Best practice for FDI in Mexico

The year 2018 was a year of mixed fortunes for Mexico and its prospects as an international investment hub. In recent years, there has been steadily growing interest in the country from both multinational companies and investment funds, which has also led to high demand for the structures that make those investments safe and successful.

However, before Donald Trump even took his seat in the White House, his protectionist language and his stance on the Mexican border raised considerable doubts about the country’s future relationship with its biggest trading partner, and what the knock-on impact would be.

With the recent signing of the United States-Mexico-Canada Agreement, those doubts can finally be put to bed as it provides a stable foundation for an ongoing and positive relationship between the countries for years to come. With political tensions soothed, interest in Mexico has returned with renewed vigour.

The appeal of Mexico can be attributed to several factors. The first of these is the workforce, which provides a ready source of cost-effective labour. Manufacturing companies benefit from a relatively low cost of labour to produce goods for export.

On the domestic front, another key driver is demographic shifts. As the country has developed, a growing middle class is driving local demand for goods and services in industries including automotive, tourism, TMT and consumer goods.

One of the strongest drivers behind foreign investment in Mexico however is the positive steps that the government itself has taken to create a supportive and secure environment, including Bilateral Investment treaties (BITs) and measures to eliminate corruption. While the recent Mexican election posed some questions surrounding the future policy outlook, the election of Andrés Manuel López Obrador restored confidence in the continued opening up of the Mexican economy to international investment.

However, considerable barriers persist in Mexico. Political risk is ever present; since the election of Donald Trump, US-Mexico ties have been in the spotlight and it can be difficult to predict where this relationship might turn in the future. Furthermore, despite government measures to tackle the problem, corruption and bribery are still an issue.

As with all international business operations, challenges can also be presented by cultural and language differences and these must be considered by companies wishing to integrate Mexican operations into their business.  How can companies looking to invest in Mexico put in place measures and policies to mitigate the impact of these challenges?

In order to leverage on local knowledge and customs, best practice is for a foreign investor to form a joint venture with a local party, and this raises a subsequent question as to where this entity should be based. To establish ‘neutral ground’ between the Mexican partner and the foreign partner, a third country jurisdiction is usually preferable, particularly one like the Netherlands for example, which can provide efficient and effective corporate law surrounding the joint venture. Such jurisdictions may also facilitate other benefits such as the availability of a BIT, transport efficiencies (i.e. to provide a mid-point for physical meetings) and efficient access to financial markets.

Of these, access to a BIT is particularly important, providing significant protections for foreign investors including fair and equitable treatment, protection from expropriation and performance requirements for investments, and access to neutral dispute settlement. Mexico is fortunate to have BITs in place with several foreign countries, however this should be carefully considered when selecting a jurisdiction for a joint venture. In cases where a joint venture is not created with a local partner, the same benefits can be sought by setting up a bid company from which to make foreign investments.

Regarding cultural barriers, appointing local advisers can be crucial to efficiently establish cooperation between non-Mexican and Mexican stakeholders in a transaction. Local advisers often operate in the international environment and so are well placed to guide foreign investors doing business in Mexico, but also leverage this knowledge of foreign business customs and etiquette towards its Mexican stakeholders.

Mexico’s geographic position, natural resources and political openness have made it a global heavyweight at attracting foreign investment. While every business transaction presents its own unique circumstances, choosing local partners and an appropriate jurisdiction for new structures are at the core of making those investments safe and secure.

Jan Willem van Drimmelen is Global Head of Corporate Client Services at Intertrust Group, which provides corporate, fund, capital market and private wealth services.