Mexico is an attractive and competitive destination that is catching the attention of many foreign investors. Thanks to its strategically advantageous location, growing economy and talented workforce, the future looks very prosperous for the Latin American jurisdiction.
Mexico has become an attractive, emerging market for foreign investors. As well as being among the 15 largest economies in the world, Mexico boasts the second largest economy in Latin America. The country has reached a level of political maturity and economic stability, which has caught the attention of many investors looking to find new opportunities or expand existing operations.
Yet, despite all great things that Mexico has going for it, it has been classified as a 'very high complexity' jurisdiction by TMF Group experts, based on how its local requirements and regulatory framework compare with other locations assessed in this year's Global Business Complexity Index (GBCI).
With so many legislative changes, and rules and regulations that sometimes lack clarity, having local knowledge of the investment environment, as well as good knowledge on the legal, accounting and taxation frameworks is vital for those considering entering the market.
What is the GBCI and what does it reveal about business complexity in Mexico?
Every year, TMF Group ranks 77 jurisdictions around the world, looking at how simple or complex they are to operate in and understand from a business perspective.
Data is compiled annually, analysed and condensed into a single report: the Global Business Complexity Index (GBCI). The report looks at locations that account for 71% of the world's population, 92% of GDP and 95% of foreign direct investment (FDI).
The analysis of the GBCI report focuses on three core areas of business operations:
- Accounting and tax
- Global entity management
- Payroll and human resources
This year, analysis for the GBCI report revealed a number of themes for businesses to consider, such as the global emergence from the Covid-19 pandemic and the restrictions that are still enforced, or being lifted.
It's important to note: the complexity ranking does not necessarily determine the attractiveness of a jurisdiction. Some of the most complex jurisdictions can be the most rewarding, provided investors go into them with open eyes and the support of local experts.
This brings us to Mexico. In the past two years, the country has risen up the complexity ranking. In 2020, Mexico was considered the 13th most complex jurisdiction to do business. It climbed steeply up the list in 2021, rising to the third most complex jurisdiction. Now, in 2022, Mexico has seen a slight improvement as it dropped to the fourth spot on the list.
Mexico's movement in the complexity index could be down to a slow – or even lacking – response to the pandemic. While other countries were coming up with ways to help and simplify procedures to adapt to the situation, the Mexican administration didn't manage to bring many responsive measures into effect. It wasn't necessarily a case of Mexico becoming more complex, but more that Mexico didn't move swiftly to make things simpler.
Eyes to the future
Despite all its complexity issues, Mexico is a jurisdiction which looks to the future. Where currently tradition is valued over simplicity, the adoption of technology will play a significant role in reducing these complexities. The Mexican government continues to make a concerted effort to attract FDI and expects to see an increase in the amount of investment from abroad in the coming years.
Right now, in terms of workforce and wages, Mexico is arguably more attractive than China. Wages in China are increasing, so many companies are considering bringing their production to Mexico to take advantage of cheaper labour.
Mexico is expected to remain stable politically, and is likely to introduce greater laws and regulations relating to economic substance requirements.
These factors all further reinforce the point that even though Mexico is considered a complex jurisdiction, it's still an attractive place to do business.
Workforce complexity issues within Mexico
Mexico is strong in terms of workforce, not just in terms of cost, but also sheer numbers. According to the World Bank, Mexico has a population of just over 130 million people. It also has a total workforce of almost 60 million, and is adding around a million new workers to the workforce pool every year.
When it comes to human resources and the workforce, there are challenges in terms of legislation in certain jurisdictions. Research this year shows that there is a talent shortage. If Mexico can manage the talent scarcity issue, it will help strengthen the appeal for new operations to move into Mexico.
In recent years, companies have typically outsourced some of their services to places like Eastern Europe, China and India. Now, we are seeing a shift as companies are looking to switch to locations such as Mexico, and as they look to keep labour costs down. A number of large companies are already establishing large factories in Mexico, so there is a demand for workers.
However, recent legislative changes could add to Mexico's complexities woes when it comes to the workforce. The 'Comprobante Fiscal Digital por Internet' (CFDI), requires businesses to document specific employee data. Companies that have thousands of employees will need to go through their payroll list and ask all individuals to provide the necessary details. This is required for employers to be able to electronically generate payslips.
For industries that have seasonal peaks, such as in the retail sector, it is often required to hire short-term employees to handle the additional workload at peak times. This is no longer as straightforward as it was: businesses will have to change their processes around how they hire people, and there is a lot more paperwork to be filled out.
The administrative burden that Mexican authorities are imposing on new companies is significant. For example, incorporating a publicly listed company can become onerous in terms of gathering all required information, which includes documents such as birth certificates for certain company personnel.
This process is lengthy and laborious, which compounds the complexity of establishing a business in Mexico in the first instance.
On a more positive note, Mexico is looking at ways to increase workforce flexibility. Remote working legislation is currently being rolled out. This arrangement could benefit both employer and employee, but there is still some way to go to iron out the finer details.
What are some of the big opportunity trends that are impacting Mexico and the companies thinking about operating in Mexico?
Possibly the biggest trend – and number one opportunity – in Mexico right now is nearshoring. Mexico is one of the emerging markets most open to FDI. This is due to many factors, including its strategic geographical position, competitive costs, economic growth and its ability to manufacture in-demand products.
Mexico is also seeing foreign investors purchasing land to build industrial plants. The companies that are buying land in Mexico are looking at this as a long-term investment for the next 20-30 years.
One of the biggest attractions for businesses to enter into Mexico are its free trade agreements with the US and Canada. Mexico is well positioned to plug the gap in the global supply chain and has a good railroad service linking to these countries. These agreements and infrastructure allow for the easy export of goods across borders into huge consumer markets.
A lot of automotive industries have suffered because of the global supply chain issues caused by the pandemic. Now, there is an influx of Asian companies coming into Mexico, looking to establish better bases from which to supply their customers in the US, Canada and worldwide. This kind of investment is not limited to the automotive and aerospace industries; consumer goods and pharmaceuticals industries have also seen an uptick.
Next steps for investing in Mexico
There's no disputing that Mexico continues to be a highly attractive destination for investors, yet it remains a complex jurisdiction to do business in.
The key is to have local knowledge at hand, to guide you through this complex web of rules and customs, which in turn affords you the time you need to focus on your strategy to achieve success in Mexico.
Our team of experts on the ground in Mexico have the local knowledge to help you navigate these areas of complexity – swiftly and efficiently. Our professionals provide accounting, tax compliance, corporate secretarial and HR and payroll services to both local and multinational companies.
Whether you want to establish new operations in the jurisdiction or just want to streamline your Mexican operations, talk to us.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.