Claudio Rodríguez-Galán
Partner
Holland & Knight
/
Expert Contributor

Mexico As an Opportunity for New Investments

By Claudio Rodríguez | Tue, 09/13/2022 - 09:00

In spite of the challenging situation in the energy sector and the recently started discussion panel requested by the US and Canada under the framework of the USMCA, it is important to understand that foreign investment is driven by many other rationales and that many other areas are still huge opportunities in Mexico for foreign investors. Thus, discussion of the positive conditions still existing in Mexico is necessary not only because they are waiting to be exploited but because Mexico is indeed a land of opportunity for new ventures and investments.

The international theory of foreign investment shows us that decisions are made to invest in a foreign (host) country in different ways, under different conditions and for different reasons. The most important, naturally, is to open a new market for products and services. One other reason is to bridge the trade barriers and costs in place between host country and country of origin. In this case, incorporation of a (host country) subsidiary will naturally make the products and services original from that country, which will include the products in the trade system and alliances that such host country has. As such, the existence of lower production costs and a fantastic and close geographical position to the United States and Canada will motivate foreign companies to produce in Mexico, with the benefits of having a new local market of over 100 million people and access to the US and Canadian markets (with over 350 million people).

In summary, attractiveness of a host country to foreign investors is generally not in the hands of host governments but, rather, depends on natural geographical conditions or size of the domestic market; however, governments are and shall be active in promoting the necessary governmental conditions to improve these “natural” factors. 

That is why other rationales are taken into account by foreign investors when deciding to place a geographical and legal presence in a host country. In particular, 12 have been detected: political stability, financial/economic system, legal system, bureaucracy, exchange control, tax system, limits to foreign direct investment, trade barriers, intellectual property protection, public security; and, financial/banking requirements. 

All those shall be predictable and to such an end, international institutions like the United Nations Conference on Trade and Development (UNCTAD) have created Investment Policy Reviews, or IPRs, to analyze all those rationales that are reviewed by potential investors. Also, certain codes of conduct are produced to address other important, specific issues like expropriation, return of profits and fair conditions. Mexico is no exception and information is available.

It is clear that Mexico should still improve certain conditions, including public security and broader independence between powers, but significant federal laws have been in place since the first years of the 1990s to protect fundamental conditions to receive and protect foreign investment, including, among others, a strong and proven Federal Competition Law, Federal Foreign Trade Law, Federal Intellectual Property Law and the Federal Foreign Investment Law. Alongside those, independent federal institutions protect competition, trade, intellectual property and foreign investment: that is, the pillars of the international world trade system itself.

It is clear that liberalization of specific investment areas, as started in the ‘90s, is perhaps one of the most progressive among many countries, and therefore, in Mexico today only a few areas do not allow foreign investment participation or control. This is an additional reason to consider Mexico as an attractive country. Beyond the obvious, it means that flow of foreign capital has no restrictions in more than 99 percent of all commercial and trade activities in Mexico. 

Mexico has impressive competitive advantages that still are waiting to be discovered and, therefore, both horizontal foreign investment (producing products identical to those produced in the country of origin) and vertical foreign investment (producing elements to be included in a different final product) should increase in Mexico due to the current geopolitical conditions where US, Canadian and European companies are moving their facilities out of certain Asian countries (nearshoring), and because of the geographical positioning of Mexico with its international trade treaties in place. 

Finally, confirming the above, it is interesting to analyze the recently enacted US Inflation Reduction Act (IRA) that might be an additional opportunity for foreign investors in Mexico, simply because IRA will indirectly promote industrial production in Mexico to supply the economic chain to be created in the US, and thus offering investors indirect access to activities and multibillion-dollar investments in many economic areas in the US, providing a boost for vertical investment products of Mexican origin to the American market.