Foreign Direct Investment & Economic Development: The Case Of Mexico

1ForeignDirectInvestment&EconomicDevelopment:TheCaseofMexicoAsdiscussedthroughoutthissemester ,theglobaleconomycananddoesimpacteveryoneinvolved.Onesuchmeansofinternationaleconomictransactionisthroughinvestmentincontrollingownershipinabusinessinonecountrybyanentitybasedinanother .Whentheinvestmentismadeeither"inor ganically"bybuyingacompanyinthetar getcountryor"or ganically"byexpandingtheoperationsofanexistingbusinessinthatcountry ,thatinvestmentisdeemedaForeignDirectInvestment(FDI).ThisresearchpaperwillexploreFDIasitrelatestoeconomicdevelopmentinageneralsense.Inaddition,FDIwillbeexaminedconcerningMexico'seconomicgrowth.Foreigndirectinvestmentgenerallyinvolvesmer gersandacquisitions,constructingnewfacilities,reinvestingprofitsfromoverseasoperations,andtakingoutintra-companyloans.Foreigndirectinvestmenttypicallyreferstobuildinganewfacilityandalastingmanagementinterest(10percentormoreofvotingstock)inanenterpriseoperatinginanothereconomy(W orldBank).Anentitybasedinanothercountrycontrolsownershipofabusinessenterpriseinonecountryaspartofinternationalfactormovements.Investmentsinforeignsecurities,suchasstocksandbonds,aredistinguishedfromforeignportfolioinvestmentsbytheelementof"control."FDIisasubsetofinternationalfactormoves.Itischaracterizedbycontrollingownershipinonecountrybyanenterprisebasedinanother .FDIdif fersfromforeignportfolioinvestment,wheretheinvestorholdsnostakeinthecompanyhebuysinto.Inforeigndirect2investment,theinvestorcontrolsthecompany ,notjustownsashareofstock.Standarddefinitionsofcontrolusethe10%thresholdofvotingshares.However ,thisisagrayareabecauseasmallerblockofstockoftengivescontrol.Furthermore,controllingtechnology ,managers,andcriticalinputscanconferdefactopowertotheinvestor(FinancialT imes).FIL(ForeignInvestmentLaw)regulatesMexico'sforeigndirectinvestments(FDI).Mexicannationalshavethesamerights,obligations,andremediesasforeigninvestorsundertheFIL.ObtainingapprovalfromtheNationalCommissionofForeignInvestments(Commission)isrequiredwhenforeigninvestorswishtoacquiremorethan49%ofsharesofMexicancompanieswithassetsexceedingtheannualthresholddeterminedbytheCommissionatthetimeoftheacquisition(currentlyapproximatelyUSD$1million).Furthermore,Article27oftheMexicanConstitutionprohibitsforeignersfromacquiringdirectdomainoverlandsandwaterswithin100kilometersofthenationalbordersinlandor50kilometersfromtheseashore.Foreigncapitalisalsocappedat49%inships,broadcasting,airtransportation,andportadministration.SpecialEconomicZones(SEZs)werecreatedinMexicotoattractinvestmenttoeconomicallybackwardareasinthecountry'ssouthernstates.CompanieslocatedintheseSEZswillgetvariousincentives,businessfacilities,duty-freecustomsbenefits,infrastructuredevelopmentprivileges,andeasierregulatoryprocesses(SantanderT rade).FreeT radeZones(FTZs)wheregoodsboundforforeignmarketscanleaveMexicoduty-free.Refundofimportdutypaidonfinalimportation.Thisincentiveestablishesanadvantageforimporterswhocanobtainarefundofimportdutypaidonthefinalimportationofrawmaterialsorfinishedproductsiftheyareexportedwithin12months.TheIMMEXprogram,formallyknownastheIMMEX3maquiladoraprogram,allowsforeignmanufacturerstoimportrawmaterialsandcomponentsintoMexicotax-andduty-free,providedthat100%ofallfinishedgoodsareexportedfromMexicowithinagovernment-specifieddeadline(SantanderT rade).TheMexicangovernmentwasveryactiveinissuingadministrativeresolutions,decrees,andrecommendationsthroughout2020tomitigate,contain,andaddresstheCOVID-19pandemic.FDI,however ,wasnotexplicitlydiscussedinanyoftheseresolutions,decrees,orrecommendations.Instead,theywere(andare,insomecases,still)generallyapplicabletoprivateinvestment(NortonRoseFulbright).Despitethedif ficultiesthattheeconomyhassuf feredduetoCOVID-19andtheuncertaintythatitcaused,theUnitedNationsConferenceonT radeandDevelopment(UNCT AD)notedthatMexicorankedninthamongthetenrecipientcountriesofforeigndirectinvestmentin2020.Mexicoreceived31milliondollarsinforeigndirectinvestmentfromJanuarytoDecember2021,anincreaseof8.7%overthesameperiodin2020(Dicex).AccordingtoMexicangovernmentdata,39.7%ofFDIwentintomanufacturing,15.2%intofinancialandinsuranceservices,and15%intotransportation.Atthesametime,therestisdistributedinsectorssuchascommerceandaccommodationservices,amongothers.Regardingcountryoforigin,47.5%ofFDIcamefromtheUnitedStates,13.7%fromSpain,6.5%fromCanada,andtherestcamefromtheUnitedKingdom,Germany ,Japan,andothercountries.FDIwasprimarilyattractedtoMexicoCitywith15.99%,NuevoLenwith12.7%,BajaCaliforniawith7%,Jaliscowith6.64%,Chihuahuawith5.83%,Guanajuatowith5.52%andtheremaining46.29%bytheotherstates(MexicoNow).4TheCOVID-19Pandemichascausedadeepeconomiccrisis,whichhasaf fectedglobalFDI.AccordingtotheEconomicCommissionforLatinAmericaandtheCaribbean(ECLAC),initsreportForeignDirectInvestmentinLatinAmericaandtheCaribbean,2020,becauseofthepandemic,mostoftheworld sproductivesectorswerehitinageneralizedway ,whichsuccessivelyextendedtocross-borderinvestments,whichcouldregisterareductionofbetween30%and40%attheendof2021.AccordingtotheEconomicCommissionforLatinAmericaandtheCaribbean,amongthetransformationsthatglobalchainsofvaluewillgothroughinthenextdecadeisthewithdrawal,tovaryingdegrees,ofinternationalproducts,whichwillleadtoareductioninforeigninvestment,withafocusonnationalrelocation(reshoring).Thismigrationhasthepotentialtobeveryimportantforhigh-techindustries.However ,intheautomotivesector ,thispointisambiguous:alar geamountofinvestmentalreadymadeintheleadingLatinAmericancountriesthatproducevehicles(BrazilandMexico),aswellastheleveloftechnicalpreparationattainedbytheirworkforce,generateahighlevelofterritorialroots,makingthereturnoftheseindustriestotheircountriesoforiginunlikely .MexicohasseveraladvantagesasaninvestmentopportunitythroughFDI.First,itisoneofthemostopencountriestoforeigndirectinvestmentinLatinAmerica.Second,itislocatedstrategicallybetweenNorthAmericaandLatinAmericaandthusactsasatransitplatformfortradebetweentheseregions.Third,ithasawiderangeofnaturalresources,allowingthe5developmentofallkindsofindustriesatlowcosts.Fourth,thecountry'slabormarketisyoungandhighlyeducated,solaborcostsarereasonable.Fifth,tourismisasignificantsourceofincomeforthecountry ,andiscurrentlyamongthetopsevendestinationsforinternationaltourists.Sixth,thecountryhasasolidindustrialbase,meaningthereareplentyofopportunitiesforinvestors.Finally ,thegovernmentiscommittedtomaintaininggoodrelationswithforeigninvestorsandhasmadesignificantprogresstowardmeetingtheMillenniumDevelopmentGoals(SantanderT rade).Thereare,however ,somedownsidestoinvestinginMexicothroughFDI.Forexample,ThecountryisstronglyreliantonitsrelationshipwiththeUnitedStatesandthusvulnerabletoanychangestothefreetradedeal.Corruptionisrampantinmanystateandlocalgovernmentinstitutionsandagencies,andcrimeisrisingthroughoutMexico.Specificindustriesalsofaceintensecompetition.TheMexicaneconomyislikewisepainfullyexposedtooilpricechanges.Mexicaninfrastructure(particularlyinthetransportationandener gysectors)andtheeducationsystemcouldbebetterandmoreef fective.Finally ,druggangviolenceisasubstantialsocialandeconomicthreatinmanycommunities,particularlyneartheUSborder .TheMexicangovernmenthascreatedanopenandsecureenvironmentforforeigninvestors.TheInvestinMexicoBusinessCenterwasestablishedin2022tofacilitateinvestments.Mexicoisonitswaytobecominganationthatwouldattractforeigninvestmentworldwide.However ,Itisn'tthesafestandmostsecureinvestment,withmanyeconomicandsocialproblemsdomesticallyholdingthecountrybackfromattractingmoreinvestments.Butwithallofthatbeingsaid,theMexicangovernmentisworkinghardtosecureitseconomic6structuresandfinancialinstitutionstomakeMexicomoreattractivetoprospectivecashflows.FromcreatingsuccessfuleconomicexclusivezonestoshowingresiliencethroughouttheworstCOVID-19pandemic,Mexicowilllikelybecomeacentralhubforforeigninvestmentsinthenextfewdecades.7Citations:For eigndir ectinvestmentinMexico2022.DICEX.(n.d.).RetrievedNovember30,2022,fromhttps://dicex.com/news/for gein-direct-investment-in-mexico-2022/?lang=enFor eigndir ectinvestment,netinflows(BOP ,curr entUS$).Data.(n.d.).RetrievedNovember30,2022,fromhttps://data.worldbank.or g/indicator/BX.KLT.DINV .CD.WDLexicon.ForeignDirectInvestmentDefinitionfromFinancialT imesLexicon.(n.d.).RetrievedNovember30,2022,fromhttps://web.archive.or g/web/20190408103028/http://lexicon.ft.com/T erm?term=foreign-direct-investmentMexicofor eigndir ectINVESTMENT2022data-2023for ecast-1960-2021historical.MexicoForeignDirectInvestment-2022Data-2023Forecast-1960-2021Historical.(n.d.).RetrievedNovember30,2022,fromhttps://tradingeconomics.com/mexico/foreign-direct-investmentMexico:For eigninvestment.ForeigninvestmentinMexico-Santandertrade.com.(n.d.).RetrievedNovember30,2022,fromhttps://santandertrade.com/en/portal/establish-overseas/mexico/foreign-investmentMexico:Globalrulesonfor eigndir ectinvestment.Globalrulesonforeigndirectinvestment|Publications|Knowledge|Globallawfirm|NortonRoseFulbright.(n.d.).RetrievedNovember30,2022,fromhttps://nortonrosefulbright.com/en/knowledge/publicationsSaldaa,J.(2021,July2).Pr ospectsforfor eigndir ectinvestmentinMexico2021.MEXICONOW .RetrievedNovember30,2022,fromhttps://mexico-now .com/prospects-for-foreign-direct-investment-in-mexico-2021/