Doing business in Mexico

Explore the challenges, risks and potential rewards of setting up your business in Mexico

Mexico is one of the world’s most open countries for new market entrants, with no shortage of benefits ready and waiting for any business looking to reach new customers. Let’s take a closer look at the potential benefits, risks and challenges of doing business there, and help you get your business expansion strategy underway.

1 Overview

Explore our detailed guide to explore the following key points essential to plan your business expansion strategy for Mexico:

2 Ease of doing business in Mexico

From more relaxed labor laws to a simplified tax system, expanding to Mexico has never been easier.

New labor market regulations In recent years, doing business in Mexico has been made easier by the removal of geographic differences in the national minimum wage. This simplification has undoubtedly helped boost business opportunities in Mexico as, previously, the country was divided into two zones – A and B – each with its own wage laws.

3 Benefits of doing business in Mexico

Simpler tax payments

There are many different pros and cons to consider when doing business in Mexico. However, one of the big advantages is the abolition of the business flat tax. Bear in mind though, it can make paying taxes more expensive because only a portion of salaries can now be deductible. One other thing to remember, the payroll tax rate that employees pay has been increased for Mexico City. 1

Easier to get credit

Mexico has passed a new law which allows the general description of assets granted as collateral – and this applies to both Mexico City and Monterrey.

Stable politics

Of all the pros and cons of doing business in Mexico, its political stability is a definite advantage for many businesses considering expanding there. The leading political party – the Institutional Revolutionary Party (PRI) – has continually evolved in-line with the broad global business climate, to create an economy that’s relatively stable and well-equipped for international business.2

4 Ease of cross-border trading

In world rankings, Mexico City and Monterrey score 82.9 for their ease of trading across borders.1

Multiple free trade agreements (FTAs)

Mexico has more FTAs in place than any other country: currently 11, across 46 different countries – providing market access to more than half the world’s GDP. The country’s legal and tax system also means both Mexican and foreign businesses are treated the same way – which is good news for new market entrants.2

5 What are the risks of doing business in Mexico?

Any overseas expansion comes with its fair share of risks, and Mexico is no exception. Here’s a quick rundown of some of the key considerations to be aware of before you take that critical first step.

Large wealth gap

There is still a significant high/low income divide in Mexico, although the gap has been closing in recent years.

Strict localisation requirements

One other risk of doing business in Mexico is the legal requirement to label all products in Spanish. Doing so will add an extra process and cost to getting your products into the hands of your customers, which could potentially make your offering less competitive.

6 Cultural differences to be aware of when doing business in Mexico

When doing business in Mexico, it’s important to have a good understanding of the country’s cultural specifications. For example, business culture in Mexico is very relationship-driven, so you’ll need to be prepared to build and develop personal relationships with your commercial suppliers and partners. This may take time – and you may also need to arrange for interpreters to attend meetings.

7 Costs of doing business in Mexico

When it comes to launching your great business ideas in Mexico, you’ll still need to address the inevitable expense of doing business abroad. Let’s explore some of the main overheads and costs you’re likely to face on the way.

Construction permits

In recent years, the Mexican government has increased fees around construction permits in both Mexico City and Monterrey – which has made the process more expensive for businesses.

Electricity

In Mexico City, the main electricity provider is CFE Distribución who charge 11.5 US cents per kWh used. There are 7 procedures involved in getting connected to the grid, with an average time taken of 112 days. Reliability of supply and transparency of tariff scores 7 – compared to 4.3 for Latin America & Caribbean, and 8 for the top 27 economies. Monterrery’s overall ‘Getting Electricity Score’ is 80.93.

Property taxes

Another risk associated with doing business in Mexico is the government’s increase in municipal property tax transfer rates, making it more expensive to register property.

Taxes

In terms of the ease and cost of paying taxes, Mexico City and Monterrey rank 121st in the world with a score of 66.65. This compares with 84.14 for the U.S. (ranked 37th); 65.36 for India (also ranked 121st); and 34.40 for Brazil (ranked 184th). Businesses in Mexico must pay tax 6 times a year, requiring an investment of 240.5 hours in total. Total tax and contributions as a percentage of profit is 53%. (Correct as at May 2018 covering for the Paying Taxes indicator calendar year 2017, January 1, 2017 – December 31, 2017)1. [Source]

Resolving disputes and enforcing contracts

In Mexico City, the average claim for a standardized case is MXN 304,155 – and all cases are managed through the Mexico City First Instance Oral Civil Court. Average time taken to process a case is 350 days (versus 768.5 in Latin America & Caribbean, and 582.4 for OECD high income). Overall costs, as a percentage of claim value, are 33.5% in Mexico City, which is higher than both Latin America & Caribbean (31.4%) and OECD high income (21.2%). Mexico City’s Enforcing Contracts score is 65.4 – lower than Monterrey (74.60) and the U.S. (72.61), but above India (41.19).

Managing insolvency

While insolvency perhaps isn’t a subject you’ll want to be focusing on right now. It’s still important to get a feel for how the process is managed in Mexico, should the worst happen. The average time taken to process an insolvency is 1.8 years – which is almost on par with OECD high income (1.8), and significantly below Latin America & Caribbean (2.9). Recovery rate (cents on the dollar) is 64.7 on average, almost twice that on Latin America & Caribbean and again just below OECD high income, at 70.5 cents. Mexico City’s strength of insolvency framework index performs well at 11.5, which is just under OECD high income’s 11.9. Overall, both Mexico City and Monterrey score 70.77 in terms of resolving insolvencies.

8 How to start a business in Mexico

Like any major commercial decision, working out how to start a business in Mexico as a foreigner isn’t something to rush into. While the country’s increasingly stable politics and openness to trade are certainly good news for potential investors, there are still a number of cultural and regulatory hurdles to consider first if your business is to be successful in this market.

The first step to starting a business abroad is knowing which markets are suitable for the products or services you offer. That’s where Market Finder can help. It not only allows your business to quickly identify potential markets overseas, but also has lots of useful features, guides and success stories to help you build your operations and market your business to the right audience. Plus you’ll discover new potential partners that can help make your overseas expansion plans a success. Click here to find out more.