What to think about when setting up shop in Mexico What to think about when setting up shop in Mexico

What to think about when setting up shop in Mexico
05 Jun 2018

Mexico is one of the most competitive countries in the world in terms of foreign investment due to its size, political and macroeconomic stability, domestic market strength and stable inflation. But doing business there can be a time-consuming activity, which is why having a little local knowledge is crucial.

To make itself more attractive to investors, the Mexican government has over the last few years improved the country’s infrastructure and fostered competition in sectors such as transportation, energy and telecommunications. As a result, it is now the 15th largest economy in the world and the 11th biggest in terms of purchasing power. 

One of the biggest changes for Mexico over recent years has been in relation to its trade policies. The country currently has free trade agreements with 46 others and has also become a global manufacturing base, with strong links to consumer economies in both North and South America.

Mexico likewise benefits from a strategic location and is close to the world’s key countries in terms of consumption, which means it can respond quickly to changes in demand.

But there are still many hurdles to overcome when doing business here. Therefore, it makes sense for companies thinking of setting up shop in the country to acquire some local knowledge of its investment environment and legal, accounting and taxation frameworks.

Starting a business

Starting a business in Mexico was once a complex minefield, but thanks to tough government action, it is a much easier process today. Mexico ranks 49th overall in the World Bank’s ‘Doing Business’ evaluation and 90 for ease of starting a business.

But there are several procedures that can be tricky for firms unfamiliar with the environment to navigate. This situation is particularly true in terms of registering with the Mexican Social Security Institute (IMSS). 

Dealing with construction permits

It takes about 76 days to obtain a construction permit, which is much quicker than the Latin American and Caribbean average. The most time-consuming activity is getting water and sewerage connected. Obtaining a single zoning certificate stating specific land use and feasibility can also be a complex task.

Obtaining electricity

According to the World Bank, Mexico ranks 92nd in the world for ease of obtaining electricity,  which underlines the complex nature of the process. It is a task laden with bureaucracy and, before contractors can even start work, firms must complete the required application forms, obtain a certificate and submit to an inspection from the Comisión Federal de Electricidad (CFE). 

Registering property

Registering property in the country is a long and arduous task and can take almost double the average time of most OECD countries (22 days). Obtaining a certificate of good standing from the water service, and a Zoning Certificate relating to the property, can take some time. But dealing with the Public Registry of Property of the Federal District is particularly time-consuming.

Obtaining credit

The fact that Mexico’s financial sector is well developed makes it relatively straightforward to obtain credit, although the process is still quite difficult compared to most developed nations.

Protecting investors

Investor protection is still a contentious issue in Mexico, although the North American Free Trade Agreement (NAFTA), which is currently in the process of being renegotiated, has gone a long way to rectifying some past issues.

Paying tax

Paying tax is a laborious process here, taking some organisations more than 240 business hours per year, even though it is only necessary to make six payments. As a result, according to our Financial Complexity Index - which ranks 94 countries based on their complexity in terms of accounting and tax compliance - Mexico ranked 15th overall, and number one for complexity in ‘bookkeeping’ (84%).

Moreover, the country’s tax legislation is unique in the sense that the basic documentation accepted to support a transaction is an invoice issued by a supplier. Although Mexico is in the process of adopting the IFRS global accounting standards, foreign companies should analyse existing regulatory and reporting differences, particularly if operating across a number of industries.

Trading across borders

There is a substantial cost associated with trading across borders, which is far higher than the average in South America and the Caribbean. The fee for importing is around US$450 per container, while exporting costs US$400. It also takes quite a long time to move containers around - about 12 days on average when either importing or exporting.

Enforcing contracts and resolving insolvency

It takes 350 days to enforce a contract and, because there are 38 procedures involved in doing so, it is a complex task. Resolving insolvency, on the other hand, is somewhat more streamlined and takes a mere 1.8 years compared to 2.9 in the rest of South America and the Caribbean.

Culture

Typically, business meetings start off slowly, and matters of importance such as deal making are generally not discussed until the end. There is a large social divide between executives and the rest of the company, with decisions usually made by a single individual rather than a board of directors.

  Fernando Garrido

Fernando Garrido is managing director of TMF Mexico. He has more than 25 years’ experience in consulting and outsourcing, having worked with businesses in multiple industries. Fernando is an engineer with an MBA who has been responsible for creating world-class multicultural teams and solid commercial strategies.

 

Mexico is one of the most competitive countries in the world in terms of foreign investment due to its size, political and macroeconomic stability, domestic market strength and stable inflation. But doing business there can be a time-consuming activity, which is why having a little local knowledge is crucial.

To make itself more attractive to investors, the Mexican government has over the last few years improved the country’s infrastructure and fostered competition in sectors such as transportation, energy and telecommunications. As a result, it is now the 15th largest economy in the world and the 11th biggest in terms of purchasing power. 

One of the biggest changes for Mexico over recent years has been in relation to its trade policies. The country currently has free trade agreements with 46 others and has also become a global manufacturing base, with strong links to consumer economies in both North and South America.

Mexico likewise benefits from a strategic location and is close to the world’s key countries in terms of consumption, which means it can respond quickly to changes in demand.

But there are still many hurdles to overcome when doing business here. Therefore, it makes sense for companies thinking of setting up shop in the country to acquire some local knowledge of its investment environment and legal, accounting and taxation frameworks.

Starting a business

Starting a business in Mexico was once a complex minefield, but thanks to tough government action, it is a much easier process today. Mexico ranks 49th overall in the World Bank’s ‘Doing Business’ evaluation and 90 for ease of starting a business.

But there are several procedures that can be tricky for firms unfamiliar with the environment to navigate. This situation is particularly true in terms of registering with the Mexican Social Security Institute (IMSS). 

Dealing with construction permits

It takes about 76 days to obtain a construction permit, which is much quicker than the Latin American and Caribbean average. The most time-consuming activity is getting water and sewerage connected. Obtaining a single zoning certificate stating specific land use and feasibility can also be a complex task.

Obtaining electricity

According to the World Bank, Mexico ranks 92nd in the world for ease of obtaining electricity,  which underlines the complex nature of the process. It is a task laden with bureaucracy and, before contractors can even start work, firms must complete the required application forms, obtain a certificate and submit to an inspection from the Comisión Federal de Electricidad (CFE). 

Registering property

Registering property in the country is a long and arduous task and can take almost double the average time of most OECD countries (22 days). Obtaining a certificate of good standing from the water service, and a Zoning Certificate relating to the property, can take some time. But dealing with the Public Registry of Property of the Federal District is particularly time-consuming.

Obtaining credit

The fact that Mexico’s financial sector is well developed makes it relatively straightforward to obtain credit, although the process is still quite difficult compared to most developed nations.

Protecting investors

Investor protection is still a contentious issue in Mexico, although the North American Free Trade Agreement (NAFTA), which is currently in the process of being renegotiated, has gone a long way to rectifying some past issues.

Paying tax

Paying tax is a laborious process here, taking some organisations more than 240 business hours per year, even though it is only necessary to make six payments. As a result, according to our Financial Complexity Index - which ranks 94 countries based on their complexity in terms of accounting and tax compliance - Mexico ranked 15th overall, and number one for complexity in ‘bookkeeping’ (84%).

Moreover, the country’s tax legislation is unique in the sense that the basic documentation accepted to support a transaction is an invoice issued by a supplier. Although Mexico is in the process of adopting the IFRS global accounting standards, foreign companies should analyse existing regulatory and reporting differences, particularly if operating across a number of industries.

Trading across borders

There is a substantial cost associated with trading across borders, which is far higher than the average in South America and the Caribbean. The fee for importing is around US$450 per container, while exporting costs US$400. It also takes quite a long time to move containers around - about 12 days on average when either importing or exporting.

Enforcing contracts and resolving insolvency

It takes 350 days to enforce a contract and, because there are 38 procedures involved in doing so, it is a complex task. Resolving insolvency, on the other hand, is somewhat more streamlined and takes a mere 1.8 years compared to 2.9 in the rest of South America and the Caribbean.

Culture

Typically, business meetings start off slowly, and matters of importance such as deal making are generally not discussed until the end. There is a large social divide between executives and the rest of the company, with decisions usually made by a single individual rather than a board of directors.

  Fernando Garrido

Fernando Garrido is managing director of TMF Mexico. He has more than 25 years’ experience in consulting and outsourcing, having worked with businesses in multiple industries. Fernando is an engineer with an MBA who has been responsible for creating world-class multicultural teams and solid commercial strategies.