Foreign Direct Investment (FDI) in Mexico

Preface

As a seasoned investor in international infrastructure projects, I have had the pleasure and opportunity to live and work in regions as diverse as Mexico, Asia, Europe, the Middle East, and Scandinavia. Navigating the legal landscapes in these areas is crucial. Understanding your own country's laws is one thing; grasping the regulations of other nations where you conduct business is another. However, this understanding is essential for any investor or leader of a multinational company. This article focuses exclusively on Mexico. Future articles will cover Singapore, France, and the UAE.

Introduction

My investing experience has impressed upon me the importance of understanding the main laws, international agreements, and key institutions that govern and promote foreign investment. This knowledge is crucial not just for private sector investors but also for foreign government agencies conducting business in other countries. In Mexico, local laws apply to foreign government agencies, making it vital for administrative contracting officers to ensure full compliance with these regulations.

Overlooking these legal requirements can result in significant conflicts and costly delays, affecting everyone involved. Therefore, doing thorough legal homework and proactively understanding and respecting local laws is key to successful and sustainable international investment projects.

Foreign Direct Investment (FDI) in Mexico

The Foreign Investment Law of 1993 (FIL) is the primary piece of legislation that governs foreign direct investment (FDI) in Mexico. The last update was on May 27, 2024. Article 2 of this public policy law defines foreign investment for Mexico, the restricted zone (see Section I of Article 27 of the Political Constitution of the United Mexican States for more information on this national territory), and the Foreign Exclusion Clause.

Example 1: Marine Infrastructure Companies

Consider, first, a marine infrastructure company interested in port services that allow ships to conduct inland navigation operation, such as towing, mooring and barging. In Mexico, Article 8 of the FIL requires a favorable resolution by the Commission for foreign investment to participate in a percentage higher than 49%.

Example 2: Mining or Water Development

However, foreign individuals and entities intending to acquire real estate outside of restricted zones or to obtain concessions for the exploration and development of mines and waters anywhere within Mexico need only submit to the Ministry a statement agreeing to the terms of Section I of Article 27 of the Political Constitution of the United Mexican States while requesting its corresponding permit from that Ministry.

Under the Interim Articles of the FIL, SIXTY.III. Allows for up to 100% of the capital stock of Mexican companies to be owned by foreigners without the need to obtain a favorable resolution from the Commission. But under the SEVENTH section, foreign investment may only hold or have an interest of up to 49% of the capital stock of Mexican companies engaged in activities of manufacturing and assembly of parts, equipment and accessories for the automotive industry, without prejudice to the provisions under the Decree for Promotion and Modernization of the Automotive Industry. Yet, as of the first of January 1999, foreign investment may hold an interest of up to 100% in the capital stock of Mexican companies, without the need to obtain a favorable resolution from the Commission.

Example 3: Automakers and EV Battery Investments

Mexico is the 4th largest producer of autoparts in the world, and 1st to the United States. More than half of the imported autoparts to Mexico compliment the local manufacturing lines. Much of this is then exported back to its original country. The primary countries of origin include the United States, China, Germany and Japan. For established automakers like Audi, BMW, Ford Motor Group, Honda, Mercedes Benz, Nissan, Toyota, Volkswagen, and Tesla, Mexico's balanced approach to foreign investment creates a stable, fair, and transparent environment conducive to economic growth and development. At the same time, with two-thirds of plub-in EV's being assembled in the United States as of 2021, there's a significant capacity gap in mining and refining battery materials. The United States lags far behind China. The Inflation Reduction Act will likely establish an EV supply chain for the long-term and draw investments in EV battery capacity. By 2030, EV battery manufacturing capacity in North America will likely increase 20 times. Consequently, companies in the electromobility sector have announced nearly 100 investments in Mexico. Among them are:

Today, Mexico is an important player in the transition to electric vehicles. Mexico is the United States' ally in the goal of strengthening supply chains. Meanwhile, EV sales in Mexico are expected to grow over coming years in the Mexican market, as Mexico pushes towards electrification goals. Source: Prodensa

Summary of "Foreign Direct Investment in Mexico: Domestic and International"

This white paper , authored by Dr. Sophy M. Laughing (yours truly), provides a detailed overview of Mexico's investment policy, highlighting the key laws, international agreements, and institutions that govern and encourage foreign investment. Central to this framework, as introduced above, is the Foreign Investment Law of 1993, which allows up to 100% foreign ownership in most sectors, requiring only registration with the National Registry of Foreign Investment. The paper discusses Mexico's adherence to global standards through its commitments under the World Trade Organization and trade agreements such as NAFTA (replaced by USMCA) and the CPTPP. These agreements ensure fair market access, protection of intellectual property, and effective dispute resolution mechanisms. Recent institutional changes, like the establishment of a new investment facilitation agency, reflect Mexico's ongoing efforts to streamline investment promotion and create a stable, transparent environment for foreign investors. Despite Mexico's commitment to transparency and efficiency, it is essential to stay informed on Mexico's laws, work with competent licensed attorneys, and keep up with new developments both nationally and in specific regions where business is conducted.

Importance and Target Audience

This paper is informative for international investors, policy makers, and business leaders interested in understanding Mexico's investment landscape. By reading this paper, they will gain insights into the legal and regulatory frameworks shaping foreign direct investment (FDI) in Mexico. It is particularly beneficial for foreign investors looking to navigate the complexities of Mexico's laws and international agreements, ensuring they can make informed decisions and capitalize on investment opportunities. Policy makers and government officials can also use this paper to better understand the impact of FDI on economic growth and the importance of maintaining a conducive investment environment.

Key Learnings

Readers of this paper will learn about the foundational legal instruments governing FDI in Mexico, including the specific provisions of the Foreign Investment Law of 1993. The paper elucidates Mexico's commitments to international standards and the benefits of trade agreements, and explains the roles of key institutions, such as the National Foreign Investment Commission. By understanding these elements, readers will be equipped with the knowledge and additional resources to effectively engage in foreign investment in Mexico, anticipate regulatory changes, and leverage opportunities for economic growth and development.

About the Author

Sophy Laughing, Ph.D., MBA, serves as the CEO of the Cobeal Group of Companies. With offices in Asia, the United States, and Latin America, Sophy has invested extensively in industrial manufacturing and large-scale infrastructure and construction projects. Understanding relevant laws and regulations for each region helps to mitigate the risks of foreign direct investment (FDI), whilst fostering an appreciation for the diverse cultures that define global trade.

Disclaimer:

This article does not include recent policies on new technologies, the CENACE (National Center for Energy Control) Measures, or the SENER (Secretary of Energy) Policy imposing additional restrictions and conditions for the issuance of generation permits for solar and wind facilities, as well as for their interconnection to the National Electric System. These changes are considered an attack against the electricity legal framework established by the former administration. On one hand, these changes strengthened CFE's position, by allowing CFE's oldest green projects (Laguna Verde nuclear plant) to sell CELs, while negatively impacting foreign investment in renewable energies, since the power dispatch procedures give priority to CFE's conventional power projects over cheaper renewable plants.