Business Environment: Mexico

Mexico ranks among the easiest countries to do business in Latin America according to the World Bank’s Ease of Doing Business 2012 report. However, high crime rates prove problematic for businesses. The government is making efforts to encourage investments in key industries but the tax environment is not overly business friendly and labour markets are rigid. Mexico’s large consumer market and proximity to the USA provide significant opportunities for marketers of consumer goods.

Summary

Mexico was the sixth easiest country to do business in Latin America according to the World Bank’s Ease of Doing Business 2012 report, ranking 53rd out of 183 countries. The economic environment is stable and real GDP grew by 3.8% in 2011. However, following the recession in 2009 Mexico is heavily reliant on the USA and Canada making it vulnerable to economic concerns in these economies. In addition, corruption and high crime levels raise security issues for businesses.

Mexico’s investment laws are generally geared towards actively encouraging foreign investment. Foreign direct investment (FDI) is however restricted for the airline, telecoms and energy industries. Mexico’s tax environment is not overly business friendly, and is amongst the weaker areas in its business environment. In 2011, the corporation tax rate in Mexico was 30.0%, unchanged from 2010. Mexico also has a large informal economy in 2012, and consequently a persistent problem with tax evasion.

Mexico ranked 78th out of 138 countries in the Networked Readiness Index in 2010. The index measures the propensity for countries to exploit the opportunities offered by information and communications technology (ICT). Mexico’s labour markets are inflexible and skills shortages remain in areas such as finance, engineering and skilled production operation. However, both the average wage per hour and the average wage per hour in manufacturing are competitive and lower than peer economies like Brazil.

In 2010, Mexico entered a period of demographic dividend, expected to last 25 years. This will create many opportunities for marketers of consumer goods due to rising consumption levels. Per capita consumer expenditure reached Mx$82,379 (US$6,940) in 2011, and is forecast to grow by an average of 2.3% per year in real terms between 2012 and 2020.

Operating Environment

Sixth easiest place to do business in Latin America

Mexico’s dealing with construction permits ranking improved by six places between the Doing Business 2011 and Doing Business 2012 rankings because Mexico made applying for construction permits quicker by consolidating internal administrative procedures.

Mexico ranked 53rd out of 183 countries in the World Bank’s Ease of Doing Business 2012 report, up from 54th out of 183 countries in the 2011 report. This ranking made Mexico the sixth easiest country to do business in Latin America, ranking higher than Brazil (126th out of 183 countries), Latin America’s biggest economy. Mexico’s overall ranking improved because of improvements in its ease of dealing with construction permits, getting credit and trading across borders, where rankings in the 2012 report saw a jump of 6, 5 and 3 places respectively over the 2011 report. Dealing with construction permits has become easier in Mexico and the time for dealing with construction permits has fallen to 81 days in the 2012 report from 104 days, as stated in the 2011 report. This was due to Mexico merging and streamlining construction procedures related to zoning and utilities.

Mexico’s economy has recovered from the global economic crisis of 2008-2009 with real growth of 5.4% in 2010 and 3.8% in 2011 owing to the rebound in manufacturing exports and sustained domestic demand. With the exception of a severe contraction of 6.1% in 2009, real GDP growth in Mexico has been positive between 2006 and 2011, marking it out as a stable growth economy.

A potential weakness of the economic environment in Mexico is that its fortunes are heavily bound in those of the neighbouring North American economies due to the trilateral North American Free Trade Agreement (NAFTA) between Mexico, Canada and the USA. Exports to the USA and Canada accounted for 83.5% of all Mexico’s exports in 2011. In addition to exports, a high proportion of Mexico’s GDP comes from remittance inflows from North America due to a high number of its citizens working in the USA and sending their income home. While the economy is expected to witness real GDP growth of 3.6% and 3.7% respectively in 2012 and 2013, spillover effects from the USA might dampen growth prospects in the near term.

Ease of Doing Business Ranking 2011 – 2012

Ranking out of 183 countries

 

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Source: Doing Business, World Bank

Note: (1) Regulations in Doing Business 2012 are measured from June 2010 until May 2011. The data for all sets of indicators in Doing Business 2012 are from June 2010 until June 2011 (except for paying taxes data which refers to January–December 2010). (2) Rankings are based on data sets across 183 countries. (3) Doing Business presents quantitative indicators on business regulations and the protection of property rights that can be compared across 183 economies. A high ranking means the regulatory environment is conducive to the operation of business.

Mexico’s Global Competitiveness Index (GCI) ranking in 2011-2012 was 58th out of 142 countries, an improvement from its 2010-2011 ranking of 66th place. Mexico’s GCI ranking is still much lower than Chile, the most competitive country in Latin America, which occupied 31st place in 2011-2012, but it is gaining ground on Brazil which took 53rd place. Mexico’s improved score was partially a result of advances in the efficacy of its financial markets: the Mexican government is making a concerted effort to boost the number of small and medium sized businesses by lending money to them through its loan guarantee programmes.

The advances made in Mexico’s competitiveness have been somewhat overshadowed by the fact that corruption remains a problem in Mexico. Crime, theft, and corruption were cited as the most problematic factors for doing business in the GCI survey 2011-2012 for Mexico. The country ranked 100th out of 182 countries in Transparency International’s 2011 Corruption Perceptions Index.

Despite the economic recovery in 2010 and 2011, business confidence in Mexico remains seriously undermined by security concerns. Business investment continues to be hampered by problems with organised gangs, especially for the trafficking of drugs from Mexico to the USA. Crime remains rampant in Mexico’s key industrial area between Monterrey and Nuevo Laredo – a major commercial and manufacturing hub for carmakers. The Mexican and US governments have been working in conjunction with one another to tackle organised crime, but casualties – including civilians – increased significantly between 2008 and 2011.

Global Competitiveness Index in Selected Countries 2011 – 2012

Ranking out 142 countries

 

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Source: World Economic Forum

Note: The Global Competitiveness Index measures the microeconomic and macroeconomic foundations of national competitiveness, taking into account 12 subjects – Institutions, Infrastructure, Macroeconomic stability, Health and primary education, Higher education and training, Goods market efficiency, Labour market efficiency, Financial market sophistication, Technological readiness, Market size, Business sophistication and Innovation.