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Analysis

Mexico Rises as a Hub for Foreign Investment

Tue, 01/22/2013 - 13:48

Over the past two decades Mexico has transformed itself from a closed economy with low foreign investment to a highly attractive market for international companies: Mexico changed from having an protectionist economy with high import taxes to a very open model, reducing regulation and signing 44 free trade agreements, which makes it the nation with the most free trade agreements in the world. This change in structure began in 1994 with the signing of the North American Free Trade Agreement (NAFTA), which made Mexico, according to British Insider, “A factory for manufactured goods destined for the US and Canada, and now a factory for the world.”

The opening up of the Mexican economy and the policies implemented in the last two decades have helped the country become a highly attractive market for international companies, but with its strategic location, sharing a long border with the largest economy in the world, it has been able to contend with other highly competitive manufacturing economies such as China. In the past, Chinese manufacturing wages were four times cheaper than Mexico’s; nonetheless, as Chinese wages have risen and oil prices have soared, Mexico has begun to attract more and more foreign investment, not only because it has low manufacturing costs, but also because transportation costs to the US are significantly cheaper from Monterrey than they are from Guangdong. For this reason, it is not surprising to see some of the largest international companies, such as Nissan, Honda, General Motors, Coca-Cola, and DuPont, opening new manufacturing plants all over Mexico.

It is not only foreign companies that have benefited from the opening up of the Mexican economy and the boom of foreign investment. Companies such as Bimbo and Cemex have been able to grow significantly not just in Mexico but abroad too, distributing their products mostly in Latin America, but also further afield in Europe and Asia. As The Economist argues, “being a multinational corporation based in Mexico is no longer a disadvantage, since raising capital is not hard in Mexico; the Mexican bolsa is flavor of the month with foreign investors because Mexican firms are wellplaced to expand north (where there are lots of Mexicans) or south (where Spanish is the lingua franca).”

Even though in the past Mexico o†ered a cheap labor force for manufacturing, it did not o†er international companies a workforce with the necessary skills to compete with other more developed nations; however, according to the New York Times, “Mexico currently graduates around 115,000 engineering students per year — roughly three times as many as the US on a per-capita basis.” This drastic increase in producing skilled labor has led to a boom in various industries, such as aerospace, automotive, and other advanced manufacturing industries.

The global recession that hit the US and Europe in 2007- 2008 had a huge negative e†ect on the Mexican economy and its prospects of becoming a hub for foreign investment, but the country has built solid foundations that will help it to achieve strong growth in the future – the country’s potential for progress is evident in the fact that Mexico exceeded Brazil’s GDP growth rate in 2011 and 2012. If this growth trend continues, the Mexican economy could surpass Brazil’s by the end of the decade, and according to Goldman Sachs and Nomura, by 2020 Mexico’s economy could be amongst the ten largest in the world.