Expanding into Mexico: Benefits, Risks and Impediments

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Introduction

Globalization and improvement in communication have opened up the international market. Most of the companies venturing into these markets seek to increase their sales volume, diversify their operations, increase the profit margin, avoid excessive competition in the domestic market and also increase their market share.

Though the benefits of expanding globally are enormous, there are many risks and impediments that may hamper the expansion process.

These risks include price fluctuations, exchange rate volatility, political influences, legal and regulatory rules. The company management must therefore carefully evaluate the target market so as to project the expected profits and understand the challenges in order to develop effective entry strategies.

Prior knowledge needed prior to expanding into Mexico

Before the company can expand to Mexico, it is necessary for the company to evaluate various factors that are imperative for the overall success of the expansion strategy. First, the target market is very important as it forms the consumer base for the company. Currently, Mexico has about 110 million people. It is the 13^th largest economy in the world and the 11^th most populous country in the world.

The country trades with the USA as the most important import and export partner. The nation has an elaborate transport and communication network which is ideal for doing business.

Most of the residents are in the upper middle class level. The country is an emerging power and has become one of the industrialized nations. The country supports several trade agreements such as the North American Free Trade Agreement (NAFTA) according to which it trades with the USA.

Profitability

The company hopes that the business will be profitable due to the large population in the country. Since the country is expanding to a market where the competition is not very high, it expects to capture a large portion of the market and hence the business will be profitable. In addition to the large target market, the country labor force is enormous as compared to the USA.

The labor rates are lower in Mexico and hence the company will reduce its operations costs, and this will increase the profit margins. The company expects that Mexico has lower taxes and lower rental rates which increase the profit margins.

Potential risks

Despite the increase in profits that are expected, the company has several risks that may affect the running of the business. The crime rate is very high causing a lot of uncertainties and instabilities. In Mexico, the market is controlled by cartels which are hard to break up. These cartels pose significant threat to the company as the cartel can cause physical damage to the new company structure and workers.

Competition: The other potential risks come from the competitors. These are the local companies that exist around Mexico and they deal with the same commodities as this company.
Changes in laws and regulations: changes in the legal system can pose a significant challenge to the company. Laws limiting international investors and promoting domestic companies could affect the company’s operations internationally. International companies may be required to pay extra tax which increases the final product costs in relations to the domestic market prices.
Political instability: political instability in the Mexico could result in reductions of the company’s profits.
Exchange rate changes: Exchange rates fluctuations affect international prices. If the country’s monetary policy is not effective, inflation would affect the prices of production factors and raw materials and this would affect the company’s profitability
Changes in trade agreement: Changes in trade agreement between USA and Mexico can also affect the profits and operations of the company in this area.

Common and Civil law systems in Mexico

The Mexican legal system originates from the Greek, Roman, and French legal systems. The law is similar to other common laws around the world. The current Constitution that governs Mexico is based on the Constitution of 1917. The country has a well organized and evolved legal system in contrast to the perception that most foreign people have that the country’s legal system is not adequate.

The Mexican laws are similar to the most of the laws in the world as opposed to the US legal system. The US common law is derived from the case laws, statutory laws of England and American civilizations while that of Mexico is derived from the Roman laws that were later refined by the French. In the US, case laws are commonly used to solve judicial cases while in Mexico, case laws are rarely used.

The Mexican laws require that international companies running businesses in Mexico are affected by the Mexican law either directly or indirectly even if the business is not located there. The country’s administrative laws are formulated by agencies. They include labor, financial, banking, and taxations laws. These rules are gradually overriding the traditional Mexican laws.

Dispute resolution

One of the main recognized dispute resolution methods is through arbitration. The law applies to all national and international parties to a dispute unless there are international treaties and laws forbidding the use of arbitration.

The Mexico commercial arbitration statute was passed in 1993, and it is used in dispute resolutions. The arbitration law requires that both parties agree to arbitrate. The failure in arbitrations results in the court litigation where the contract laws apply (Mueller 2).

Contract law

The fundamental rules that govern Mexico are found in the civil codes of many states in Mexico. These laws stipulate the basic rules of contractual engagements and rules regarding patenting, trademarks, and the negotiable credit instruments. The contract law identifies 20 types of contracts such as associations, bond, chattel mortgages, agency, lease, purchase and sale, deposits, and commodatums among others.

Employee labor violations

The Mexican labor laws are drawn from the Constitution. They indicate the minimum wage that employees can earn. The laws also state that those paying on an hourly rate must not go below the minimum wage that is allowed. The method of payment is the subject of employees’ consent. Companies must follow these minimum requirements to avoid violations.

Labor contract: the Mexican laws provide the minimum contract period for both executive and non-executive employees. Non-executive employee must be trained for three month while the executive employee must be trained for six months.
Outsourcing: the Mexican laws prohibit certain forms of outsourcing. Any outsourcing works must be of a specialized nature and not similar to the work that employee within the company can do. These laws mean that workers will have to get extra benefits due to any additional work. Most companies do not subcontract ordinary works.
Termination: The Mexican law details the causes for termination of employment such as fraud, insubordination, drug, alcoholism, immoral conduct among others. The company venturing abroad must understand these laws.

Human rights violation

The Mexican laws ban all forms of racial, ethnic, national origin, age, disability, health, religion, sex and marital status discriminations. The company must ensure that this does not occur. In Mexico, the human rights abuse is on the rise. Despite the current laws governing the human rights, there are still much human rights abuse in the country (Amnesty International 4).

There are large criminal organizations that control the drug and human trafficking trade which the government has not been able to deal with. Criminal gangs always target human rights activist and journalists who expose their cartels. This makes most residents live in fear due to crimes, lawlessness, torture, murder and other atrocities.

Impunity in this country is high; crimes are committed by security and military personnel when fighting the drug cartels. Victims are tortured in remand with some common methods as electrocuting, beatings, chocking someone with a plastic bag, threats, and spraying someone with water (Human Rights Watch 3).

Child labor law violations

In Mexico, child labor laws are high violated. Currently, one out of five children works. A total of 4 million kids under the age of 17 years work. The country is currently working towards eliminating child labor, and it has already ratified the UN convections on rights of the child of 1989.

Perceptions of organization’s that engage in human rights violations and child labor laws

Though many see human rights abuse and child rights abuse as being against the law, the government has no machinery and power to control these acts. When establishing the company, it is imperative that human rights are taken into accounts and the company should not engage children in work.

European Union

The European Union (EU) was formed in 1992, and it is one of the most influential international organizations of the world. The EU was previously known as the European Economic Community. The EU has is based on several policies formed by parliaments, commissions, and ministries.

Today, the trade relations between the EU and Mexico are regulated with the help of a free trade agreement which was signed in 2000, providing the country with the additional possibilities in relation to the development of trade relations with foreign countries. The agreement is based on general democratic principles to protect the interests of both parties.

The partnership between the EU and Mexico contributes to the economic growth of the country significantly, with references to the stimulation of the investment flows between Mexico and the international organization. It is possible to speak about the EU as a large export market for Mexico, and this fact contributes to the discussion of the trends in Mexico’s foreign trade.

Mexico is rich in minerals which are exported to the EU actively. Moreover, Mexico exports transport and electric equipment to the countries of the EU. It is important to note that the country also imports more innovative variants of the transport and electric equipment from the EU (Derham).

Advantages

Mexico supports the active trade and political relationships with the EU because a lot of advantages provided for the country. The first advantage is that the EU is a single market which enables companies to trade at an international level using one currency. The second advantage is the monetary union.

The EU countries trade with one currency and this makes it easy for a company to trade without the impact of exchange rate changes. The prices of different commodities remain constant. The EU also promises environmental protections and war prevention to the member states, and hence, there is political stability which is suitable for good business (Derham 7).

Lastly, the removal of the trade barriers allows companies to expand to other regions within the EU. From this point, Mexico received a lot of opportunities to develop industries and markets depending on the improvement of the effective trade and political relations with the EU.

Thus, the main purposes of the EU-Mexico cooperation are to guarantee the free and open trade markets for the parties, to avoid the competition while focusing on the productive cooperation, and to establish the norms of the successful cooperation according to the democratic principles and legal standards.

These relations are important for Mexico as well as for the EU because they allow concentrating on the investment flows, liberalization of the markets, open and effective relations between governments.

Participating in the agreement, Mexico receives more opportunities to develop trade relations with the European countries according to the globally adopted rules. Thus, the agreement guarantees the countries’ following democratic principles and protecting human rights.

Furthermore, minerals and transport equipments are exported and imported by the EU and Mexico to contribute to the further development of the fields. Today, it is possible to speak about definite Mexico’s privileges within the global market which are associated with the active relations between the EU and the country because Mexico is one of the largest partners of the EU in Latin America (Denti; Derham).

Disadvantages

Focusing on the certain disadvantages of the EU as an organization, it is important to pay attention to The main disadvantage of the EU is the loss of national sovereignty of the members of the EU. When nations join the EU, they have to obey the rules and regulations set by this economic block which is rather irrespective of the repercussions.

Another disadvantage is the fact that small nations have the limited influence on the economic policies set by the EU (Denti 5). However, these points are urgent for the countries which are the members of the EU. The cooperation with the EU is advantageous in its character for all the countries-partners of the organization.

Mexico has the closest trade and political relations with the USA, but the focus on the trade and economic relations with the EU provides the country with the opportunity to expand the spheres of the economic impact and diversify trade relations.

As a result, Mexico can compete successfully within the global market while developing the cooperative relations with the EU (Denti). That is why, the agreement between Mexico and the EU adopted in 2000 opened a lot of possibilities for the economic integration and stimulation of the investment flows.

Conclusion

In conclusion, Mexico is a good country for the company to invest in. There are huge profits expected from the business. Though the legal system is not well established, there are laws in place to protect foreign investors. The main problem with their legal system is the implementation of the laws. The company should go ahead and invest in this country though appropriate risk management strategies must be formulated.

Works Cited

Amnesty International. Mexico Laws without Justice: Human Rights Violations and Impunity in the Public Security and Criminal Justice System. 2007. Web.

Denti, David. The Influence of Small States in the European Union. Iceland: University of Iceland, 2007. Print.

Derham, Mark. European Union: Risk-Benefit Analysis. 2010. Web.

Human Rights Watch. World Report 2012: Mexico. 2013. PDF file. Web.

Mueller, Christa. Arbitration in Mexico. n.d. Web.

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