Claudio Rodríguez
Holland & Knight
Expert Contributor

Energy As a Competitive Advantage

By Claudio Rodríguez | Thu, 09/09/2021 - 15:04

Michael Porter’s theory of competitiveness is based on the causes of the productivity with which companies compete. Porter demonstrates how traditional comparative advantages such as natural resources and pools of labor have been superseded as sources of prosperity and how broad macroeconomic accounts of competitiveness are insufficient. As therein described, Porter's “diamond” constitutes a new way to understand the competitive position of a nation (or other locations) in global competition that is now an integral part of international business thinking.

Competitiveness is crucial in a globalized world, notwithstanding the economic policy adopted by each country. Even centralized economies compete between themselves and with liberal economies while attracting investments. To such an end, while deciding where and when to invest, several factors and rationales are taken into account.

In accordance with the United Nations Commission for Trade and Development (UNCTAD), 11 standards and policies are reviewed by foreign direct investment (FDI): structure, change of control policies, labor rules, competition protection, resident flexibility, profit expatriation, protection of intellectual property rights, environmental rules, corporate rulings and accounting principles, judicial system and sectorial regulations. (Rodriguez Galan, Claudio, “International Business Law,” Porrua, Mexico City, Third Edition)

On the other hand, an economic, reliable and efficient energy offer is crucial and is undoubtedly considered by FDI when planning new industrial developments in a host country. Such professional power and gas systems, with tariff visibility and reliability in the amount and quality of the energy inputs, are fundamental simply because such investments are planned for the long term. Energy, as a primary component of the daily operational cost of all industries, together with many other costs and prices, has a close relationship with the return of investments (ROI).

Having said all the above, when the judicial system and energy sector regulations are jeopardized based on dogmatic old-fashioned decisions to support monopolistic entities, even though the Constitutional framework, international treaties and federal laws allow collaboration mechanisms to offer such an efficient, economic and reliable and clean energy matrix offer, this will be considered by FDI in their decision-making process.

In Mexico, we have seen that such is exactly the case. However, we are far from knowing if the decisions taken under so-called “Energy Sovereignty” will indeed strengthen the national sovereignty (where there is no relationship whatsoever, by the way) or if, in contrast, it is just a slogan that will weaken not only state-owned energy companies (CFE and PEMEX) but the national energy offer as a whole.

If the latter is true, the competitive advantage of Mexico as an attractive and long-standing FDI destination country will be affected. Industrial clusters, car manufacturing companies and many other economic entities will consider the lack of visibility in policies, monopolistic effects and judicial fights within the energy sector as part of their decisions regarding where to invest.

In the end, this will affect employment, regional growth, capital and tax revenues. Such change of rules in the energy sector has not only affected energy-related companies doing business in Mexico. The expanding shock will reach other companies that will look for better places to do business simply because they will need such energy inputs. Thus, it may be “sovereign” but it is not an optimistic scenario at all.

Photo by:   Claudio Rodríguez