Foreign Firms With Fdi In Mexico example essay topic

. FDI IN MEXICO To begin describing how has been the growth and progress of FDI in Mexico it is important to define FDI itself. According to the OECD Economic Outlook of 2003, Foreign Direct Investment is "an activity in which an investor resident in one country obtains a lasting interest in, and a significant influence on the management of, an entity resident in another country. This may involve either creating an entirely new enterprise or, more typically, changing the ownership of existing enterprises (via mergers and acquisitions) " (157). a. Mexican International Relations Synopsis Mexico first opened its market in 1973 with a law that promoted Mexican investment and regulated the entry of foreign investment. However, the barriers and limitations it stated turned this law into everything but a promotion law. By 1989, 10 years later, a new regulation came.

Politicians were surprised by the contradictions between the regulation and the law: the regulation opened significantly Mexican doors to foreign investment. Four years later, with the leadership of President Salinas de Gort ari, a new Law for Foreign Investment was formulated, stating clearer conditions for foreigners (P'ere-Moreno). From this point on Mexico starts simplifying procedures and other guarantees to investors. It is also from this point that Mexico sees the importance of opening its frontiers to international markets by signing bilateral agreements with different countries.

No country in the world has signed more free trade agreements: Mexico has celebrated bilateral agreements with 32 countries from different areas, including the two biggest markets in the world: the US and EU. Altogether these countries make up a market of about 850 million consumers that is set to increase with the new agreement with Japan. Much of the FDI in Mexico is attracted by the country's strategic location in North American Free Trade Agreement, which has positioned it as a launch pad to the US and Canada. Agreement Countries Publication Coming into Force NAFTA United States and Canada 20/12/1993 01/01/1994 FTA-G 3 Colombia and Venezuela 9/01/1995 01/01/1995 FTA Mexico - Costa Rica Costa Rica 10/01/1995 01/01/1995 FTA Mexico - Bolivia Bolivia 11/01/1995 01/01/1995 FTA Mexico - Nicaragua Nicaragua 1/07/1998 01/01/1998 FTA Mexico - Chile Chile 28/07/1999 01/01/1999 U EFTA European Union 26/06/2000 01/01/2000 FTA Mexico - Israel Israel 28/06/2000 01/01/2000 FTA Mexico - TN El Salvador, Guatemala and Honduras 14/03/2001 El Salvador and Guatemala 15/03/2001 Honduras 01/06/2001 FTA Mexico - A ELC Iceland, Norway, Liechtenstein and Switzerland 29/06/2001 01/07/2001 FTA Mexico - Uruguay Uruguay 14/07/2004 15/07/2004 FTA Mexico - Japan Japan 17/09/2004 Source: Mexican Economic Department web more information see Table 2 in Appendix. b. Mexico's Commercial Development Because of the multiple relationships Mexico has with other countries, Mexico has become the eighth commercial world power with a participation of 44% of Latin American exports and 49% of Latin American imports. In this year, NAFTA celebrates its 10th anniversary and since then all other treaties have been celebrated.

After these 10 years, Mexico has achieved a triplication of its exports and imports (see also Table 1): Source: Economic Department and BanxicoIt is of relevance to mention that: o Of the total trade that Mexico made, 86% corresponded to the 32 countries with which Mexico has agreements. o 96% of total exports were intended to these 32 countries. o Mexican sales have increased more within the countries with agreement than without agreement. c. Mexico's FDI Development Due to the different Bilateral Agreements and the Agreements for Promotion and Reciprocal Protection (Agreements that open new opportunities for investment and bring certainty and authority safeness to national and international investors) with which Mexico counts, the attractiveness to invest in Mexico has increased and therefore the Foreign Direct Investment has done so too. Considering FDI for the period 1994-2003, Mexico turned into the 4th country as receptor of FDI between developing countries and second in Latin America (See Graph 2). Last year it even became first receptor in Latin America, surpassing Brazil, and third between developing countries (Foreign Relations Dep., web ).

Between 1994 and 2003, Mexico received US$142.5 billion in FDI (See Graph 1). The countries from which it received the most are the following: FDI BY COUNTRY 1994-2003 Source: Foreign Relations Department Note: Espa~na = Spain, Alemania = Germany, Reino Unido = United Kingdom, Ho landa = Holland, Otros = Others, EE. UU. = US. 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, ICT, agribusiness, chemicals and pharmaceuticals, biotechnology, financial services, water and power generation (See Table 3).

The movement of FDI in Mexico is not unconnected to political and economical, both internal and external, events. As seen in the graph below, the orientation of Foreign Investment in Mexico changed completely in 2000, with the winning of President Fox, from being a country export oriented to a country trying to induce FDI into its internal economy in order to try to motivate and stimulate internal activities and benefit a major area of the population; that is, searching for internal development. For instance, from 1994 to 2000, exports represented a fundamental pillar in the generation of jobs and economical development, becoming the most dynamic sector of the economy. During this period, exports contributed to more than 50% of the GDP and one out of two jobs generated was related to export production. Foreign firms with FDI in Mexico have been investing since 1994 in the sectors with more dynamism, mainly promoting exports.

This investment can be traduced as technology transfer and better remunerated jobs in sectors like automotive and electronic; these sectors represented 63% of exports in 2003. d. FDI in Mexico from January to June 2004 The recorded FDI in Mexico during the period of January to June of this year ascends to $10,292.0 million dollars. This quantity was invested by 2,931 Mexican societies with foreign direct capital, from which 1,318 were maquiladoras that imported temporal fixed assets. The main countries investing in Mexico this year were Spain with $50.2 M followed by United States with 32.5 (See graph 3). However, apart from the quantity the country is receiving of FDI, there are several factors that are important to mention. First, on October 14, AT Kearney positioned Mexico in place 22 on the Most Trusted Countries for FDI, after being in third place last year (Melgar, Reconoce Perdida).

Second, President Vicente Fox accepted some hours later on October 14, that because of the economical recession, Mexico has been unable to attract more investors. Moreover, he says this economical recession is mainly due to structural reforms that have not been endorsed by the Congress (Grupo Reforma, Refuta Gobierno). IV. Future of FDI in Mexico, Threatened? In 2001, one year after the presidential elections, President Fox launched numerous incentives to make reforms in the laws of several economic sectors, including Labor, Taxing and Energy, the most important ones. The reason was simple: Mexico, after opening its market, needed to assure and attract more foreign investment and therefore have more private capital.

Of course, private firms contribute to the growing of a country if they have the opportunities and incentives for investing, creating jobs and expanding. However, three years have passed and the Fiscal, Energy and Labor Reforms are still being debated in the Congress. October 14 of 2004 represented a day jam-packed from opinions from around the world about Mexico's competitiveness. John Breidenstine, US Commercial Consul in Mexico, said "Mexico is no longer attractive for its low salaries, the same they are no longer a competitive advantage... Mexico needs to do more and quickly to modernize the processes... Time is money" (Ramirez, Debe Mexico).

Moreover, he said that Mexico needs to improve its competitiveness with respect to other countries because the global market demands it; if this does not happen then the capital will flow where there are greater profits. In spit of this, the Congress and Political Parties do not seem to be interested in the welfare of the country. They have in their hands three main reforms that might change the future perspective of FDI in Mexico. The costs incurred by firms in Mexico are very high considering the poor support they receive from a bureaucratized government. Energy, labor, transportation costs are the most common, reflecting the need for reforms in their sector. a. The Energy Case The energy and electrical reform will not only lessen the costs on these frames to investors, it will change national feeling.

Foreigners don't know at what extend the ownership of Oil production or the electrical power supply is nationalized. It is part of their identity, as hard it is to understand it. This is the main reason the Congress has had problems accepting the reforms: both the Congress and most citizens feel it is an assault to Mexican sovereignty. Francisco Reyes He roles, ex Secretary of the Energy Department and ex-ambassador in Washington, declared that "the problem is no that Mexico produces more oil or not, the problem is that multinational firms produce it, and the Mexican pubic opinion doesn't accept it" (Gonzales, Frena Terquedad). Pemex, or Petrol eos Mexicans, is the oil national company in Mexico in charge of the exploration, process and production of oil and gas in Mexican territory. Pemex lies with many problems concerning the lack of capacity of investing more, having more capital, acquiring know-how, because of the Energy Law: 1.

Pemex has to invest with another company outside Mexico because laws don't permit foreign investment in this sector, for example in the activity of processing oil into gas or diesel. 2. Natural gas: Mexico / Pemex has to import gas from Canada, Australia, Russia, Indonesia or New Zealand because it cannot explore and extract the one that lies under its own soil. While the exploration and exploitation of natural gas is closed to agents outside the public sector, Mexico will have to continue importing gas from other countries at prices and conditions that diminishes significantly the national production competitiveness. 3. The legal framework doesn't allow Pemex to have foreign partnerships in order to use their technology and share knowledge.

And moreover, marginal oil wells that are small for Pemex but big enough for other companies cannot be exploited, leaving aside a great opportunity. Due to these problems, which are not the only ones, the energy and cost of it is really high. Gasoline, between other, represents a disadvantage for international firms. While in the United States firms can get more competitive electrical tariffs depending on their efficiency, in Mexico there isn't any of that. In addition, gasoline on the other hand is becoming equally expensive as in US, therefore there isn't a big difference in transport expenses. Francisco Gil Diaz, present Secretary of the Energy Department, affirms that Mexico could have energy supply problems in 5 or 6 years if the energy reforms don't take place and this symbolizes one of the greatest challenges for Mexico (Mendez, Niega Gil).

In other words, is possible that in 5 or 6 years the government will not be able to invest therefore impeding the necessary production growth needed in the following years. b. Labor and Tax Reforms and Bureaucracy Equally important is the case for the Labor and Tax reforms. Andre Rozen tal, Mexican Counselor for Foreign Affairs, commented about this theme. He said that there are complications in the Judicial system because even though Mexico has good laws they are imperfect in their application. As an example we have the corruption, minimized but still present (Grupo Reforma, Destacan Estabilidad). Union workers are extremely discouraging by promoting more strikes and discouraging the creation of new jobs.

The boss is not encouraged to fire employees and, moreover, if he did, he has to pay three months of salary and other indemnities, therefore not giving additional payments during its period for working there (Perez-Moreno, Inversion). The low creation of jobs is contra rested with the informal economy which is about 30% the size of GDP. Bureaucracy is another cost that firms have to absorb, and these costs are really high compared to other countries. For example, to open a business in Australia it usually takes 2 days while in Mexico it takes 58.

Another example is how much time is needed to make worth a contract: in Mexico it takes 421 days while in Holland takes 48. As a result, this bureaucracy discourages investment and therefore productivity within the country. However, while other countries are modifying their legislation in order to receive more international flow of capital, in Mexico the reforms needed in the laws will not happen during FOX's administration. Fox started but not finished the political transformation. c. Solutions? Is there really a solution or a medicine for encourage the application of these reforms?

The truth is that Mexico has to keep doing until now: promote the application of reforms that would encourage and sustain Foreign Direct Investment. Mexico has to invest in sectors with activities and processes of more high technological level, more skilled, added value and quality. There activities will require and push on massive investment and public / private changes. Moreover, what the government has to do is to increase savings in order to allow more credit access, improve infrastructure and modernize the judicial system. V. Conclusions On the other hand, not all is black in Mexico. There have been developments in other areas that reinforce Mexico's competitiveness.

For example the growth in the Maquiladoras and Automotive industry, this last one with important investments during this year. What is the purpose of this paper is to show that if this situation keeps going, with now substantial changes in the Political and Economical system, the FDI will start decreasing due to the discouraging circumstances that foreign firms have to deal with. Mexico's voter base is young, and in presidential elections every six years, 15 to 20% of them are voting for the first time. Collective memory is short.

PRI guaranteed its own perpetuation by taking voters through a centrally planned economic cycle. Mexicans grew accustomed to 2 years of devaluation and implosion at the beginning of the cycle followed by four years of strong growth. With the world watching in 2000, Mexico elected its first non-PRI president in 71 years with a clean election. President Vicente Fox, bold, new and fresh with ideas, and the Cabinet, drafted brave reforms and quickly tried to push them through congress.

However, Mexico has little experience on legislative issues, both Political Parties and citizens. On one hand, politicians don't know how to negotiate. On the other hand, citizens are led away by the most populist party without voting for a global and national need. Political culture is accustomed to absolute power. And now, Fox is viewed as weak and ineffective. All in all, a mature relationship between the Congress and the Executive power is needed in order for the reforms to take place.

All in all, not all responsibility lies on the Congress, but on each one of the Mexicans, the Private Initiative, and the Government in general, in turn to drive the realization of all changes needed.

Bibliography

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Gonzales, Maribel. "Frena 'Terquedad' el a vance en Mexico". Reforma 29 Sept. 2004.
Grupo Reforma. "Destacan economica de Mexico". Reforma 21 Nov. 2004.
Grupo Reforma. "Refuta: so mos". Reforma 14 Oct, 2004.
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