American businesses in Mexico have recently been a major topic of political rhetoric. For investors and business owners, there are more practical questions to ask. There are pros and cons of doing business in Mexico, but they are not as simple as a “made in the USA” or “hecho en Mexico” sticker suggests.
What Are the Advantages of Doing Business in Mexico?
- Reduced costs. The immediate advantage of manufacturing in Mexico is reduced costs. Labor costs are dramatically cheaper than they are north of the border. Even for industries that rely heavily on Mexican migrant labor, it is usually cheaper to hire labor in Mexico itself.
- Skilled workforce. Much of the immigrant Mexican labor force in the United States is unskilled. This hides a fact that many businesses have taken advantage of. Inside Mexico, there are large numbers of highly skilled workers, especially in the STEM fields. Moreover, within Mexico, the uncertain legal status of workers is not an issue.
- Potential savings. There are also considerable potential savings in other inputs. Mexico is a more business-friendly environment in terms of environmental and safety regulations. Permitting requirements are much cheaper.
What Are the Disadvantages of Doing Business in Mexico?
- Criminality. Mexico is plagued by violence from drug traffickers and other paramilitary criminal operations. In some regions, such as Chihuahua or Sinaloa, the ensuing violence has reached failed-state levels. This is not simply a matter of hiring private security for a plant: unrelated attacks can easily affect flows of goods. Note that this is a regionalized issue: many parts of Mexico are quite safe.
- Corruption. Other disadvantages of manufacturing in Mexico include translation costs and corruption. Foreign businesses are routine targets of “la mordida” from the police, civil servants, organized crime, or other sectors. These are the pros and cons of doing business in Mexico: what you save on permits, you might spend on bribes.
- Political uncertainty. Finally, there is the current political environment in the United States. Businesses manufacturing in Mexico face considerable uncertainties in terms of taxes and tariffs. The legal implications of moving business to Mexico are, at the moment, hard to foresee. This is a high-risk situation, and investors need to weigh the pros and cons of doing business in Mexico in light of current US politics.
What Are the Ethics of Locating Your Business in Mexico?
International business, despite its troubled reputation, has been one of the greatest forces for peace, freedom and prosperity in history. Mexico is full of people who are willing to work hard for an economic opportunity.
Yet these ethical claims need to be grounded in reality. Parts of Mexico are effectively war zones. Some maquiladoras are notorious for placing restrictions on their worker’s personal liberty. Many pay relatively low wages, even by Mexican standards. Not every business model actually promotes peace, freedom, and prosperity.
Savvy owners and investors need to consider what risks the company could face in entering the market in Mexico. You can make a fortune on the frontier, but it is definitely a frontier.