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Analysis

Regaining the Foreign Investment Boost?

Wed, 01/25/2012 - 14:35

Between 1997 and 2011, Mexico’s annual GDP growth has stood at an average of 2.89% - lower than its neighbours in Latin America such as Brazil at 3.15%, but higher than the US, whose GDP growth in the same period was an average of 2.45% per year. This relative stagnation in a Latin American context has been attributed in part to the lack of competition in key sectors, which many believe could be solved by opening the Mexican market to more foreign investment. However, in the first nine months of 2011, Mexico received 1% less foreign direct investment than in all of 2010, leading some to suggest that the trend of underperformance in Mexico might be about to reverse.

Mexico’s industrial production for December 2011 rose by 2.8% from December 2010, according to Mexico’s National Statistics Institute, bringing the growth in industrial output up to 3.8% for the full year. The fact that manufacturing costs are on average 25% lower than in the US, as stated by Mexico’s Economy Minister Bruno Ferrari in August 2011, and the country’s proximity to the US, provide Mexico strong incentives for foreign investors.

In September 2011, the Mexican government announced that it was investigating the possibility of lowering the caps on foreign investment in the areas of transport, energy and telecommunications, which had previously been set in 1993. The current cap on foreign investment in airlines is 25%, and 49% in fixed line telephony. It was also announced that the review of the energy sector would only extend to gas distribution and petrol stations, with E&P activities being left in the hands of Pemex.

There are obviously some concerns among Mexico watchers that the security situation in the country might have a negative impact on foreign investment. However, this does not seem to be the case. In July 2011, the Mexican government published a report, which showed that foreign investment had actually increased in the seven states most aected by the drug war since it began in 2006. Across the country, net foreign direct investment from 2006 to 2010 went up to US$31 billion from US$30 billion in the 

At present, the Mexican Constitution requires foreigners who intend to engage in Mexican business to be considered as Mexican nationals in order to waive their right to seek protection from their home governments. Interested investors can do this through the formation of a Mexican corporation. In addition, there are limitations on foreign investment in activities such as insurance, bonds, manufacturing of arms and ammunition, newspaper publishing, aircraft and railway equipment, telecommunications, airports and air transportation, port services, oil pipeline construction, drilling of oil and natural gas wells and private education services. Some activities are reserved exclusively for Mexicans such as land transport of passengers and cargo, retail sale of gasoline and other oil derivatives, and development banks. All foreign investors must follow the appropriate registration process previous five years. At the same time, companies such as Bank of America and Nestle came forward to say that they had not been significantly aected by the violence in the country. Analysts have suggested that this is due to the diculty of extorting a large multinational company in comparison to a local business.

In January 2012, the IMF announced its growth forecast for Latin America, revising its previous estimate of 4% annual growth down to 3.6% for the region. Mexico’s GDP growth forecast was revised from 3.6% to 3.5%. The IMF believes that the country will be able to sustain this growth until 2013. It is uncertain at this point what impact the 2012 general election in Mexico will have on the attractiveness of the country to foreign investors.