International business project: A case of Mexico Essay

Mexico is the most populated Spanish speaking nation in the world and comes third in population in the Western hemisphere. Mexico holds more than 100 million inhabitants. In the early years of its history the government had embraced the protectionists policies of trade in order to motivate industrial growth and therefore ensure growth in the domestic economy. Unfortunately under these policies the country underwent a decline in living standards and inflation. The debt crisis in the year of 1982 that saw the country fail to meet its debt obligations primarily aggravated the challenges in the economy especially half way into the mid 1980’s (Pasco 72-73). The Mexican government therefore in the late years of 1980 adopted measures that were aimed at restructuring the country’s economy. The country’s efforts consequently shifted to trade liberalization and privatization of industries that were previously state owned. Privatization of infrastructures such as rail roads, natural gas distribution, telecommunications, electricity and the airports among others took place extensively. The country proceeded to make economic policy reforms in the early 1990’s consequently attracting large amounts of foreign investment cash. However in 1993 the flow of capital from foreign countries started to decline majorly as a result of political uncertainty and an exchange rate that was overvalued. The declined levels of international levels subsequently led to peso devaluation. By the last months of 1994 the country was experiencing a currency crisis forcing the government to take on the floating exchange rate system. The result was a deep recession of the economy six months later. The aftermath of the recession saw the government restructure the system again to create conditions that would hasten the recovery of the economy. An emergency package was received form the World Bank and a plan that increased value added tax, fostered budget cuts and even tighter monetary policies was implemented. Subsequent years saw the country increase its exports and softened the impact of the recession. The country’s Gross Domestic Product (GDP) growth in 2006 was 4. 8 percent but decreased to 3. 3 percent in the year 2007 and further down by approximately 1% in the year 2008. Mexico has not been left out and the country is significantly feeling the effects of the worldwide economic downturn. Economists forecast the contraction of its GDP this year by 2. 6 percent the sharpest ever contraction since the 95 crisis. The country is currently experiencing job losses, cut production capacities in plants and poverty levels have also short up with more than 5 million people living in impoverished conditions (Field 32-41). # Mexico’s trade position with Canada The trade relations between Canada and Mexico have strengthened because of the North American Free Trade Agreement (NAFTA). The trade flows between the two countries has shown an impressive gradual increase in the not less than nine years existence of the agreement. The results have now made Mexico, to become Canada’s major trading partner within the Latin America region. The country also ranks fourth as Canada’s trading partner in the globe after United States (US), China and Japan. For Canada, Mexico has become a very important destination and is positioned as Canada’s third biggest market for its exports. On the same note Canada in 2002 appeared on Mexico’s lists as the number five largest foreign supplier. The countries have continued over the years to strengthen their trade ties and now Canada is the first supplier of Mexican agricultural, mineral and metal products. On the other hand high production standards of Mexico have made it Canada’s top supplier in vehicles, agricultural goods and electronic equipment. Consumers in the two countries have taken advantage of the relations to access a wide range of affordable goods. On the other hand Mexico also has good trade relations with other countries such as the United States. America is basically the leading creditor and trade partner for most counties in the Latin region. The two countries are closely linked such that Mexico as a country is the most exposed to the U. S economy and any changes in it would largely affect the Mexicans. More so 80% of the Mexican exports find there way to America. Additionally the Mexican economy is greatly supported by the remittance from its working citizens who are in the United States, (Field 32-41). The remittances actually account for not less than 3 percent of its GDP and they form the second largest source of income to the nation after oil exports. The country has also taken advantage of its skilled labor force to attract high technology investors from the United States. The sectors in which America has invested in Mexico include the telecommunications, transport and agricultural industries to mention just a few. # Membership in trade blocks. Trade blocks play a very critical role especially when it comes to international trade negotiations. Mexico for example is a member of the G20 trade block which constitutes of other members such as Argentina, India, Brazil, Pakistan, China, South Africa. , Philippines, Bolivia, Thailand, Venezuela, Chile, Zimbabwe, Paraguay, among others. The G20 is developing countries grouping that resulted from the world trade talks in Cancun in the year 2003. The group is led by major exporters and countries that are rapidly growing such as India, China, Brazil, and South Africa making it strong and with the capacity to compete with the US and EU in trade negotiations. G20 has been noted for its emphatic rejection of the proposal by the EU to include competition and investment as critical elements in trade talks. The group has also been emphasizing that before they make any agreements on reduced tariffs for manufactured goods or services the rich nations must first put concessions on agriculture. Additionally Mexico together with the United States and Canada form the North American Free Trade Agreement (NAFTA). The Agreement addresses the issues of labor, environment, trade and investment. Even then the Agreement has been criticized by some US environmental groups and unions who claim that its safeguards are weak. It was consolidated in the year 1992. The aim of the agreement was to remove trade tariffs on products for a period of not less than 15 years and at the same time limit trade contacts with outsider countries in the globe. The agreement was also expected to increase and enlarge their farmers markets and stimulate economic growth. Recently there have been calls to renegotiate or suspend the Agreement after fourteen years in operations. Clearly though Mexico has benefited from its membership in the block, which is said to be the among the world’s richest blocs. It has for example acted to increase Mexico’s amounts of exports, and also increase the amount the country receives from the United States in terms of foreign direct investments (Pasco 72-73). The agreement has also led to an increase of job opportunities for Mexicans also accompanied with an increase in wages especially in the areas with most foreign investors. #4 Governments position on trade and foreign investment In the past few decades Mexico has transitioned from a closed economy to an open economy. The policy of open trade has enabled the country to face the challenges brought by the economic slow down and financial markets that are not stable. In early years of the 80’s the country took a step towards unilaterally liberalizing its economy. The country then took domestic measures with the aim of encouraging foreign investment and deregulating business activities. In the early 90’s the country embraced the country took the initiative of opening its markets by undertaking international trade negotiations with the principles of reciprocity and balance in mind. The country has currently signed various bilateral investment agreements and not less than nine international free trade. The result has been export oriented growth and industrial competitiveness. The policies have also led to preferential market access of their exports to more than 800 million consumers that benefit from their exports and have additionally opened up new investment opportunities. Generally the Mexican strategy of free trade agreements has been critical in improving its competitiveness on a global scale, increased trade and long term growth. Its current network of trade agreements can be said to be the major cause of the impressive trade flows in the country. Mexico appears among the ten largest trading countries in the world. In 2003 for example the country had exports costing not less than $165 million. Basically its quantity of exports has tripled since 1993. Mexico has also been transformed to become a manufacturing export center courtesy of trade liberalization. Currently most of the country’s exports are largely manufactured goods a change from the early 80’s when the greater percentage of exports was oil. Their young productive labor together with the measures of investment protections and tariff elimination are among the factors that have encouraged foreign investments making it a manufacturing hub. Their auto, electronics and textile and apparel industries have industries have been the most beneficiaries of trade liberalization (Pasco 72-73). . # Reasons why Canadian companies should trade/invest there and reasons why they should not. Mexico comes across as a very viable country for Canada to invest in. Among the reasons are its strategic position, economic indicators, policies that aim at encouraging foreign investors and a conducive environment for investment among many others. The country is made up of 32 federal States of which each is free and sovereign and its territory extends to not less than one million square kilometers. The country borders Guatemala, Belize and the United States. The country additionally hosts more than one hundred million inhabitants of all religious affiliations meaning that all beliefs are represented without bias though the majority of the population is Christian. Spanish is the official language of Mexico although it has more than 66 kinds of languages. The country currency is called Peso. The country’s place of location allows it to supply the markets in North America and also to have access to potential world inputs and modern technologies. The Jalisco, Quintana Roo, Colimo are among the federative entities whose populations greatly participate in economic enhancement. Its population consists of not less than 1 million unemployed citizens. The country is endowed with an attractive investment environment even as demonstrated by the following statistics: in 2007 the country was ranked as the 12th largest economy in the world by the virtue of its GDP; with regards to its oil reserves it appears as number 17 globally; additionally the country is a very important tourist destination ranking eight globally in this regard. Moreover the country is among the top ten countries in the world that benefit most from foreign direct investment. Additionally their fiscal and monetary policies have served to ensure that the country enjoys periods of macroeconomic stability with reference to the recent years. In fact it was named the best Latin American country in terms of favourable business conditions and placement of foreigners’ capitals. The stable economy that it has enjoyed has led to it accommodating not less 30,000 foreign companies. The economic stability therefore makes it a good destination for conducting profitable business. In order to attract more investment the country has a consolidation of several sectors of production which include of industries such as the automobiles industry which was ranked 7th globally, electronic industry, telecommunications industry, the information technology and software industry. These sectors provide different kinds of opportunities for Canadian investors. The country additionally has good relationships business wise with other countries in the global scenario. This has allowed it to have preferential access to the markets in Israel, North America, and the European Union just to mention a few. The preferential access it enjoys combined with its cheap yet young and qualified labor force make the country a lucrative destination for investment by Canadians. The Bilateral Investment Treaties that the country has signed should be an attraction enough for Canadian investors. Through these treaties the country offers legal protection and security to it foreign investors. Moreover the country offers a low risk return combination that guarantees the investors markets access prevailing conditions of macroeconomic stability, transparency and political stability. Additionally investors have the opportunity of benefiting from the high quality inputs offered at affordable prices, growing domestic markets, and wide array of trade agreements. In spite of this Canada may not need to invest in Mexico because of the fact that Mexico is among the top countries with high levels of corruption in the region. Any country with high levels of corruption is should be scary to investors because it simply implies that investors will have to spend more than is necessary in order to get value for their money. The effects of corruption in fact go way past the monetary costs. The country also suffers from poor infrastructural networks although the government is taking steps to ensure that infrastructure is improved to allow investors to have access to any market and on time. The country is also consumed by the culture of drug abuse among its especially productive population. This means that in a way the investor security can not be guaranteed. The country also has strict legal and regulatory frameworks that may serve to impede the speed by which an investor can establish his business. The effects of agglomeration also may work to hinder any Canadians that would want to invest in Mexico. In conclusion Mexico would be a wise choice for any investor, this is because the country has done everything to ensure that its business people will not only be able to access the internal but also the external markets especially through the many trade agreements it has signed. This means that all the established businesses in the country have the potential to operate profitably.