Mexico is among the best-performing nations in the Americas region. It embraces free trade with many of its industries being open to foreign competition. In accordance with the 2018 index statistics, Mexico is ranked position 63 in terms of economic freedom with a score of 64.8. This score is an increase of 1.2 points due to trade and investment and fiscal health improvements. Mexico has been doing well in terms of economic performance which is measured by the rates at which the nation’s gross domestic product grows. The economic growth of Mexico has been 2.5 percent for the last 5 years. It has been ranked position 12 out of the 32 nations in the Americas region. The overall economic performance of Mexico is above that expected both at the regional and world levels (Wilkie 2016, p.10).
With globalization, many nations have now realized the value of international trade and tried their best to support their national businesses to venture into it to foster their economic growth (Levitt 2013, p.249). In the context of international trade, a nation’s economic growth may be realized in two ways. First is an investment by national businesses across their national borders. Secondly is a foreign direct investment in a nation. Foreign direct investment occurs when businesses and individuals invest in nations across their national borders. An investment must be controlled 10 percent by foreigners for it to be termed as a foreign direct investment (Froot 2013, p.1). Before undertaking foreign direct investment in the nation of interest, keen scrutiny and analysis of the micro and macroeconomic factors of the nation are crucial. These factors unveil the future of investment in the nation of interest (whether the investment is likely to succeed or fail).
Foreign direct investment in Mexico is among the major contributory pillars towards its economic growth. It has been contributing much towards the Mexican economic growth. It has been increasing over the past years as the business environment in the nation improves. Currently, foreign direct investment in Mexico is more than $29.7 billion according to the United Nations Conference on Trade and Development (UNCTAD) World Investment Report 2018. Improvements have been noted due to energy and telecommunications sectors liberalization which has attracted more foreign direct investors into the nation.
The political system of the United Mexican States has been unstable for many years but it is currently improving (Cornelius 2017, p.83). With the leadership of the former president Enrique Pena Nieto, the political system was restructured a little bit but still, drug-related crimes were on the rise. Many people have been attacked by powerful drug traffickers who sell drugs from South America to the United States. Due to this, many investors have been scared away. The current president Andres Manuel Lopez, is expected to restructure the political system of Mexico and bring about peaceful coexistence among the citizens of Mexico. The judicial system of Mexico though independent has been subject to political power. Bribery and corruption activities continue to undermine the judicial system. As a result property rights have not been fully protected and many investors have faced challenges in securing their investments. Due to corruption, the security forces in Mexico have been seen misappropriating their power by sparing dangerous cartels who traffic drugs from South America to the United States. Corruption activities in the Mexican government have lowered its integrity to a low score of 26.9 according to the 2018 index. The current government under the leadership of President Andres Manuel Lopez is expected to bring more change by fighting all the impunity in government in order to attract more foreign direct investments in Mexico. The political instability in Mexico has discouraged many foreign investors but with time as improvements occur in political stability, foreign direct investments have been noted to increase. With the current government, more foreign investments are anticipated as political stability will improve.
Mexico has been doing well in terms of economic performance despite frequent earthquakes in the country. The economy of Mexico has been ranked among the 15 largest economies in the world and it is ranked number 2 among the largest economies in Latin America. The economic growth of Mexico which is measured by the rate at which its gross domestic product grows has been averaging 2.5 percent for the last 5 years. The third quarter of the year 2018 indicated a growth rate of 2.5 percent while the second quarter indicated a growth rate of 2.6 percent. The growth rate is above the anticipated one of 1.9 percent as some of the major sectors of the economy especially the oil and service industries had been struck by an earthquake during the year 2017 September. This shows that the Mexican economy has been doing well despite the earthquake challenges and this has attracted many foreign investors into the economy. The unemployment rate in Mexico has been averaging 4.0 percent for the last 5 years (Martin 2017, p.3). With improvements in the Mexican education sector, the quality of labor has highly increased and it is cheap. Currently, the unemployment rate stands at 3.2 percent as compared to that of 2017 which was 3.6 percent. The availability of high-quality cheap labor has highly attracted more foreign direct investors to Mexico. The inflation rate in Mexico has been relatively low at averaging 4.0 percent for the last 5 years. Currently, the inflation rate stands at 4.72 percent (Galindo and Ros 2018, p.201). Despite the Mexican inflation rate having increased, it has been relatively stable. This means that the prices of goods and services have been kept relatively stable. This has attracted many foreign direct investments in Mexico as investors can plan their future expenditure with great certainty. Interest rates in Mexico have averaged 5.57 percent for the last 10 years. Currently, interest rate stands at 8.0 percent as the Bank of Mexico is restoring the value of its peso. Interest rates are anticipated to decrease to 5.0 percent. Despite the rise in Mexican interest rates, they have been kept stable and this has enabled investors to have a clear glimpse of what the future holds. As a result, many investors have been attracted to join the economy of Mexico.
Considering the social-cultural activities of Mexico, there has been a huge gap between the poor and the rich due to income disparity in the nation (Hanson and Harrison 2015, p.271). Remote areas have been highly neglected. This calls for investment in remote and the neglected rural areas. Mexico has been doing well in terms of technology advancement. Transportation and environmental technologies have risen as the Mexican education sector continues to instill technology-oriented minds to its university students. This has highly attracted foreign direct investments into the Mexican economy as technology is highly improved and its citizens are well versed with technological advancements.
Mexico is endowed with numerous natural resources which contribute much towards its economic growth. Most of its natural resources are minerals. They include lead, copper, zinc, oil, silver, arsenic, bismuth and chocolate (Del Angel-pérez and Alfonso 2014, p.329). The economic industries of Mexico include iron and steel, textiles, consumer durables, mining, food and beverages, clothing, tobacco, tourism and chemicals. Mexico highly participates in the export market of the natural resources for which it has a comparative advantage in producing. The total exports of Mexico currently are more than $406 billion. The main products exported by Mexico include oil and oil products, electronics, mobile phones, televisions, automobiles, computers, chocolate, fruits, silver, cotton, coffee and vegetables. The main export partners of Mexico include the United States, Canada, China, Spain and Brazil with percentages of 80.3, 2.7, 1.5, 1.5 and 1.2 respectively. Exports contribute much to the overall economic growth of Mexico. The natural resources for which Mexico has a competitive advantage in producing highly attract foreign direct investments since their production and market is not yet saturated. The potential opportunities for foreign direct investment in Mexican natural resources include electronics, food and beverages, renewable energies, automotive sector after-sales sectors such as the sale of accessories and repair parts, tobacco products and the banking sector.
The currency of Mexico has been experiencing favorable stable exchange rates against foreign currencies in the international market. The most commonly used foreign currencies in Mexico are the EURO and the US Dollar. For the last one year, the exchange rate for Euro and the US dollar against the Mexican Peso has averaged 22.90 and 20.29 respectively. The real exchange rates of the Mexican peso are anticipated to improve in future as they have done for the past 3 months. The Bank of Mexico has been maintaining the foreign currency exchange rates favorably stable considering the prevailing market conditions (Ogaki and Santaella 2018, p.135). It has highly fought for the stable value of the Mexican Peso. Currently, the interest rates stand at 8.0 percent which is a move by the Bank of Mexico to avoid currency devaluation of the Mexican Dollar in the international market (Thornton 2017, p.255). The current volatility rate of the Mexican Peso stands at 0.66 percent. This shows that the Mexican Peso has remained favorably stable. The stability of the Mexican Peso has attracted many foreign direct investments into the economy as investors can plan their future transactions without the fear of future currency deterioration. The Mexican Peso is among the currencies which have continued to improve their value with time.
The Mexican government has reformed many of its policies especially those related to foreign direct investment to attract more foreign direct investors into the nation (Balassa 2015, p.795). Mexico has signed agreements with over 30 countries promising to protect foreign direct investments in the nation. Such nations include Turkey and Brazil among others. Certain sectors have now been fully opened to foreign direct investment with 100 percent ownership rights. Such sectors include petroleum drilling, insurance sectors and telecommunications and satellite communications among others. The ownership in these sectors thereafter was only limited to 49 percent. The Mexican government has reformed its education sector whereby students are initially trained before being allowed into the job market to acquire the necessary skills in their respective fields of study. The government has improved its political stability more than some of the neighboring nations. The current government is devoted to eliminating attacks from drug traffickers as well as eliminating corruption in the nation. Importers have now been allowed to carry customs clearance themselves without seeking the help of customs brokers. The second customs clearance has also been eliminated in order to fasten the goods clearance process. All these policies among others have highly attracted foreign direct investment in Mexico.
Despite the established trade policies to foster foreign direct investment in Mexico, there are still exist some barriers to foreign investment. These barriers include both the tariff and the non-tariff (Lee and Swagel 2017, p.372). The Mexican government applies tariff of 5.6 percent on imports. The United States tariff on agricultural products was heightened on May July 2018 due to tariffs it applied to Mexican steel and aluminum. Mexico requires import licenses for any goods entering the nation. Most of the times import licenses are delayed for targeted products from certain nations. Certain standards are also set for various products entering Mexico. Recently the standards for the used vehicles were raised to discourage there purchase in the nation.
Certain incentives have been offered by the government of Mexico to attract more foreign investments. Investment in specific sectors of the economy namely livestock, timber-based, agriculture and fishing are granted tax exemptions according to the number of shareholders (Busse and Koopmann 2016, p.97). Foreign investments in the IMMEX group are allowed zero duties for importing raw materials for 18 months. Special Economic Zones have been established in Mexico to attract foreign investment in these areas. Any investment done in the areas is granted free customs duties, prerogatives of development of infrastructure and various incentives. All these introduced incentives among others have contributed much towards improving foreign direct investments and more positive results are anticipated in the future.
Mexico has been ranked position 15 in terms of foreign direct investment. It has opened many of its sectors to foreign investors and has introduced various incentives for foreign investors (Feenstra and Hanson 2017, p.371). Foreign investment in Mexico has increased over the past years to more than $29.7 billion during the year 2017 according to the United Nations Conference on Trade and Development (UNCTAD) World Investment Report 2018. This has been as a result of improvement in political stability and expansion of Mexican infrastructure such as air infrastructure. Various incentives introduced in specified areas have also contributed to the increased foreign direct investment.
From the assessed micro and macroeconomic factors, Mexico has a high potential and opportunity for foreign direct investments. Political instability in Mexico resulting from drug trafficking has been a major issue of concern but the current government is working towards improving it. The economy of Mexico has been growing despite the various challenges it faces including natural disasters such as earthquakes. Economic growth has averaged 2.5 percent for the last 5 years. The current unemployment rate in Mexico stands at 3.2 percent as its education sector has been reformed to provide students with quality skills which match their areas of expertise. The inflation, foreign currency exchange and interest rates despite being a bit higher have been kept stable by the Bank of Mexico. This has enabled investors to plan for their future activities with great certainty and has attracted more foreign investors to invest in the economy. The Mexican government has come up with various policies and incentives aimed at attracting and maintaining more foreign investors in Mexico. The government has introduced tax exemptions for investments made in the Special Economic Zones among other incentives. The government should remove barriers to trade. The process of acquiring import licenses should be made easy. Also, considerate level of standards for goods and services should be adopted to avoid hindering foreign investors from certain countries.
References
Balassa, B., 2015. Trade policy in Mexico. World Development, 11(9), pp.795-811.
Busse, M. and Koopmann, G., 2016. The EU-Mexico Free Trade Agreement-Incentives, Context and Effects. J. World Investment, 3, p.97.
Cornelius, W.A., 2017. The political economy of Mexico under de la Madrid: austerity, routinized crisis, and nascent recovery. Mexican Studies/Estudios Mexicanos, 1(1), pp.83-124.
Del Angel-pérez, A.L. and Alfonso, M.B.M., 2014. Totonac homegardens and natural resources in Veracruz, Mexico. Agriculture and Human Values, 21(4), pp.329-346.
Feenstra, R.C. and Hanson, G.H., 2017. Foreign direct investment and relative wages: Evidence from Mexico’s maquiladoras. Journal of international economics, 42(3-4), pp.371-393.
Fischer, S., 2013. The role of macroeconomic factors in growth. Journal of monetary economics, 32(3), pp.485-512.
Froot, K.A., 2013. Introduction to” Foreign Direct Investment”. In Foreign Direct Investment (pp. 1-12). University of Chicago Press.
Galindo, L.M. and Ros, J., 2018. Alternatives to inflation targeting in Mexico. International Review of Applied Economics, 22(2), pp.201-214.
Giddens, A., 2018. Globalization. In Sociology of Globalization(pp. 19-26). Routledge.
Hanson, G.H. and Harrison, A., 2015. Trade liberalization and wage inequality in Mexico. ILR Review, 52(2), pp.271-288.
Lee, J.W. and Swagel, P., 2017. Trade barriers and trade flows across countries and industries. Review of Economics and Statistics, 79(3), pp.372-382.
Levitt, T., 2013. The globalization of markets. Readings in international business: a decision approach, 249.
Martin, G., 2017. Employment and unemployment in Mexico in the 1990s. Monthly Lab. Rev., 123, p.3.
Ogaki, M. and Santaella, J.A., 2018. The exchange rate and the term structure of interest rates in Mexico. Journal of Development Economics, 63(1), pp.135-155.
Thornton, J., 2017. The adjustment of nominal interest rates in Mexico: A study of the Fisher effect. Applied Economics Letters, 3(4), pp.255-257.
Wilkie, J.W. ed., 2016. Society and economy in Mexico (Vol. 10). University of California at LA.
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