Macroeconomics Term Paper

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Mexico

I. SUMMARY II. INTRODUCTION

A. 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.

III. CULTURAL FORCES A. Population

1. Count is 114,975,406 as of July 2012 2. Urban Population: 78% of total population 3. Speak Spanish only: 92.7%

B. Growth Rate 1. Mexico’s growth rate is 1.086% as of 2012 2. Mexico’s birth rate is 18.87 births out of 1,000 population as of 2012 3. Mexico’s death rate is 4.9 deaths out of 1,000 population as of July 2012

C. Literacy 1. Age 15 and over can read and write 2. The total population for literacy is 86.1% 3. Broken down is Male: 86.9% and Female: 85.3%

D. Education 1. An average citizen spends 14 years in school (primary to tertiary education)

a) Male: 14 years b) Female: 14 years

2. Primary school (Elementary School) Net enrollment ratio: a) Male: 94% (2010) b) Female: 94% (2010)

3. Secondary school (Middle to High School) Net enrollment ratio: a) Male: 71% (2010) b) Female: 72% (2010)

4. Tertiary school (College, University, Vocational School) Net enrollment ratio: a) Male: 36% (2010) b) Female: 46% (2010)

5. The education expenditure is 4.8% of GDP (2007)

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E. Social Structure 1. Mexico is broadly a middle class society. 2. 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

3. The family is at the centre of the social structure 4. Mexican society and business are highly stratified and vertically structured. 5. Mexicans emphasize hierarchical relationships. 6. People respect authority and look to those above them for guidance and

decision-making. 7. Rank is important, and those above you in rank must always be treated with

respect. 8. This makes it important to know which person is in charge, and leads to an

authoritarian approach to decision-making and problem solving. 9. Mexicans are very aware of how each individual fits into each hierarchy--be it

family, friends or business. 10. It would be disrespectful to break the chain of hierarchy.

F. Family Roles 1. Mexicans consider it their duty and responsibility to help family members. 2. Outside of the major cosmopolitan cities, families are still generally large. 3. The extended family is as important as the nuclear family since it provides a

sense of stability. 4. Most Mexican families are extremely traditional, with the father as the head,

the authority figure and the decision-maker. 5. Mothers are greatly revered, but their role may be seen as secondary to that of

their husband. G. Basis for Value System

1. Religion: Roman Catholic 76.5%, Protestant 5.2% (Pentecostal 1.4%, other 3.8%), Jehovah's Witnesses 1.1%, other 0.3%, unspecified 13.8%, none 3.1% (2000 census)

2. Ethnic Groups: Mestizo (Amerindian-Spanish) 60%, Amerindian or predominantly Amerindian 30%, white 9%, other 1%

H. Customs 1. Mexico has a meeting etiquette, gift giving etiquette, dining etiquette, and

business etiquette. 2. Meeting etiquette:

a) When greeting in social situations, women pat each other on the right forearm or shoulder, rather than shake hands

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b) Men shake hands until they know someone well, at which time they progress to the more traditional hug and backslapping.

c) Wait until invited before using a Mexican's first name 3. Gift giving etiquette:

a) If invited to a Mexican's house, bring a gift such as flowers or sweets. b) Gift-wrapping does not follow any particular protocol. c) Do not give marigolds as they symbolize death. d) Do not give red flowers as they have a negative connotation. e) White flowers are a good gift, as they are considered uplifting. f) Gifts are opened immediately. g) If you receive a gift, open it and react enthusiastically.

4. Dining etiquette: a) If you are invited to a Mexican's home: arrive 30 minutes late in most

places because arriving on time or early is considered inappropriate. b) At a large party, you may introduce yourself. c) At a smaller gathering, the host usually handles the introductions. d) Always keep your hands visible when eating. Keep your wrists resting on

the edge of the table. e) Do not sit down until you are invited to and told where to sit. f) Do not begin eating until the hostess starts. g) Only men give toasts. h) It is polite to leave some food on your plate after a meal.

5. Business etiquette: a) Business appointments are required and should be made at least 2 weeks

in advance. Reconfirm the appointment one week before the meeting. b) Reconfirm the meeting again once you arrive in Mexico and make sure

that the secretary of the person you will be meeting knows how to contact you.

c) It is important that you arrive on time for meetings, although your Mexican business associates may be up to 30 minutes late.

d) Have all written material available in both English and Spanish. e) Agendas are not common. If they are given, they are not always followed.

I. What does this mean for the industry you selected wanting to do business in this country? 1. Large population will be able to meet the labor demands of the firm 2. Many unskilled workers will lead to lower wages and more profit as well as

increased training costs

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3. Since 92.7% of the population speaks Spanish only, firms should have means of interpreting Spanish

4. Firms should observe Christian holidays and local traditions 5. Firms should organize their company with a Top down management style. 6. Shared culture will allow firms to more easily market and sell their products

IV. ECONOMIC FORCES A. GDP

1. Purchasing power parity: a) USD $1.683 trillion (2011) b) USD $1.619 trillion (2010) c) USD $1.534 trillion (2009)

2. Official Exchange Rate: USD $1.155 trillion (2011) 3. Real Growth Rate:

a) 4% (2011) b) 5.5% (2010) c) -6.3% (2009)

4. Per Capita (PPP): a) USD $14,800 (2011) b) USD $14,400 (2010) c) USD $13,900 (2009)

5. Composition by Sector: a) Agriculture: 3.8% b) Industry: 34.2% c) Services: 62% (2011)

B. Selling U.S. Goods and Services 1. Advertise on billboards 2. Internet campaigns 3. Broadcast media: many TV stations and more than 1,400 radio stations, most

are privately owned 4. Direct marketing methods:

a) Radio b) T.V. commercials c) Telemarketing d) Postal mail e) Email f) Internet consulting g) Databases

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C. Distribution Systems 1. Physical Infrastructure

a) Open to foreign investment b) The Mexican government has been actively seeking an increase in private

involvement in infrastructure development in numerous sectors, including transport, communications, and environment.

c) Improvement in the national infrastructure is seen as a key element to strengthening economic competitiveness and attracting investment to disadvantaged regions of the country.

d) 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.

e) In 2011, the Public-Private Associations Law was approved by the lower house of Congress; the law had been approved by the Senate in October 2010.

f) 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.

g) 1,724 airports (249 have paved runways) h) 1 heliport i) Pipelines: gas 16,594 km; liquid petroleum gas 2,152 km; oil 7,499 km;

oil/gas/water 4 km; refined products 7,264 km; water 33 km j) Railways: 17,166 km k) Roadways: 366,095 km (132,289 km are paved) l) Waterways: 2,900 km m) Merchant Marine: 52 (bulk carrier 5, cargo 3, chemical tanker 11,

liquefied gas 3, passenger/cargo 10, petroleum tanker 17, roll on/roll off 3) n) Ports and Terminals: Altamira, Coatzacoalcos, Lazaro Cardenas,

Manzanillo, Salina Cruz, Veracruz 2. Telecommunication Systems

a) Mexico allows up to 49 percent FDI in companies that provide fixed telecommunications networks and services

b) Highly developed system undergoing expansion and privatization

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c) Long-distance telephone calls go via mix of microwave and domestic satellite links with 120 ground stations.

d) International calls via five satellite ground stations and microwave links to United States.

e) Demand still exceeds supply for new telephones in homes, but situation improving

f) More than 600 medium wave amplitude modulation (AM) stations, privately owned and 22 shortwave AM stations

g) More than 1,400 radio stations, most are privately owned h) Almost 300 television stations, most organized into two national networks

D. Financial Services 1. Currency Stability & Exchange Rate Mechanisms

a) Exchange rate-Mexican pesos per US dollar (a) 12.423 (2011) (b) 12.636 (2010) (c) 13.514 (2009) (d) 11.016 (2008) (e) 10.8 (2007)

b) Inflation continues to cause the devaluation of the peso. This is good for Mexican exports but not so good for foreign imports into Mexico.

2. Interest Rates a) Commercial bank prime lending rate: 4.92% (2011) b) Central bank discount rate: 4.5% (2009)

3. Inflation Rate a) 3.4% (2011) – Inflation is going down b) 4.2% (2010)

E. Capital Resources 1. Production Capabilities

a) Natural resources: petroleum, silver, copper, gold, lead, zinc, natural gas, timber

b) Exports: manufactured goods, oil and oil products, silver, fruits, vegetables, coffee, cotton

c) Agricultural products: corn, wheat, soybeans, rice, beans, cotton, coffee, fruit, tomatoes; beef, poultry, dairy products; wood products

d) Industries: food and beverages, tobacco, chemicals, iron and steel, petroleum, mining, textiles, clothing, motor vehicles, consumer durables, tourism

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2. Technology a) Mexico has the third greatest geothermal energy production in the world b) Nanotechnology: the clothing industry is currently using embedded

nanoparticles to create stain-repellent khakis c) Solar technology: “Green parking lots” d) Telephones- main lines in use: 19.684 million (2011) e) Telephones- mobile cellular: 94.565 million (2011) f) Internet hosts: 15.165 million (2010) g) Internet users: 31.02 million (2009)

F. Property Ownership 1. Within a zone of 100 kilometers from the border or 50 kilometers from the

coast, a foreigner cannot acquire the direct ownership of land. a) These areas are known as Restricted or Prohibited Zones

2. The purchase of non-residential property can be achieved through a Mexican corporation which, under certain conditions, can be 100% foreign-owned a) An agreement is signed that says the corporation is subject to Mexican law

and the owners will not invoke the laws of their parent country b) The real estate must be registered with the Foreign Affairs Ministry and be

used for non-residential activities c) In other words under the above conditions foreigners can directly acquire

properties for tourist, commercial and industrial use. G. Workforce

1. Labor force: 49.17 million (2011) 2. Labor force by occupation:

a) Agriculture: 13.7% b) Industry: 23.4% c) Services: 62.9%

3. Unemployment rate: a) 5.2% (2011) b) 5.4% (2010

4. Underemployment may be as high as 25% H. What does this mean for the industry you selected wanting to do business in

this country? 1. Large market for economic growth (many opportunities for firms) 2. Extensive land transportation will allow firms to easily transport products and

receive materials 3. High interest rates will make it difficult for many firms to obtain loans

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4. The variety of industries allows many different firms the opportunity to seek business ventures in Mexico

5. The high unemployment (and underemployment) rate means firms will have an abundance of labor

6. If there is high underemployment it means that, there is skilled labor that is underutilized and can be hired at a reasonable rate.

V. POLITICAL FORCES A. Balance of Payments

1. Balance of Trade a) Exports: USD $349.7 billion (2011) b) Imports: USD $350.8 billion (2011)

2. Current Account a) USD $8.789 billion (2011) b) USD $3.094 billion (2010)

3. Capital Account a) USD $229.88 billion (2011) b) USD $220.12 billion (2010)

4. Reserve Account a) USD $149.3 billion (2011) b) USD $120.5 billion (2010)

B. Political Stability 1. Expropriation

a) Not allowed to expropriate property except for a public purpose and on a non-discriminatory basis

b) Governed by international law c) Require rapid fair market value compensation including accrued interest

2. War/Terrorism a) Mexican president declared war on the country’s drug cartels b) The cartels make kidnappings, torture, and beheadings common c) Causes corruption of police and government

C. Trade Regulations & Standards 1. Tariffs

a) 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.

b) On January 1, 2008, Mexico eliminated remaining tariffs and tariff-rate quotas on all U.S. agricultural exports.

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c) 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.

d) Retaliatory tariffs ranged from 5 percent on a few goods, including hams and toilet paper, to 25 percent on some cheeses.

2. Non-tariff Trade Barriers a) Minimum estimated prices, also referred to as a “reference price”, no

longer affect goods other than used cars b) Certain sensitive products must obtain an import license for which the

difficulty varies according to the nature of the product. c) Commercial samples of controlled products shipped by courier are also

subject to these regulations. d) 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. D. Laws Regarding Trade/Commerce

1. Intellectual Property Protection a) Mexico was listed on the Watch List in the 2011 Special 301 report. b) The report noted Mexico’s improved enforcement efforts, but noted that

overall piracy and counterfeiting rates remain high. c) Cooperation among enforcement issues has continued to improve, but

coordination at the sub-federal level remains weak. d) Concerns also remained over enforcement procedures and the inconsistent

issuance of deterrent penalties. e) 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.

2. Antitrust a) 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

b) 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.

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c) 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

3. Transparency a) 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.

b) Mexico's 31 states have passed similar freedom of information legislation that mirrors the federal law and meets international standards in this field.

c) 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.

4. Dispute Settlement a) Chapter Eleven of NAFTA contains provisions designed to protect cross-

border investors and facilitate the settlement of investment disputes. b) Investors may initiate arbitration against the NAFTA Party under the

Arbitration Rules of the United Nations Commission on International Trade Law ("UNCITRAL Rules") or the Arbitration (Additional Facility) Rules of the International Centre for Settlement of Investment Disputes ("ICSID Additional Facility Rules").

5. Investment Climate a) In 2010, U.S. investors accounted for 27.6 percent of all FDI in Mexico,

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

commercial (19 percent) sectors. c) Despite Mexico's relatively open economy, a number of key sectors in

Mexico continue to be characterized by a high degree of market concentration.

d) For example, telecommunications, electricity, television broadcasting, petroleum, beer, cement, and tortillas feature one or two or several dominant companies (some private, others public) with enough market power to restrict competition.

E. Government Procurement 1. 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.

2. In March 2011, the Mexican Senate approved President Calderon’s Federal Anti-Corruption in Government Contracting initiative, which would impose

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penalties against national or foreign individual and legal entities for irregular conduct (including bribes) during their direct or indirect participation in federal government procurement.

F. Corruption 1. Corruption is pervasive in almost all levels of Mexican government and

society. 2. In 2008, Calderon launched "Operacion Limpieza," investigating and

imprisoning alleged corrupt government officials in enforcement agencies. 3. In 2010, the Mexican Congress considered legislation to prevent the use 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.

G. Foreign Exchange Controls 1. No controls on transfer of U.S. dollar 2. Profits can be sent or brought back freely

H. What does this mean for the industry you selected wanting to do business in this country? 1. U.S. and Mexico have strong trade ties so it will be easier to start and continue

doing business in Mexico than compared to other countries 2. Drug wars may limit the scope to which firms can do business in Mexico 3. Few tariff restrictions allow firms to conduct business on a larger international

scale meaning more potential customers and potential profits 4. Corruption may hurt firms you participate in unfavorable business endeavors

or firms who pose as tough competition 5. Lack of competition in some sectors could provide a great opportunity to

firms VI. OPPORTUNITIES/THREATS – For U.S. firms in this industry doing business

with this country A. Opportunities

1. Trade between U.S. and Mexico totals almost USD $850 million per day 2. National infrastructure plan offers key projects in power, oil and gas, airports,

water supply and water treatment 3. Many market sectors that show much promise including agribusiness, auto

parts and services, telecommunications equipment and much more 4. Shared culture makes it easier to market and sell products and services

B. Threats 1. Devaluation of peso 2. High interest rates makes it difficult to get loans 3. Drug cartels cause violence and insecurity in areas (especially near border)

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4. The economy thrives on the success of the U.S. economy, so if the economy in the U.S. is down than so is the economy in Mexico

VII. CONCLUSION A. The reliance of Mexico’s economy on that of the U.S. provides many

opportunities for firms B. Firms have access to many factors of production needed to be successful C. The large population of unskilled workers combined with lower minimum wages

means Mexico can produce goods/services at a lower opportunity cost- comparative advantage

D. The shared culture of the U.S. and Mexico allows firms to more easily market and sell their products