Macroeconomics Term Paper

Mexico, Page 1

Running Head: MEXICO’S CULTURAL, ECONOMICAL, AND POLITICAL STATE

Mexico’s Cultural, Economical, and Political State

For

Firms Pursuing Business In or With Mexico

By

Kashmala Khan

For

Athena Miklos, Professor

ECN 2025-102947

Tuesdays and Thursdays, 10:00-11:20 AM

College of Southern Maryland

La Plata, Maryland

November 15, 2012

Mexico, Page 2

Summary

Before a firm does business in Mexico it is imperative to understand the achievements

and pitfalls of its cultural, economic, and political forces. Although Mexico has improved

substantially with its technological development, investment policies, foreign exchange policies,

and tariffs, it still has significant pitfalls when it comes to honoring contracts, legal framework,

and enforcing laws.

The cultural forces of Mexico are largely dependent on social structure. Mexicans respect

authority and look to those above them for guidance and decision-making. This makes it

important to know which person is in charge, and leads to an authoritarian approach to decision-

making and problem solving. Since 92.7% of the total population in Mexico speaks Spanish

only, it will be beneficial to learn Spanish or have a translator at hand at all times. Shared culture

makes it easier to market and sell goods and services.

The economic forces in Mexico offer both favorable and unfavorable qualities. Mexico is

currently the second largest export market for U.S. goods. Some of the greatest achievements of

economic forces include physical infrastructures, telecommunication systems, production

capabilities, and technology. The unfavorable qualities of the economic forces include high

employment rate and unskilled labor.

The political forces in Mexico also play a great role in opportunities and pitfalls. The

opportunities include efficient settlements to disputes and reasonable trade regulations and

standards. The pitfalls include wars and terrorism caused by the drug wars and cartels.

There are numerous opportunities for firms in the Textiles and Clothing industry of

Mexico. A firm should be knowledgeable about the cultural differences in Mexican people in

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order to undergo business successfully. A firm should also be aware of the potential profit

Mexico has to offer, as well as the potential problems. To conclude from this research, U.S.

firms should enter the Textiles and Clothing industry in Mexico because there are a lot of

opportunities and the Mexican economy will further expand in the near future.

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Introduction

This paper will review and relay the most recent information regarding Mexico’s cultural,

economic, and political forces. The objective of this paper is to assist firms who are interested in

entering the Textiles and Clothing industry in Mexico by portraying the opportunities, issues,

and pros and cons of doing business in Mexico. The Social Process Triangle Model was used to

analyze the environment. As a whole, it represents the big picture of modern Mexico’s Textiles

and Clothing industry. The triangle is divided into three sub-triangles, which are the Cultural

Forces, Economic Forces, and the Political Forces.

The sub-triangle, Cultural Forces, will discuss the cultural forces that are contributing to

Mexico’s social process. This consists of factors such as population, education, social structure,

family roles, the basis for a value system, and customs that are practiced in Mexico. The sub-

triangle, Economic Forces, will discuss Mexico’s economic forces that affect its social process.

This includes factors such as GDP, the selling of U.S. goods and services, distribution systems,

financial services, capital resources, property ownership and the workforce. Lastly, the sub

triangle, Political Forces, will portray the political forces that influence Mexico’s social process.

This will include factors such as balance of payments, political stability, trade regulations and

standards, laws regarding trade and commerce, Government procurement, corruption, and

foreign trade controls. The information from this paper will determine the outlook for firms

wanting to do business in the Textiles and Clothing industry of Mexico.

Cultural Forces

Mexico is the eleventh most populous country in the world. The population count in

Mexico is 114,975,406 people. Among the population, 27.8% are between the ages of 0-14,

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65.5% are between the ages of 15-64, and 6.7% are age 65 and over. The median age in Mexico

is 27.4 years (CIA, 2012). According to this population data, currently there are not as many

people that live up to be over the age of 65 years old. The urban population consists of 78% of

the total population (CIA, 2012). Mexico City is the second-largest urban agglomeration in the

Western Hemisphere, after Sao Paulo (Brazil), but before New York-Newark (US). The

populations in the major cities in Mexico are 19.319 million in Mexico City; 4.338 million in

Guadalajara; 3.838 million in Monterrey; and 2.278 million in Puebla. With a growth rate of

1.086%, the population has remained essentially unchanged for several years. Mexico’s birth rate

is 18.87 births out of 1,000 population and its death rate is 4.9 deaths out of 1,000 population

(CIA, 2012).

Mexico currently has a literacy rate of 86.1%, where literacy is defined as those age 15

and over who can read and write. 86.9% of the males and 85.3% of the female populations in

Mexico are literate (CIA, 2012). An average citizen spends 14 years in school from primary to

tertiary education. The net enrollment ratio for both males and females in primary school is 94%.

The net enrollment ratio in secondary schools for males is 71% and 72% for females. In tertiary

education, such as, College, University, and Vocational School, females have a higher net

enrollment ratio than the males. The net enrollment in tertiary schools for males is 36% and 46%

for females (UIS Statistics, 2010). This shows that the women go further in education than the

men in this society.

Mexico is broadly a middle class society. Steady economic growth rates, more open and

competitive markets, and the smaller families that result from sharply declining fertility rates are

responsible for the country’s expanding, prosperous middle class (Foreign Affairs, 2012). The

family is at the centre of the Mexican social structure. Mexican society and business are highly

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stratified and vertically structured. Mexicans emphasize hierarchical relationships and the people

respect authority and look to those above them for guidance and decision-making. It would be

disrespectful to break the chain of hierarchy. Furthermore, rank is important, and those above

you in rank must always be treated with respect. This makes it important to know which person

is in charge, and leads to an authoritarian approach to decision-making and problem solving.

Mexicans are very aware of how each individual fits into each hierarchy, be it family, friends or

business (Kwintessentials, 2010). The family roles in Mexico are the same throughout Mexican

culture.

First, Mexicans consider it their duty and responsibility to help family members.

Secondly, mothers are greatly revered, but their role may be seen as secondary to that of their

husband. Outside of the major cosmopolitan cities, families are still generally large. The

extended family is as important as the nuclear family since it provides a sense of stability. Most

Mexican families are extremely traditional, with the father as the head, the authority figure and

the decision-maker (Kwintessentials, 2010). Religion in Mexico is dominated by Roman

Catholics, which consists of 76.5% of the total population. However, 5.2% is Protestant, 1.1% is

Jehovah's Witnesses, other is 0.3%, unspecified is 13.8%, and people with no religion make up

3.1% of the population (CIA, 2012).

Customs in Mexico consist of a meeting etiquette, gift-giving etiquette, dining etiquette,

and business etiquette. Meeting etiquettes included waiting until invited before using a Mexican's

first name; women pat each other on the right forearm or shoulder in greeting situations; and men

shake hands every time they meet with each other until they know that person well. Gift-giving

etiquettes include bringing a gift such as flowers or sweets when invited to a Mexican’s house,

and if you receive a gift, open it and react enthusiastically. Dining etiquettes include keeping

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your hands visible while eating and leaving some food on your plate after a meal. Business

etiquettes include making business appointments at least 2 weeks in advance and having all

written material available in both English and Spanish (Kwintessentials, 2010).

According to all of the information about Mexico’s cultural forces, there many

conclusions that can be made for the outlook of business in the Textiles and Clothing industry in

Mexico. First, a large population will be able to meet the labor demands of the firm. Secondly,

many unskilled workers will lead to lower wages and more profit as well as increased training

costs. Thirdly, since 92.7% of the population speaks Spanish only, firms should have means of

interpreting Spanish. Additionally, firms should observe Christian holidays and local traditions

because of the dominance in religion in Mexico. Furthermore, firms should organize their

company with a top down management style. As a result, shared culture will allow firms to more

easily market and sell their products.

Economic Forces

Mexico is the world’s fifteenth largest economy when measured at market exchange

rates, and twelfth when using purchasing power parity. With Gross Domestic Product (GDP) at

USD 14,800 per capita and a real growth rate of 4%, Mexico has a purchasing power parity of

USD 1.683 trillion. Mexico also has an official exchange rate of USD 1.155 trillion (CIA, 2012).

GDP composition by sector consists of agriculture 3.8%, industry 34.2%, and services 62%

(CIA, 2012). The selling of U.S. goods and services can be advertised on billboards, featured on

internet campaigns, or firms can use direct marketing methods. The direct marketing methods

include, radio, T.V. commercials, telemarketing, postal mail, email, internet consulting, and the

use of databases.

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In Mexico’s physical infrastructure, the country is open to foreign investment. The

Mexican government has been actively seeking an increase in private involvement in

infrastructure development in numerous sectors, including transport, communications, and

environment. Improvement in the national infrastructure is seen as a key element to

strengthening economic competitiveness and attracting investment to disadvantaged regions of

the country. In July 2007, President Calderon presented the National Infrastructure Program

2007-2012. A key aspect of this program is to increase private investment through means of

Service Lending Projects (public-private partnerships) and concessionary schemes. In 2011, the

Public-Private Associations Law was approved by the lower house of Congress; the Senate had

approved the law in October 2010.

The Public-Private Partnership Law allows the government to enter into infrastructure

and service provision contracts with private companies for up to 40 years. The law provides

more legal certainty to private investors by equally distributing risks, facilitates access to bank

loans, and harmonizes existing state public-partnership models under a single federal law (2012

Investment Climate Statement, 2012). Mexico’s well-developed infrastructure enables the

economy’s productivity and consists of 1,724 airports (249 paved runways), 1 heliport, 17,166

km railways, 366,095 km roadways, and 2,900 waterways (CIA, 2012).

The Telecommunication Systems in Mexico are highly developed systems undergoing

expansion and privatization. Long-distance telephone calls go via mix of microwave and

domestic satellite links with 120 ground stations (2012 Investment Climate Statement, 2012).

Demand still exceeds supply for new telephones in homes, but the situation is improving. There

are international calls via five satellite ground stations and microwave links to the United States.

Mexico allows up to 49 percent FDI in companies that provide fixed telecommunications

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networks and services. There are more than 600 medium wave amplitude modulation (AM)

stations, privately owned and 22 shortwave AM stations. There are more than 1,400 radio

stations, most that are privately owned (CIA, 2012).

The exchange rate in Mexico, Mexican pesos per US dollar, is 12.423 (CIA, 2012).

Inflation continues to cause the devaluation of the peso. This is good for Mexican exports but not

so good for foreign imports into Mexico. The Commercial bank prime lending rate is 4.92%

(CIA, 2012), and the Central bank discount rate is 4.5% (CIA, 2012). The inflation rate went

from being 4.2% in 2010 to 3.4% in 2011; therefore, inflation is going down. Mexico has

numerous production capabilities. The natural resources in Mexico include petroleum, silver,

copper, gold, lead, zinc, natural gas, and timber. Exports from Mexico include manufactured

goods, oil and oil products, silver, fruits, vegetables, coffee, and cotton. Mexico’s agricultural

products include corn, wheat, soybeans, rice, beans, cotton, coffee, fruit, tomatoes; beef, poultry,

dairy products and wood products. The industries operating in Mexico are food and beverages,

tobacco, chemicals, iron and steel, petroleum, mining, textiles, clothing, motor vehicles,

consumer durables, and tourism (CIA, 2012).

Mexico’s technology includes geothermal energy production, nanotechnology, solar

technology, telephones, broadcast media, and the internet. Mexico has the third greatest

geothermal energy production in the world which uses natural resources to conduct electricity.

Nanotechnology is utilized in many of Mexico’s industries. For instance, the clothing industry is

currently using embedded nanoparticles to create stain-repellent khakis ("Current

Nanotechnology Applications," 2012). Solar technology is being used in Mexico in order to

create Green Parking lots that will shelter cars from the vibrant Mexican sun and allow for the

production of renewable energy (Sarah, 2012). The number of telephone main lines in use are

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19.684 million and the mobile cellular telephones in use are 94.565 million (CIA, 2012).

Broadcast media includes many TV stations and more than 1,400 radio stations, most that are

privately owned. There are 15.165 million internet hosts and 31.02 million internet users (CIA,

2012).

Firms considering business with Mexico should know that they have favorable property

ownership and establishment rights. Within a zone of 100 kilometers from the border or 50

kilometers from the coast, a foreigner cannot acquire the direct ownership of land. These areas

are known as Restricted or Prohibited Zones. The purchase of non-residential property can be

achieved through a Mexican corporation, which, under certain conditions, can be 100% foreign-

owned (Foreign Ownership of Property, 2012). Mexico has a labor force of 49.17 million people.

The labor force in agriculture is 13.7%, industry 23.4%, and services 62.9%. The unemployment

rate is 5.2% (CIA, 2011). Underemployment may be as high as 25%.

According to all of the information about Mexico’s economic forces, there many

conclusions that can be drawn for the future of business venture in the Textiles and Clothing

industry in Mexico. First, there’s a large market for economic growth, which creates many

opportunities for firms. Secondly, extensive land transportation will allow firms to easily

transport products and receive materials. Thirdly, high interest rates will make it difficult for

many firms to obtain loans. Furthermore, the variety of industries allows many different firms

the opportunity to seek business ventures in Mexico. In addition, the high unemployment (and

underemployment) rate means firms will have an abundance of labor. Therefore, if there is high

underemployment it means that, there is skilled labor that is underutilized and can be hired at a

reasonable rate.

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Political Forces

Mexico’s balance of payments is of great importance to firms wanting to do business

there. Last year, Mexico’s exports amounted to USD 349.7 billion and its imports totaled USD

350.8 billion. Its current account balance in 2011 was USD 8.789 billion, up from USD 3.094

billion in 2010. Its capital account was USD 229.88 billion in 2011, and its reserve of foreign

exchange and gold was USD 149.3 billion in December 2011 (CIA, 2012).

In Mexico, expropriation is governed by international law. Firms are not allowed to

expropriate property except for a public purpose and on a non-discriminatory basis.

Expropriation requires rapid fair market value compensation including accrued interest. There is

currently war and terrorism occurring in Mexico. The Mexican president declared war on the

country’s drug cartels. The cartels make kidnappings, torture, and beheadings common

(Shootouts in Mexican Border, 2012). This is a huge problem for Mexico because it ruins its

society. It causes corruption of police and government.

Any firm wanting to do business with Mexico should understand its trade regulations and

standards. Pursuant to the terms of the NAFTA, on January 1, 2003, Mexico eliminated tariffs on

all remaining industrial and most agricultural products imported from the United States. On

January 1, 2008, Mexico eliminated remaining tariffs and tariff-rate quotas on all U.S.

agricultural exports. On March 18, 2009, in response to the U.S. cancellation of the United

States-Mexico Cross Border Trucking Demonstration Project, Mexico imposed retaliatory tariffs

on 89 types of U.S. goods totaling about USD 2.4 billion in exports from 40 U.S. states.

Retaliatory tariffs ranged from 5 percent on a few goods, including hams and toilet paper, to 25

percent on some cheeses (Foreign Trade Barriers, 2012). There are a few non-tariff trade barriers

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in Mexico. First, minimum estimated prices, also referred to as a “reference price,” no longer

affect goods other than used cars. Second, certain sensitive products must obtain an import

license for which the difficulty varies according to the nature of the product. Third, commercial

samples of controlled products shipped by courier are also subject to these regulations. In the

case of liquid, gas or powdered products, as of June 2008, they are no longer eligible to be

shipped by courier, even in small quantities (Trade Regulations and Standards, 2011).

In accordance with intellectual property protection, Mexico was listed on the Priority

Watch List in the 2011 Special 301 report. The report noted Mexico’s improved enforcement

efforts, but noted that overall piracy and counterfeiting rates remain high. Cooperation among

enforcement issues has continued to improve, but coordination at the sub-federal level remains

weak. Concerns also remained over enforcement procedures and the inconsistent issuance of

deterrent penalties. The United States welcomed Mexico’s passage of legislation in 2009 that

would provide the Mexican Attorney General’s office and certain Mexican enforcement officials

with ex officio authority to prosecute intellectual property rights (IPR) infringement (Foreign

Trade Barriers, 2012).

Pursuant to antitrust, Mexican President Felipe Calderon, seeking to strengthen

competition among companies, proposed bigger fines and jail time for antitrust violations. The

country needs more competition to promote investment. Calderon proposed fines of as much as

10 percent of revenue and possible jail time for colluding on prices. He also proposed fines of as

much as 8 percent of revenue for "relative monopoly practices," or restrictions such as

exclusivity agreements that keep new competitors from entering an industry. About 30 percent of

consumer spending goes to markets with a lack of competition, causing Mexicans to spend 40

percent more than they would with better enforcement of antitrust rules (Erik & Harrison, 2010).

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The Transparency and Access to Public Government Information Act, the country's first

freedom of information act, went into effect in June 2003 with the aim of increasing government

accountability. Mexico's 31 states have passed similar freedom of information legislation that

mirrors the federal law and meets international standards in this field. Five years after its

passage, transparency in public administration at the federal level has noticeably improved, but

access to information at the state and local level has been slow (Bureau of Western Hemisphere

Affairs, 2012). Courts are fully available for foreign investors in the event of investment

disputes. Chapter Eleven of NAFTA contains provisions designed to protect cross-border

investors and facilitate the settlement of investment disputes. Investors may initiate arbitration

against the NAFTA Party under the Arbitration Rules of the United Nations Commission on

International Trade Law or the Arbitration Rules of the International Centre for Settlement of

Investment Disputes (Bureau of Western Hemisphere Affairs, 2012). Pursuant to the investment

climate in Mexico, in 2010, U.S. investors accounted for 27.6 percent of all FDI in Mexico,

benefiting 23,360 companies. U.S. FDI was largely concentrated in the manufacturing (46

percent) and commercial (19 percent) sectors. Despite Mexico's relatively open economy, a

number of key sectors in Mexico continue to be characterized by a high degree of market

concentration (Bureau of Western Hemisphere Affairs, 2012).

Pursuant to government procurement, the Mexican government uses several “electronic

government” Internet sites to increase the transparency of government processes and to provide

guidelines for the conduct of government officials (Foreign Trade Barriers, 2012). Corruption is

pervasive in almost all levels of Mexican government and society. In 2008, Calderon launched

"Operacion Limpieza," investigating and imprisoning alleged corrupt government officials in

enforcement agencies. In 2010, the Mexican Congress considered legislation to prevent the use

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of money from organized crime groups in elections. The bill has not yet passed, but Congress

will most likely take the law up again in 2011 (Bureau of Western Hemisphere Affairs, 2012).

For foreign exchange controls, there are no controls on the transfer of U.S. dollars. Profits can be

sent or brought back freely.

According to all of the information about Mexico’s political forces, there many

conclusions that can be made for the outlook of business in the Textiles and Clothing industry in

Mexico. First, the United States and Mexico have strong trade ties so it will be easier to start and

continue doing business in Mexico than compared to other countries. Secondly, drug wars may

limit the scope to which firms can do business in Mexico. Thirdly, few tariff restrictions allow

firms to conduct business on a larger international scale meaning more potential customers and

potential profits. Furthermore, corruption may hurt firms who participate in unfavorable business

endeavors or hurt firms who pose as tough competition. Additionally, lack of competition in

some sectors could provide a great opportunity to firms.

Opportunities/Threats

Mexico possesses many opportunities for firms seeking business there. First, trade

between the United States and Mexico totals almost USD 850 million per day. Secondly, a

national infrastructure plan offers key projects in power, oil and gas, airports, water supply and

water treatment. In addition, there are many market sectors that show much promise including

agribusiness, auto parts and services, telecommunications equipment and much more. Lastly,

shared culture makes it easier to market and sell goods and services. Threats from doing business

in Mexico include the devaluation of the peso, high interest rates that makes it difficult to get

loans and drug cartels which cause violence and insecurity in areas (especially near border). The

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economy thrives on the success of the U.S. economy, so if the economy in the United States is

down then so is the economy in Mexico.

Conclusion

The reliance of Mexico’s economy on that of the United States provides many

opportunities for firms who want to enter the Textiles and Clothing industry. In Mexico, firms

have access to many factors of production needed to be successful. The large population of

unskilled workers combined with lower minimum wages means Mexico can produce

goods/services at a lower opportunity cost-comparative advantage. The shared culture of the

United States and Mexico allows firms to more easily market and sell their products.

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