Overview of Mexico Inward and Outward FDI - Essay Example

? Part A Overview of Mexico inward and outward FDI Mexico is a highly populated Latin American nation. It has an open trade regime due to the North American Free Trade Agreement (NAFTA). Foreign direct investment in Mexico is reported to have recorded a 21% increase in the year 2007. In actual figures, this amounted to US $ 23.2 billion. This was the second highest FDI in the country's history. About half of the FDI investment to Mexico was from the USA. Holland and Spain followed suit with an investment percentage of 15% and 10% respectively. FDI inflow within September 2007 for Mexico amounted to $18.4 billion; this was 30.3% higher in comparison to figures for the same time in the year 2006 ((2005, September 1). Latin America Telecom, pp. 12-19.). Half of the capital investment in the form of FDI was directed towards the manufacturing sector. The net impact of this implied an increased availability of remunerative jobs for the Mexican populace. Economic Analysts have considered 2008 to be an irregular year with the US economy suffering from multiple effects of recession in its mortgage and financial sectors (http://www.vcc.columbia.edu). It is important to note that, Mexico is highly dependent and interlinked with the US economy through various trade and financial relations. Mexico's expected foreign direct investment stands to a reduced amount of $20 billion for 2008. The FDI and ODI rankings of Mexico in the world are moderated but continue to grow (see below). FDI net flows(% of GDP) 3.02 2.46 1.81 1.95 1.68 FDI net outflows (% of GDP) 0.80 0.11 0.80 1.31 0.83 Part B 1. GDP variation in the last 10 years In the third quarter of 2012, the GDP of Mexico expanded by 45%. As reported by the relevant agency, GDP growth in Mexico has averaged at 7% from the year 1993-2012 with a record high of 2.9% in the year 1996. This is because Mexico has a free market economy, which contains both the modern and outdated industries highly dominated by the private sector. Competitions have though been expanded in the field of seaports, railroads, telecommunication, electricity generation, natural gas distributions and airports. Most of the Mexican trade as an export-oriented country is under free trade agreements; this is in fact over 90% with the agreements existing between Mexico and more than 40 other countries. As the second largest economy in the Latin America, their GDP has not varied much (UNCTAD 2012). 2. Inward direct investment to Mexico As shown from the data by the World Bank data, the inward direct investment in to Mexico has witnessed a systematic fluctuation for the last 10 years starting from January 2002 to January 2012. The figures from the FDI years are as follows; 3.69 in 2002 followed by 2.65, 3.27, 2.87, 2.1, 3.02, 2.46, 1.81, 1.95 and 1.68 in the year 2012 (http://www.economywatch.com/foreign-direct-investment/countries/mexico.html). The fluctuations may be attributed to the nature of the economy and the economies of the countries surrounding Mexico. In the year 2009 for example, the economic profile for Mexico took a turn for the worse given that the economy of the countries around was from a recession. Widespread disease in the form of a flu outbreak added to the failing economy in 2009. Policy stimulus packages by the government proved inadequate against the background of limited fiscal stimulus and monetary relaxation (unctadstat.unctad.org/TableViewer/tableView.aspx). From an all-time low rate of annual inflation of 3.3% in 2005, this rate has only recently displayed signs of reducing from 6.4% in 2008 to 5.4% (Source: World Bank 2012). These fluctuations are largely caused by the economy of Mexico’s close association with US business and trade through bilateral agreements ((2011, June 8). Defense & Aerospace Week, 1, 33-8.) The main countries undertaking FDI in Mexico are the USA and the European Union (MEXICO: FDI RISES IN MEXICO). This is partly because Mexico is a free market economy with close trade ties with US and Canada. The other reason is that Mexico signed a Free trade agreements with the two countries an agreement which covered the trade and investments for both service and goods industries (Luo 2002). They also agreed to access the public procurement markets for either country an agreement, which is overseen by both special and joint committees meeting biannually at high political meeting. USA has most of its trade interest vested in Mexico since Mexico is rich in raw materials for the US industries. The rules for trade between the countries favor their actions to transact business with one another. The incentives offered by Mexican governments can only be favorable for trade and industry establishments between the two countries. For the last three years, the FDI net balance from the US and the EU into Mexico was 6, 8.2 and 7.5 respectively indicating a sharp rise then a fall due to poor economic conditions (UNCTAD 2012). FDI into Mexico is largely witnessed in the sectors of manufacturing and services. This is mainly because Mexico as a middle-income nation still relies on agriculture and formal education as a backbone for the operations of the country. The countries that conduct FDI into Mexico which are the US and EU are developed countries with all the technological endowment but without the raw materials, in exchange the countries invest by establishing their firms in Mexico (MEXICO: FDI RISES IN MEXICO). The developed countries dominated by the EU and the US countries are sure of being given incentives like land for the construction of their industries, alongside this they will be in a position of exploiting the cheap manual labor that is there in the Mexico. In this way, they will be able to produce at quite lower costs of production hence maximize their benefits. This explains why the manufacturing for goods and the service industries for skills by the citizens majorly compose the FDI into Mexico (www.economywatch.com/world_economy/mexico/industry-sector-industries.html). 3. Outward direct investment from Mexico As shown from the data by the world bank and the below graph, outward FDI from Mexico to other countries from the year 2002 all the way to 2012 have witnessed a progressive rise and fall attaining the highest value of 1.31 in 2010 which sharply fell in 1012 to 0.83. The 1990’s is the decade of an important rise of Foreign Direct Investments outflows lead by developing Asia and Latin America (Love 1999, June 1). The main difference that explains the Mexican leadership in FDI outflows is the government support through different forms such as promotion and subsidies. Nevertheless, there is a common denominator in the rise of investments abroad: The strong competitive pressures generated by globalization process forces firms to internationalize increasingly early to meet the international standards of business practice (Luo 2002). In Latin America in the 1990’s, economic liberalization, deregulation and privatization policies exposed local companies to the challenge of competing in not only a captive local markets but also pursuing foreign investment opportunities (Kehal 2004). These are the main reasons as to why the ODI by Mexico has been on the rise since then (see chart below). Mexico conducts its outward direct investments with a few countries in the US and the EU. A bulk of the countries it deals with come from the middle east and Africa, the countries are composed of the less developed and the developing countries (Kehal 2004). The main reason for this is the fact that the incentives by such countries and conditions for trade are quite affordable. The rules, regulations and laws in such countries are also quite flexible to allow for ease and cost effective way of establishing industries. Latin America Mexico included was the most affected developing region during the economic crises in United States given they solely depended on the US; this impact was reflected on the ability of Latin American firms to invest abroad in 2007 as a measure of spreading the risk (www.oecd-ilibrary.org). Despite this situation, the enterprises overcome and continued it is upward surge in 2008: ODI by firms in the region reached nearly USD$ 82 billion in 2008; this is an increase of 46.5% with regard to 2007. This increase is the result of the accelerated efforts of some Latin American companies, better known as Trans Latinos, to expand operations beyond their borders specifically Africa and the Middle East (Love 1999, June 1). According to International Monetary Fund: Mexico 2011 article IV consultation (2012), Mexico offers ODI in both the manufacturing and the service sectors since they are the main sectors that are developed in the country. Mexico as a developing country attracting FDI from the US and the EU exports the same to other less developed countries, they export their labor to those countries give the abundance supply of their labor. The reasons why they are able to provide the ODI in both the manufacturing and the service sectors is that, the targeted countries have flexible laws and attractive incentives to attract investment from another developing country (Bernardi 2008). Their major interest in the countries in Africa and the Middle East is the existence of the sea transport across the Atlantic, which they are able to exploit to aid the movement goods and services. In addition, The rising flows from Asia in 2007 were enough not only for increasing its investments overseas but also to contribute in the rising global ODI, this fact prevent that ODI flows from developing countries, as a group, were affected by the negative results of Latin America in that year of operation (Butler, Pick, & Hettrick 2001). References Bernardi, L, 2008, Tax systems and tax reforms in Latin America. Routledge: London. Butler, EW, Pick, JB, & Hettrick, WJ, 2001, Mexico and Mexico City in the world economy. Westview Press: Boulder, CO. International Monetary Fund: Mexico 2011 article IV consultation. (n.d.), Retrieved November 30, 2012, from www.imf.org/external/pubs/ft/scr/2011/cr11250.pdf Inward and outward foreign direct investment flows, annual, 1970-2011 (Mexico in the Central America). (n.d.), Retrieved November 30, 2012, from unctadstat.unctad.org/ TableViewer/ tableView.aspx Kehal, HS, 2004, Foreign investment in developing countries, Palgrave Macmillan: Houndmills, Basingstoke, Hampshire. Love, JH, 1999, June 1, The ownership advantage in Latin American FDI: a sectoral study of US directs investment in Mexico. Journal of Development Studies, 3, 67-9. Luo, Y, 2002, Multinational enterprises in emerging markets. Copenhagen Business School Press: Copenhagen. MEXICO: FDI RISES IN MEXICO, (foreign direct investment) (Brief Article) (Statistical Data Included). (2002, February 25), Info-Prod Research, pp. 23-45. Mexico's Economy on Track Due to Strong Foreign Direct Investment, (2011, June 8), Defense & Aerospace Week, 1, 33-8. Mexico's FDI receipts for 2005 predicted to reach $17.6 billion. (Foreign direct investment) (Brief Article). (2005, September 1). Latin America Telecom, pp. 12-19. UNCTAD, 2012, World investment report 2012: Towards a new generation of investment policies, UNCTAD: New York & Geneva. Vale Columbia Center on Sustainable International Investment, (n.d.), Vale Columbia Center on Sustainable International Investment, Retrieved November 30, 2012, from http://www.vcc.columbia.edu Retrieved November 30, 2012, from www.oecd-ilibrary.org/economics/country-statistical-profile-mexico-2011_csp-mex-table-2011-1-en Foreign Direct Investment in Mexico, (n.d.), Retrieved November 30, 2012, from http://www.economywatch.com/foreign-direct-investment/countries/mexico.html Mexico Industry Sectors, (n.d.), Retrieved November 30, 2012, from www.economywatch.com/world_economy/mexico/industry-sector-industries.html Read More