Over the past two decades, Mexico has experienced significant growth and development, particularly within its manufacturing sectors. An emerging market with a GDP of over a trillion dollars, the country is now ranked as the second-largest economy in Latin America and the 15th in the world. Because of this, Mexico has become an increasingly desirable destination for foreign companies interested in international business expansion and global employment.
But Mexico it may not be the ideal business destination for everyone. It’s important to consider both the pros and cons of doing business in Mexico as part of any strategic growth planning.
Advantages of doing business in Mexico
There are several reasons why companies are increasingly interested in growing their business Mexico, including:
Mexico excels as a manufacturing economy that focuses on four primary sectors:
- Medical devices
These key industries have helped Mexico’s economy experience year-over-year expansion. And over the past three decades, it's taken several steps to make itself an even more attractive international market for foreign companies via its maquiladoras system. In 2006, Mexico further sought to increase the competitiveness of its manufacturing sector on a world scale by instituting the IMMEX Program, which allowed for the duty-free and tariff-free short-term importation of goods used in industrial maquiladoras processes.
IMMEX also sought to modernize and globalize Mexico’s manufacturing abilities by embracing specialized technologies and cutting-edge manufacturing methodologies. For foreign companies, these efforts combined with international trade deals have helped make Mexico one of the most desirable manufacturing destinations in the world.
Hiring and employment capabilities in Mexico
A skilled workforce has made hiring in Mexico attractive to foreign companies. The five largest employment sectors are:
- Social services
- Professional services
When it comes to manufacturing, there are three aspects that set the Mexican workforce apart:
Highly skilled workers
The Mexican government has invested in education and STEM training to produce highly skilled and knowledgeable workers and engineers. And seeing as Mexico has been embracing its manufacturing identity for nearly 60 years, there are now three generations of workers that have a wealth of experience working in factories and along supply lines.
As of 2015, Mexico was producing the world’s eighth highest rate of graduates in engineering, manufacturing and construction, with more than 110,000 students per year. That figure is double what it was producing just a decade previously. In addition to the national push, local and regional governments have also installed specialized training programs to produce advanced and highly technical workers, especially when compared with laborers in Asian manufacturing destinations.
A young workforce
Mexico has a youthful and energetic workforce. Nearly four in 10 workers are younger than 25 years old. There are more talented workers willing and able to start a life-long career in manufacturing from the outset. For foreign companies, this gives them access to a workforce that can be trained and molded.
Inexpensive labor costs
Employee wages often represent the most significant investment for any company, but especially so when it comes to manufacturing. That said, cost of labor in Mexico is much more affordable and comparable to many of the Asian manufacturing hubs.
Currently, the hourly average for a ground-floor worker in Mexico is $2.80 per hour. And that figure has remained virtually stagnant over the past decade. This is a competitive rate with China, but it's less costly when compared to the United States’ manufacturing hourly average, which is $30 per hour.
Mexico has purposefully created an economic environment that is open to other countries. It’s a member of:
- World Trade Organization (WTO)
- Asia-Pacific Economic Cooperation (APEC)
- Organization for Economic Cooperation and Development (OECD)
- Pacific Alliance Trade Bloc
Besides Singapore, Mexico has the second most free-trade agreements of any nation. There are currently 13 open free-trade agreements with more than 50 different countries. Such deals make it easier and cheaper for a foreign company to do business in the country.
For instance, the United States-Mexico-Canada Agreement (USMCA) of 2020 was an update to NAFTA. Some crucial highlights include:
- 70% of all auto manufacturing parts must be manufactured in Mexico, the U.S. or Canada
- Improved Mexican labor laws
- Increased intellectual property rights laws
- Raised de minimis shipment value levels from 7% to 10%
Proximity to the United States and Canada
For companies in North America, Mexico is much more ideally located than Asia. This was already true before the pandemic, but now there are also supply chain crises, rising fuel prices and rapidly increasing inflation to contend with. Put simply, trans-oceanic shipping has become a costly endeavor. Per Fox Business:
“The cost to transport shipping containers between China and the United States surged to a record high in September … the median cost of shipping a standard rectangular metal container from China to the West Coast hit $20,586, nearly double what it cost in July, which was twice what it cost in January.”
In comparison, Mexico’s proximity makes it less of a logistical and budgetary challenge to get finished goods back to the U.S. or Canada. The country is bordered by four American states—California, Arizona, New Mexico and Texas—and has a robust highway and railway system that makes it cheaper and faster to ship over rail lines than via cargo ship. Additionally, many of Mexico’s key manufacturing sectors are strategically located along these passageways to facilitate an even speedier freight process.
While this ensures faster fulfillment at a lower price, there’s the additional benefit that comes with operating in similar time zones; this allows American and Canadian companies to stay in constant contact with their operations. If there’s an issue, it can be dealt with immediately without having to wait for the right time window.
Challenges of doing business in Mexico
Although doing business in Mexico is an attractive proposition, there are some potential drawbacks to consider and prepare for. These include:
Crime and corruption
Mexican cartels have an outsized hand in the goings-on of the country, leveraging their power, money and threat of violence to exert control over both the government and police.
Although cartels tend to avoid foreign businesses for the fear that an incident will bring unwanted international attention, foreign companies must be wary of both the potential threats of violence and corruption. As of 2020, Mexico ranked No. 104 in the international corruption perception index.
Because of this, companies must be judicious about who they choose to partner with to avoid reputational harm.
Slow permitting processes
Although there has been a concerted effort by the Mexican government to make the country more business-friendly, particularly to international organizations, but setting up shop can still be a confusing process. Companies looking to expand to Mexico must navigate often complex permitting and license requirements for forming a legal entity, establishing property, registering with the state, and operating the business.
Complicated tax laws
Mexico has some of the more complicated tax laws for foreign businesses in the world. Properly filing as a foreign company can be a significant time investment and it requires substantial knowledge of Mexican tax laws. The primary taxes companies in Mexico must consider include:
- Income tax (ISR)
- Value Added tax (IVA)
- Excise tax (IEPS)
- Social Security fees
Also, as Deloitte notes, “Companies with employees must distribute and pay an amount equal to 10% of tax profits to their employees. Profits must be distributed within 50 days after filing the annual ISR return.”
A trusted partner for expanding your business in Mexico
After a careful evaluation of the pros and cons of doing business in Mexico, you may be ready to take the next step and begin making plans for expansion. Whether you plan to hire employees in Mexico and need help navigating HR and payroll requirements, or you’re considering a full entity establishment, it’s helpful to consider an expansion partner, such as an employer of record (EOR), that has in-country expertise and can provide guidance to ensure a seamless transition.