Country’s Macro Environment
The Description of the Country
Mexico is a country with a total population of 129,163,276 (as of the end of 2017) that is located in the Southern area of North America, having borders with Belize, the United States, and Guatemala (“Mexico: Introduction,” 2018). The country’s income level is considered to be the upper middle (GDP per capita is $18,149 as of the end of 2017), and also Mexico is characterized as a developing country according to the globalEDGE website (“Mexico: Economy,” 2018). The country is a member of the Asia-Pacific Economic Cooperation (APEC), the North American Free Trade Agreement (NAFTA), and the Trans-Pacific Partnership (TPP) (“Mexico: Introduction,” 2018). One of the most important industries in Mexico is agriculture and food service, and also tobacco, chemical, as well as iron and steel industries are well-developed (Torres, Mayo, & Jiménez, 2018; “Mexico: Economy,” 2018).
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According to the globalEDGE website, the physical and IT infrastructure of the country have significant weaknesses, and improvement is needed in these areas of concern (“Mexico: Risk assessment,” 2018). As Torres-Landa, Olea, and Bain (2017) mention, Mexico has established a position as a huge host for foreign investments due to its geographical closure and economic ties with the United States. Since food and retail industries are considerably developed in Mexico, such multinational corporations as Walmart operate in it (González, Husted, & Aigner, 2017). The level of corruption in the country is significantly high (Exhibit 1). Out of 175 countries, Mexico is 135 in the rank of least corrupt countries, as of the end of 2017 (“Mexico corruption rank,” 2018).
Political Situation and Stability
It is possible to state that the political situation in the country lacks stability. For the last five years, Mexico was under the government of President Enrique Peña Nieto, and it is worth mentioning that the majority of the country’s population is not satisfied with the high level of corruption as well as rising crime rates and violence, which have developed during the President Peña Nieto’s five-year term (“Mexico: Risk assessment,” 2018). In July 2018, presidential elections will be held, and it could not be predicted how the political climate in the country will change. One of the most notable candidates that are expected to involve in the elections is left-wing populist Andrés Manuel López Obrador (“Mexico: Risk assessment,” 2018).
Legislation Affecting Inward Foreign Investment
The primary legislative act that regulates the inward foreign investment process is Foreign Investments Law, which was legislated in 1993, and since then, it was amended by adding specific regulations (Torres-Landa et al., 2017). Also, the legislative act under consideration describes and determines each of the relevant business sectors in the country as well as remaining restrictions with respect to foreign investments (Torres-Landa et al., 2017). In general, all foreign investments in Mexico are regulated in the following way: they should be reported to the Foreign Investments National Registry (RNIE), which is dependent on the Ministry of Economy (Torres-Landa et al., 2017).
Economic Conditions and Stability
As it is stated on the globalEDGE website, Mexico is among the countries with an acceptable level of risk climate (“Mexico: Risk assessment,” 2018). In particular, the country risk rating is marked B, which means that there are political and economic uncertainties that can challenge adequate decision-making in the business environment as well as corporate payment behavior (“Mexico: Risk assessment,” 2018). Also, it is stated that corporate default probability is on a satisfactory level (“Mexico: Risk assessment,” 2018).
Considering business climate rating, it is marked as A4, which means that the business environment in the country is acceptable (“Mexico: Risk assessment,” 2018). In particular, it is possible to observe several aspects that contribute to this ranking. First of all, it is mentioned that corporate financial information is not always reliable, and, in some cases, this information is difficult to be retrieved (“Mexico: Risk assessment,” 2018). The debt collection system is not sufficiently developed, the institutional framework has its flaws, and intercompany transactions might be performed with significant difficulties (“Mexico: Risk assessment,” 2018). GDP growth rate is relatively low, which is a negative sign, but the unemployment rate is also significantly low, which indicates the strong labor force in the country (Exhibit 2). It is essential to mention a relatively low inflation rate, which is 2,8% as of the end of 2016 (Exhibit 3).
As it was previously mentioned, the political situation in Mexico could not be considered stable due to the lack of satisfaction with the outcomes of the five-year term of President Enrique Peña Nieto. Accordingly, the social climate in the country is also the subject of considerable uncertainty. As it was identified, high levels of corruption, criminality, and violence in Mexico significantly affect the business environment (“Mexico: Risk assessment,” 2018). It is also possible to mention that, despite the fact that the labor force in the country is largely developed as it is 58,072,901 people as of the end of 2017, the majority of the employed individuals possess a considerably low education because the education system is not strong in Mexico (“Mexico: Economy,” 2018). Another cultural issue that might occur during the process of entering the Mexican market by a foreign company is that the country’s population shares a different social background compared to Canadians. Accordingly, business customs are also different in Mexico, as people tend to avoid certainty along with considering socializing as a highly important part of a business meeting. Business etiquette requires that both parties should have lunch and discuss topics other than their business.
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Further, it is essential to focus on the analysis of the basic and advanced factors of production that exist in Mexico and also to observe various sorts of business opportunities they might support. Traditionally, there are three primary factors of production, which include land, labor, and capital goods. Each of the mentioned aspects directly influences the quality of the final outcome of the production process, which is the product itself (Sotomayor, 2016). As it was previously identified, the labor factor is the strongest aspect of the country’s business environment since the unemployment rate is significantly low, and numerous individuals are involved in the labor force (“Mexico: Economy,” 2018).
Considering the land factor, it is possible to mention that there are both strengths and weaknesses. Geographic proximity to the North American economy, especially to the United States, as well as the substantial industrial base, could be considered as strengths of the Mexican business environment (“Mexico: Economy,” 2018). However, the country is largely dependent on the economy of the United States. Additionally, Mexico’s infrastructure lacks substantiality. Another weakness that should be mentioned is the negative impact of the underinvestment in the Mexica oil industry, which is the reason for the insufficiency of economic profit from this industry (“Mexico: Economy,” 2018). Considering the fact that Mexico and Canada do not share a border, it is possible to predict that the land factor will negatively influence the entrance of a Canadian company on the Mexican market.
The third primary aspect is capital goods. The total tax rate has been continuously growing in the recent decade, and as of the end of 2017, it is 52,1% (“Mexico: Economy,” 2018). The real interest rate has dropped since 2013, and as of 2016, it is significantly low, being 0.104% (“Mexico: Economy,” 2018). The manufacturing percentage of GDP has grown since 2013, which is a positive sign for the business (“Mexico: Economy,” 2018). As of the end of 2017, the added value of the manufacturing sphere is 17.116% (“Mexico: Economy,” 2018). The total merchandise trade rate has also grown since 2013, and as of the end of 2016, it is 71.635% (“Mexico: Economy,” 2018).
Since the majority of the essential data regarding the country’s macroeconomic environment as well as basic and advanced factors of production is provided in the previous sections, it is appropriate to focus on the analysis of the risks and benefits inherent in doing business in the country. In general, it is possible to state that the Mexican business environment provides a vast set of opportunities for a foreign company to enter the Mexican market. The most beneficial factors are the low unemployment rate, strong labor force, and the country’s openness to foreign investments. Also, the country’s membership in the North American Free Trade Agreement (NAFTA) is a supporting factor for entering the Mexican market. Therefore, it would be easier for a foreign company to establish its business in Mexico. However, it is of high importance to mention the unstable political situation in the country as well as the slow GDP growth rate that could adversely impact the operations of a foreign business. Additionally, there are such problems as significantly high corruption rates and criminality.
Recommendation and Conclusion
Finally, it is essential to retrieve meaningful conclusions from the conducted analysis. In general, it is possible to recommend that the company should expand in the Mexican market. As it is evident from the research, there are numerous benefits for expanding in the selected country, including such aspects as the ease of foreign investment process, strong labor force factor, and favorable economic indices such as the tax rate and real interest rate. Nevertheless, there are considerable challenges that could adversely affect the company’s economic performance in the country. However, it should be concluded that a balanced and well-developed economic strategy for the market entrance in Mexico would help in using the strengths of the country’s economy in favor of the company and also to eliminate the influence of negative factors.
González, M. F., Husted, B. W., & Aigner, D. J. 2017. Opportunity discovery and creation in social entrepreneurship: An exploratory study in Mexico. Web.
globalEDGE. 2018. Mexico corruption rank. Web.
globalEDGE. 2018. Mexico: Economy. Web.
globalEDGE. 2018. Mexico: Introduction. Web.
globalEDGE. 2018. Mexico: Risk assessment. Web.
Sotomayor, M. 2016. Vertical specialization of production: Critical review and empirical evidence for the Mexican manufacturing industries 1994-2014. International Journal of Business and Social Research 6(2):11-28.
Torres-Landa, J. F., Olea, F. de N., & Bain, P. C. 2017. Mexico. Web.
Torres, F. R., Mayo, A. R. P., & Jiménez, H. G. 2018. Subsidies to the agricultural sector for the search for food sovereignty. A funding option for a strategic sector of the national economy. Case: Mexico. Web.