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.

Business Facilitation

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.

Outward Investment

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.

There are two main SOEs in Mexico, both in the energy sector.  Pemex operates the hydrocarbons (oil and gas) sector, which includes upstream, mid-stream, and downstream operations.  Pemex historically contributed one-third of the Mexican government’s budget but falling output and global oil prices alongside improved revenue collection from other sources have diminished this amount over the past decade to about 8 percent.  The Federal Electricity Commission (CFE) operates the electricity sector.  While the Mexican government maintains state ownership, the latest constitutional reforms granted Pemex and CFE management and budget autonomy and greater flexibility to engage in private contracting.

Pemex

As a result of Mexico’s historic energy reform, the private sector is now able to compete with Pemex or enter into competitive contracts, joint ventures, profit sharing agreements, and license contracts with Pemex for hydrocarbon exploration and extraction.  Liberalization of the retail fuel sales market, which Mexico completed in 2017, created significant opportunities for foreign businesses.  Given Pemex frequently raises debt in international markets, its financial statements are regularly audited.  The Natural Resource Governance Institute considers Pemex to be the second most transparent state-owned oil company after Norway’s Statoil.  Pemex’s ten-person Board of Directors contains five government ministers and five independent councilors.  The administration has identified increasing Pemex’s oil, natural gas, and refined fuels production as its chief priority for Mexico’s hydrocarbon sector.

CFE

Changes to the Mexican constitution in 2013 and 2014 opened power generation and commercial supply to the private sector, allowing companies to compete with CFE.  Mexico has held three long-term power auctions since the reforms, in which over 40 contracts were awarded for 7,451 megawatts of energy supply and clean energy certificates.  CFE will remain the sole provider of distribution services and will own all distribution assets.  The 2014 energy reform separated CFE from the National Energy Control Center (CENACE), which now controls the national wholesale electricity market and ensures non-discriminatory access to the grid for competitors.  Still, legal and regulatory changes adopted by the Mexican government attempt to modify the rules governing the electricity dispatch order to favor CFE.  Dozens of private companies and non-governmental organizations have successfully sought injunctions against the measures, which they argue discriminate against private participants in the electricity sector.  Independent power generators were authorized to operate in 1992 but were required to sell their output to CFE or use it to self-supply.  Those legacy self-supply contracts have recently come under criticism with an electricity reform law giving the government the ability to cancel contracts it deems fraudulent.  Under the reform, private power generators may now install and manage interconnections with CFE’s existing state-owned distribution infrastructure.  The reform also requires the government to implement a National Program for the Sustainable Use of Energy as a transition strategy to encourage clean technology and fuel development and reduce pollutant emissions.  The administration has identified increasing CFE-owned power generation as its top priority for the utility, breaking from the firm’s recent practice of contracting private firms to build, own, and operate generation facilities.  CFE forced several foreign and domestic companies to renegotiate previously executed gas supply contracts, which raised significant concerns among investors about contract sanctity.

The main non-market-based advantage CFE and Pemex receive vis-a-vis private businesses in Mexico is related to access to capital.  In addition to receiving direct budget support from the Secretariat of Finance, both entities also receive implicit credit guarantees from the federal government.  As such, both are able to borrow funds on public markets at below the market rate their corporate risk profiles would normally suggest.  In addition to budgetary support, the CRE and SENER have delayed or halted necessary permits for new private sector gas stations, fuel terminals, and power plants, providing an additional non-market-based advantage to CFE and Pemex.

Privatization Program

Mexico’s 2014 energy reforms liberalized access to these sectors but did not privatize state-owned enterprises.

Corruption exists in many forms in Mexican government and society, including corruption in the public sector (e.g., demand for bribes or kickbacks by government officials) and private sector (e.g., fraud, falsifying claims, etc.), as well as conflict of interest issues, which are not well defined in the Mexican legal framework.

Complicity of government and law enforcement officials with criminal elements is a significant concern.  Collaboration of government actors with criminal organizations (often due to intimidation and threats) poses serious challenges for the rule of law.  Some of the most common reports of official corruption involve government officials stealing from public coffers or demanding bribes in exchange for awarding public contracts.  The current administration supported anti-corruption reforms (detailed below) and judicial proceedings in several high-profile corruption cases, including former governors.  However, Mexican civil society asserts that the government must take more effective and frequent action to address corruption.

Mexico adopted a constitutional reform in 2014 to transform the current Office of the Attorney General into an Independent Prosecutor General’s office in order to shore up its independence.  President Lopez Obrador’s choice for Prosecutor General was confirmed by the Mexican Senate January 18, 2019.  In 2015, Mexico passed a constitutional reform creating the National Anti-Corruption System (SNA) with an anti-corruption prosecutor and a citizens’ participation committee to oversee efforts.  The system is designed to provide a comprehensive framework for the prevention, investigation, and prosecution of corruption cases, including delineating acts of corruption considered criminal acts under the law.  The legal framework establishes a basis for holding private actors and private firms legally liable for acts of corruption involving public officials and encourages private firms to develop internal codes of conduct.  The implementation status of the mandatory state-level anti-corruption legislation varies.

The new laws mandate a redesign of the Secretariat of Public Administration to give it additional auditing and investigative functions and capacities in combatting public sector corruption.  Congress approved legislation to change economic institutions, assigning new responsibilities and in some instances creating new entities.  Reforms to the federal government’s structure included the creation of a General Coordination of Development Programs to manage the newly created federal state coordinators (“superdelegates”) in charge of federal programs in each state.  The law also created the Secretariat of Public Security and Citizen Protection, and significantly expanded the power of the president’s Legal Advisory Office (Consejería Jurídica) to name and remove each federal agency’s legal advisor and clear all executive branch legal reforms before their submission to Congress.  The law eliminated financial units from ministries, with the exception of the Secretariat of Finance, the army (SEDENA), and the navy (SEMAR), and transferred control of contracting offices in other ministries to the Hacienda.  Separately, the law replaced the previous Secretariat of Social Development (SEDESOL) with a Welfare Secretariat in charge of coordinating social policies, including those developed by other agencies such as health, education, and culture.  The Labor Secretariat gained additional tools to foster collective bargaining, union democracy, and to meet International Labor Organization (ILO) obligations.

Mexico ratified the OECD Convention on Combating Bribery and passed its implementing legislation in May 1999.  The legislation includes provisions making it a criminal offense to bribe foreign officials. Mexico is also a party to the Organization of American States (OAS) Convention against Corruption and has signed and ratified the United Nations Convention against Corruption.  The government has enacted or proposed strict laws attacking corruption and bribery, with average penalties of five to 10 years in prison.

Mexico is a member of the Open Government Partnership and enacted a Transparency and Access to Public Information Act in 2015, which revised the existing legal framework to expand national access to information.  Transparency in public administration at the federal level improved noticeably but expanding access to information at the state and local level has been slow.  According to Transparency International’s 2020 Corruption Perception Index, Mexico ranked 124 of 180 nations.  Civil society organizations focused on fighting corruption are increasingly influential at the federal level but are few in number and less powerful at the state and local levels.

Business representatives, including from U.S. firms, believe public funds are often diverted to private companies and individuals due to corruption and perceive favoritism to be widespread among government procurement officials.  The GAN Business Anti-Corruption Portal states compliance with procurement regulations by state bodies in Mexico is unreliable and that corruption is extensive, despite laws covering conflicts of interest, competitive bidding, and company blacklisting procedures.

The U.S. Embassy has engaged in a broad-based effort to work with Mexican agencies and civil society organizations in developing mechanisms to fight corruption and increase transparency and fair play in government procurement.  Efforts with specific business impact include government procurement best practices training and technical assistance under the U.S. Trade and Development Agency’s Global Procurement Initiative.

UN Anticorruption Convention, OECD Convention on Combatting Bribery

Mexico ratified the UN Convention Against Corruption in 2004.  It ratified the OECD Anti-Bribery Convention in 1999.

Resources to Report Corruption

Contact at government agency:

Secretariat of Public Administration
Miguel Laurent 235, Mexico City
52-55-2000-1060

Contact at “watchdog” organization:

Transparencia Mexicana
Dulce Olivia 73, Mexico City
52-55-5659-4714
Email: info@tm.org.mx

* data from the IMF’s Coordinated Direct Investment Survey

* data from the IMF’s Coordinated Portfolio Investment Survey (CPIS)