1. Openness To, and Restrictions Upon, Foreign Investment
Policies Towards Foreign Direct Investment
Mexico is open to foreign direct investment (FDI) in the vast majority of economic sectors and has consistently been one of the largest emerging market recipients of FDI. Mexico’s proximity to the United States and preferential access to the U.S. market, macroeconomic stability, large domestic market, growing consumer base, and increasingly skilled yet cheap labor combine to attract foreign investors. The COVID-19 economic crisis showed how linked North American supply chains are and highlighted new opportunities for partnership and investment. Still, recent policy and regulatory changes have created doubts about the investment climate, particularly in the energy and the formal employment pensions management sectors.
Historically, the United States has been one of the largest sources of FDI in Mexico. According to Mexico’s Secretariat of Economy, FDI flows for 2020 totaled USD 29.1 billion, a decrease of 11.7 percent compared to the preliminary information for 2019 (USD 32.9 billion), and a 14.7 percent decline compared to revised numbers. The Secretariat cited COVID’s impact on global economic activity as the main reason for the decline. From January to December 2020, 22 percent of FDI came from new investment. New investment in 2020 (USD 6.4 billion) was only approximately half of the new investments received in 2019 (USD 12.8 billion), and 55.4 percent came from capital reinvestment while 24.9 percent from parent company accounts. The automotive, aerospace, telecommunications, financial services, and electronics sectors typically receive large amounts of FDI.
Most foreign investment flows to northern states near the U.S. border, where most maquiladoras (export-oriented manufacturing and assembly plants) are located, or to Mexico City and the nearby “El Bajio” (e.g. Guanajuato, Queretaro, etc.) region. In the past, foreign investors have overlooked Mexico’s southern states, although the administration is focused on attracting investment to the region, including through large infrastructure projects such as the Maya Train, the Dos Bocas refinery, and the trans-isthmus rail project.
The 1993 Foreign Investment Law, last updated in March 2017, governs foreign investment in Mexico, including which business sectors are open to foreign investors and to what extent. It provides national treatment, eliminates performance requirements for most foreign investment projects, and liberalizes criteria for automatic approval of foreign investment. Mexico is also a party to several Organization for Economic Cooperation and Development (OECD) agreements covering foreign investment, notably the Codes of Liberalization of Capital Movements and the National Treatment Instrument.
The administration has integrated components of the government’s investment agency into other ministries and offices.
Limits on Foreign Control and Right to Private Ownership and Establishment
Mexico reserves certain sectors, in whole or in part, for the State, including: petroleum and other hydrocarbons; control of the national electric system, radioactive materials, telegraphic and postal services; nuclear energy generation; coinage and printing of money; and control, supervision, and surveillance of ports of entry. Certain professional and technical services, development banks, and the land transportation of passengers, tourists, and cargo (not including courier and parcel services) are reserved entirely for Mexican nationals. See section six for restrictions on foreign ownership of certain real estate.
Reforms in the energy, power generation, telecommunications, and retail fuel sales sectors have liberalized access for foreign investors. While reforms have not led to the privatization of state-owned enterprises such as Pemex or the Federal Electricity Commission (CFE), they have allowed private firms to participate. Still, the Lopez Obrador administration has made significant regulatory and policy changes that favor Pemex and CFE over private participants. The changes have led private companies to file lawsuits in Mexican courts and several are considering international arbitration.
Hydrocarbons: Private companies participate in hydrocarbon exploration and extraction activities through contracts with the government under four categories: competitive contracts, joint ventures, profit sharing agreements, and license contracts. All contracts must include a clause stating subsoil hydrocarbons are owned by the State. The government has held nine auctions allowing private companies to bid on exploration and development rights to oil and gas resources in blocks around the country. Between 2015 and 2018, Mexico auctioned more than 100 land, shallow, and deep-water blocks with significant interest from international oil companies. The administration has since postponed further auctions but committed to respecting the existing contracts awarded under the previous administration. Still, foreign players were discouraged when Pemex sought to take operatorship of a major shallow water oil discovery made by a U.S. company-led consortium. The private consortium had invested more than USD 200 million in making the discovery and the outcome of this dispute has yet to be decided.
Telecommunications: Mexican law states telecommunications and broadcasting activities are public services and the government will at all times maintain ownership of the radio spectrum. In January 2021, President Lopez Obrador proposed incorporating the independent Federal Telecommunication Institute (IFT) into the Secretariat of Communications and Transportation (SCT), in an attempt to save government funds and avoid duplication. Non-governmental organizations and private sector companies said such a move would potentially violate the USMCA, which mandates signatories to maintain independent telecommunications regulators. As of March 2021, the proposal remains pending. Mexico’s Secretary of Economy Tatiana Clouthier underscored in public statements that President López Obrador is committed to respecting Mexico’s obligations under the USMCA, including maintaining an autonomous telecommunications regulator.
Aviation: The Foreign Investment Law limited foreign ownership of national air transportation to 25 percent until March 2017, when the limit was increased to 49 percent.
The USMCA, which entered into force July 1, 2020, maintained several NAFTA provisions, granting U.S. and Canadian investors national and most-favored-nation treatment in setting up operations or acquiring firms in Mexico. Exceptions exist for investments restricted under the USMCA. Currently, the United States, Canada, and Mexico have the right to settle any legacy disputes or claims under NAFTA through international arbitration for a sunset period of three years following the end of NAFTA. Only the United States and Mexico are party to an international arbitration agreement under the USMCA, though access is restricted as the USMCA distinguishes between investors with covered government contracts and those without. Most U.S. companies investing in Mexico will have access to fewer remedies under the USMCA than under NAFTA, as they will have to meet certain criteria to qualify for arbitration. Local Mexican governments must also accord national treatment to investors from USMCA countries.
Approximately 95 percent of all foreign investment transactions do not require government approval. Foreign investments that require government authorization and do not exceed USD 165 million are automatically approved, unless the proposed investment is in a legally reserved sector.
The National Foreign Investment Commission under the Secretariat of the Economy is the government authority that determines whether an investment in restricted sectors may move forward. The Commission has 45 business days after submission of an investment request to make a decision. Criteria for approval include employment and training considerations, and contributions to technology, productivity, and competitiveness. The Commission may reject applications to acquire Mexican companies for national security reasons. The Secretariat of Foreign Relations (SRE) must issue a permit for foreigners to establish or change the nature of Mexican companies.
Other Investment Policy Reviews
There has not been an update to the World Trade Organization’s (WTO) trade policy review of Mexico since June 2017 covering the period to year-end 2016.
According to the World Bank, on average registering a foreign-owned company in Mexico requires 11 procedures and 31 days. Mexico ranked 60 out of 190 countries in the World Bank’s ease of doing business report in 2020. In 2016, then-President Pena Nieto signed a law creating a new category of simplified businesses called Sociedad for Acciones Simplificadas (SAS). Owners of SASs are supposed to be able to register a new company online in 24 hours. Still, it can take between 66 and 90 days to start a new business in Mexico, according to the World Bank. The Government of Mexico maintains a business registration website: www.tuempresa.gob.mx. Companies operating in Mexico must register with the tax authority (Servicio de Administration y Tributaria or SAT), the Secretariat of the Economy, and the Public Registry. Additionally, companies engaging in international trade must register with the Registry of Importers, while foreign-owned companies must register with the National Registry of Foreign Investments.
Since October 2019, SAT has launched dozens of tax audits against major international and domestic corporations, resulting in hundreds of millions of dollars in new tax assessments, penalties, and late fees. Multinational and Mexican firms have reported audits based on diverse aspects of the tax code, including adjustments on tax payments made, waivers received, and deductions reported during the Enrique Peña Nieto administration.
Changes to ten-digit tariff lines conducted by the Secretariat of Economy in 2020 created trade disruptions with many shipments held at the border, stemming from lack of clear communication between government agencies that resulted in different interpretation by SAT.
Various offices at the Secretariat of Economy and the Secretariat of Foreign Affairs handle promoting Mexican outward investment and assistance to Mexican firms acquiring or establishing joint ventures with foreign firms. Mexico does not restrict domestic investors from investing abroad.