also has some important natural hazards that need to be made note of. Tsunami, Earthquake and hurricanes.

 Conclusion:

   Mexico has experienced dynamic and unprecedented changes in the last thirteen years. The movement towards integration and development is not a recent phenomenon. Mexico though a developing country is still in many aspects, underdeveloped and in a political instability with a fight between the three major parties. But the reforms set out are definite to make a change and the country is experiencing steadily increasing economic growth with democracy. The profound changes with the victory by the PAN have a dynamic effect. Mexico has abandoned statism and adopted neo liberal economic system. The world has recognized Mexico’s open economy and in large showed it through the trade agreement and ties with the country. Based on the information obtained on Mexico, the country can be judged as a country suitable for foreign investment.

Referencing:

Bertelsman Transformation Index, (2006)  Viewed August 12th 2007 ,
<http://www.state.gov/r/pa/ei/bgn/35749.htm >

Economist Intelligence Unit, “Country Commerce” Jounral On Mexico   Septmeber 2006.

Economic Overview , Mexico Review (2007).

Investment Overview , Mexico Review , (2007)

International Monetary Fund (2007), Viewed August 11th 2007
<http://www.imf.org/external/pubs/cat/longres.cfm?sk=20968.0>

Mexico legal system   (2007), Viewed August 10th 2007
<http://www.mexlaw.com/best_websites/2_legislative.html#no%20mexican%20federal%20statutes%20in%20english >

Mexico trade, (2007) , Viewed August 12th 2007
<http://www.mexico-trade.com/general.html#leg >

North American Free Trade Agreement (NAFTA) (1994), Viewed August 12th 2007 < http://www.nafta-sec-alena.org/english/index.htm>

Political Overview,  Mexico Review 2007

Transparency International  November (2006), Viewed August
12th 2007 < http://transparency.org/policy_research/surveys_indices/cpi >

UK Trade  &Investment ,”Country Information” ,   Viewed August 11th 2007  <https://www.uktradeinvest.gov.uk/ukti/appmanager/ukti/countries?_nfls=false&_nfpb=true&_pageLabel=CountryType1&navigationPageId=/mexico >

UNICEF , “Country Index” ,Viewed August 11th  2007  <http://www.unicef.org/publications/index_pubs_americas.html >

United Nations Conference on Trade and Development (UNCTAD) (2003), World Investment Report 2003: FDI policies for Development, National and International Perspectives, Geneva.

United Nations Conference on Trade and Development (UNCTAD) (2002), World Investment Report 2002: Transnational Corporations and Export Competitiveness, Geneva

World Trade Organization (WTO) (2001), International Trade Statistics 2001, France.