MEXICO: THE FOREIGN INVESTMENT ISSUE
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Document Number (FOIA) /ESDN (CREST):
CIA-RDP87T01127R001000840003-2
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RIPPUB
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S
Document Page Count:
46
Document Creation Date:
December 22, 2016
Document Release Date:
March 14, 2011
Sequence Number:
3
Case Number:
Publication Date:
September 1, 1986
Content Type:
REPORT
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?Secret?
Directorate of
Intelligence
Mexico:
The Foreign Investment Issue
A Remora Pow
GI 86-10062
September 1986
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Directorate of
Intelligence
Mexico:
The Foreign Investment Issue
Reverse Blank
A Research Paper
This paper was prepared by the
Office of Global Issues. Comments and queries are
welcome and may be directed to the Chief,
Development Issues Branch, OGI)
Secret
GI 86-10062
September 1986
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Summary
Information available
as ctf I August 1986
was used in this report.
Mexico:
The Foreign Investment Issue
Mexico's longstanding aversion to foreign investment, in our judgment, is a
major constraint on much-needed structural economic reform. President
Miguel de la Madrid Hurtado has tried to be more receptive to foreign in-
vestment than his recent predecessors, but he has been unable to overcome
several major barriers:
? Philosophical Biases. Many Mexicans believe foreign investment de-
pletes nonrenewable resources and impinges on national sovereignty. As a
result, initiatives that might attract more foreign investment are blocked
by those?the established business community, government bureaucrats,
labor leaders and leftist ideologues?who believe foreign investment is
damaging to their interests.
? Restrictive Legal Framework. Foreign direct investment in Mexico is
regulated by a comprehensive body of law, established during the 1970s,
that discriminates against foreign investors by restricting equity positions
and limiting protection of intellectual property.
? Institutional Obstacles. Once an investment proposal is approved, busi-
nessmen are confronted with numerous institutional impediments includ-
ing subsidized government enterprises, a dearth of local credit, discour-
aging price controls, discriminatory incentives, accelerated taxation,
import restrictions, and frustrating labor legislation.
The Mexican investment climate has, in addition, deteriorated under de la
Madrid. Two decrees, for example, implemented by the present adminis-
tration have expanded regulatory requirements in the automotive and
pharmaceutical sectors where foreign investment is highly concentrated.
Moreover, the deterioration of Mexico's economy has further deterred
potential investors and structural reform.
Despite Mexico City's rhetoric to the contrary, foreign investors have long
been discouraged by the unfriendly environment. Our estimates indicate
that net foreign direct investment in Mexico averaged only 2.2 percent of
gross fixed investment over the last decade and never accounted for more
than 5 percent of the total. The Mexicans, instead, have shown a strong
preference for borrowing, which was about 12 times greater than net
foreign investment in the period 1976-85.
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GI 86-10062
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Access to foreign credit from commercial banks has given the Mexican
Government little incentive to make the reforms necessary to attract
foreign investment. Should Mexico City take sufficient steps, foreign direct
investment could make an important contribution in Mexico's long term
economic development. In our view, the major contribution would not be fi-
nancial, however, as even a doubling of last year's direct investment inflow
would represent only a small fraction of the foreign borrowing expected
this year. Instead, we believe the principal benefits of increased foreign
investment arise from transfers of technology and the management
practices introduced. Furthermore, Mexican enterprises would be able to
form valuable customer and supplier links to foreign firms through their
subsidiaries in Mexico.
In order for Mexico to attract increased foreign direct investment, we
believe Mexico City must first dismantle many barriers. At the margin,
even small changes, like continuing to reduce the amount of redtape faced
by potential foreign investors, would help. A major improvement in
Mexico's foreign investment climate, however, will require structural
reforms. Although domestic opposition would be strong, Mexico City could
encourage foreign investors by phasing out price controls; liquidating
nonstrategic, state-owned enterprises; improving intellectual property pro-
tection; and liberalizing restrictions on majority foreign ownership.
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Contents
Page
Summary
111
Mexico's Philosophy Toward Foreign Investment
1
Framework of Control
1
Present Attitudes
2
Flexible Interpretation of the 1973 Law
2
De la Madrid Decrees Sectoral Regulations
3
The Personal Computer Decree
3
The Automotive Decree
3
The Pharmaceutical Decree
4
Institutionalized Stumblingblocks
4
The Pervasive State
5
The Credit Crisis
5
Discouraging Price Controls
6
Discriminatory Incentives
7
Accelerated Taxation
7
Restricted Imports
8
Frustrating Labor Legislation
8
Ways To Gain Majority Control
9
The Maquiladora Program
9
Buying Out Mexican Partners
9
Section 511 Swaps
12
Impact on Foreign Investment
12
Majority Ownership
13
The Investor Countries
13
Industrial Composition
14
Geographical Dispersion
16
Prospects for Change
16
Appendixes
A. The 1973 Foreign Investment Law
19
B. The Transfer of Technology Law
21
C. The Law on Inventions and Trademarks
23
D. Potential for 100-Percent Ownership
25
E. Products Subject to Price Controls
27
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Mexico:
The Foreign Investment Issue
Mexico's Philosophy Toward Foreign Investment
The Mexican Government remains reluctant to grant
concessions to foreign investors. According to official
reports, this aversion is the outgrowth of what Mexico
City views as centuries of unequitable relations with
foreign states and investors. In particular, many
Mexicans believe that foreign investment has histori-
cally resulted in the exploitation and exportation of
nonrenewable resources and the excessive outflow of
profit, with inadequate compensation through tech-
nology transfer and training for Mexicans. Further-
more, many Mexican businessmen believe profits are
higher in an economy isolated from foreign competi-
tion. These attitudes have led Mexico City to imple-
ment restrictions and policies that discourage foreign
investors.
Framework of Control. During the 1970s, a compre-
hensive body of law was implemented that established
the ground rules for foreign investment in Mexico.
Three laws initially enacted under the Echeverria
administration remain at the heart of the Mexican
system for regulating and controlling direct foreign
investment:
? The 1973 Foreign Investment Law aimed to codify
previously existing laws, policies, and regulations
governing foreign investment. It requires that all
foreign investment in Mexico be registered. It estab-
lished the Foreign Investment Commission (FIC) to
approve or disapprove contracts regarding the trans-
fer of technology (for example, royalties, patents,
trademarks, and know-how). The FIC rules on all
plans for expansion, relocation, or new product lines
by existing firms. This law reserves certain activities
exclusively for Mexicans (appendix A gives addi-
tional details).
? The Trander Qt. Technology Law imposes standards
and prior registration requirements for patents,
trademarks, technology, and managerial services. It
created the National Registry for the Transfer of
Technology, which carefully scrutinizes contracts
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based on a number of criteria, including costs and
local availability of technology. This law seeks to
reduce Mexico's dependence on foreign technology
and provide state support to Mexican purchasers in
negotiations with foreign companies (appendix B
gives additional details).
? The Law on Inventions and Trademarks may
undergo revision. A decree has been proposed that
could marginally improve intellectual property
rights, although the current proposal still prohibits
certain products such as pharmaceuticals, pesti-
cides, and herbicides from being patented in Mexi-
co. Neither product nor process are recognized as
patentable in the case of pharmaceuticals. Patents
are good for 10 years and are not renewable. If a
patent is not exploited in the first three years, the
government can reassign its rights to another com-
pany. A certificate of invention can be obtained in
some cases where a patent is refused. A certificate
has the same rights as a patent except for exclusive
exploitation. The law also requires that all products
fabricated in Mexico be labeled with a distinctive
Mexican trademark, which must be at least equally
linked when used in conjunction with a foreign
trademark. This last provision produced so much
controversy that it has yet to be implemented
(appendix C gives additional details).
While the Technology Transfer Law and the Law on
Inventions and Trademarks have deterred foreign
investors by limiting intellectual property rights, the
most restrictive of the three laws is the one that
established the FIC in 1973. The FIC is composed of
seven Cabinet-level secretaries who screen all applica-
tions for potential investment in line with 17 criteria
contained in Article 13 of the law. These criteria
attempt to ensure that the proposed investment will:
not displace national companies that are operating
satisfactorily or be directed into areas adequately
covered by national companies; have a positive effect
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on the balance of payments, particularly by expanding
exports; increase local employment opportunities; in-
corporate local inputs into its products; and offer
technological assistance to the country.
Technically, permission for foreign investment is to be
issued by the Cabinet-level agency that would have
jurisdiction over the company applying. In practice,
decisions are left to the FIC, which analyzes proposals
on a case-by-case basis, according to official reports.
Prior to the FIC's establishment under the 1973 law,
foreign investors were free to begin their negotiations
at 100-percent ownership; subsequently, investors
have usually started from a 49-percent equity posi-
tion. In addition, acquisition of more than 25 percent
of capital or 49 percent of fixed assets in an existing
Mexican company requires written FIC authorization
under the law.
Present Attitudes. Mexico under President Miguel de
la Madrid has attempted to be more receptive to
foreign investment than have recent administrations,
but the US Embassy reports de la Madrid believes he
cannot change the rules for foreign investment and
that, if he tried, his administration would become
"illegitimate."
de la Madrid and other prominent Mexicans who
generally favor foreign investment, such as former
Finance Minister Silva Herzog and Bank of Mexico
Director Mancera, are from Mexico's technical elite
and not well established within the party structure.
These bureaucrats have held few elected positions
and, as a result, have had fewer opportunities to
become ingrained in the Institutional Revolutionary
Party's (PRI) patronage system.
The PRI dominates Mexican political life, and the
party line toward foreign investment is much harsher
than de la Madrid's. The party line was expressed at
the party's 12th national assembly in 1984 by PRI
President Adolfo Lugo Verduzco, who stated that
foreign investment, far from strengthening the econo-
my, constitutes a permanent drain on foreign ex-
change. Furthermore, Lugo said that other nations
intervene in the Mexican economy through direct
foreign investment, and therefore, one of the PRI's
main economic objectives is to fight for its regulation
and restriction
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The financial crisis has intensified these divisions in
Mexican attitudes toward foreign investment, espe-
cially since credit is increasingly difficult to obtain.
Press reports indicate that a relatively small group of
progressive bureaucrats and businessmen are working
toward opening the economy by underscoring the need
for inflows of foreign capital and technology to restart
the economy. At the same time, the status quo has
broad popular support.
resistance to foreign investment comes from
highly protected industrialists who do not want to
compete with multinational corporations (MNCs),
from labor leaders who prefer to negotiate with
Mexican businessmen, and from the political left,
which blames foreign capital for many of Mexico's
social problems.
Flexible Interpretation of the 1973 Law. De la Ma-
drid's administration has taken a number of actions in
an attempt to attract more foreign investment. In
February 1984, the FIC published a press release
citing selected high-priority industries with the possi-
bility of 100-percent foreign ownership (appendix D
lists these industries). In August 1984, the govern-
ment published another set of changes designed to
speed up the processing of foreign investment applica-
tions and to remove some of the administrative re-
quirements placed on foreign investors. The Under
Secretary for Foreign Investment, Adolfo Hegewisch,
is generally credited with having pushed through
these new guidelines. The government claims the
guidelines represent a concrete example of how it
plans to flexibly apply existing restrictions on foreign
investment.
/according to the US Embassy, Secre-
tary of Commerce and Industrial Development, Hec-
tor Hernandez, told representatives from nine Mexi-
can political parties in March 1986 that Mexico will
not modify its existing laws on foreign investment and
will not indiscriminately accept foreign investment.
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De la Madrid Decrees Sectorial Regulations
Moves to liberally interpret the 1973 law run counter
to the tight controls that the de la Madrid administra-
tion has placed on foreign investment in key indus-
tries. It introduced an automotive decree in Septem-
ber 1983 and a pharmaceutical decree in February
1984, which greatly increase government regulation
over sectors where foreign investment has been highly
concentrated. The Under Secretary for Industrial
Planning, de Maria y Campos, is generally credited
with having pushed the automotive and pharmaceuti-
cal decrees through the bureaucracy. The two decrees
are similar to the personal computer decree imple-
mented under the Lopez Portillo administration in
1981
The Personal Computer Decree. This decree limits
foreign ownership in personal computer firms to 49
percent. The decree requires that the use of locally
made parts increase from at least 35 to 50 percent in
the first four years of operation. Manufacturers must
export 25 percent of the total value of imports in the
first year of operation and 70 percent of imports in the
fourth year. A minimum expenditure is required for
personal computer research and development in Mexi-
co. The decree requires that a price ceiling be set not
higher than 50 percent above the US price for
comparable equipment produced in Mexico.
About 30 companies are approved to assemble person-
al computers in Mexico. Most are small and extreme-
ly undercapitalized Mexican operations with few em-
ployees, using what press reports call screwdriver
technology merely to assemble imported components.
In 1984, Apple Computer Inc. and Hewlett-Packard
entered the Mexican market in compliance with the
decree. According to press reports, the Mexican Gov-
ernment had offered Apple 100-percent ownership,
but Apple declined. With a joint venture, Apple
sought to share risks and gain an edge in selling to
state-run companies because Mexico gives preference
to domestic companies over wholly owned foreign
subsidiaries.
Despite protests from existing Mexican producers,
including Apple de Mexico and Hewlett-Packard, the
FIC announced in July 1985 that it had approved a
revised proposal by International Business Machines
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(IBM) for a wholly foreign-owned personal computer
plant in the El Salto industrial zone near Guadalaja-
ra. IBM claimed special treatment was justified be-
cause of the scale of its proposed manufacturing plant
and its projected export earnings. The FIC disagreed
until IBM presented some dramatic concessions in its
revised proposal, including:
? An increase in capital investment from less than $7
million to more than $90 million over the next five
years.
? A change in estimated local content from a maxi-
mum of 50 percent to 70 percent within three years.
? A promise that the technology gap between what is
produced in Mexico and abroad by IBM would be
no more than six months.
? A concession that the price differential for the
Mexican products would be no more than 15 per-
cent above comparable US goods.
The Automotive Decree. This was designed to improve
the efficiency of the industry, promote research and
development, generate employment, standardize com-
ponents, and help strengthen Mexico's balance of
payments. The decree reduced the number of car lines
and models each assembler can produce; however,
additional car lines can be earned through the export
of components and vehicles. The average local-content
requirement for each assembler increases to 60 per-
cent for cars and 70 percent for light trucks by the
1987 model year. Even higher levels of domestic
content are required for other classes of motor vehi-
cles. Assemblers must balance foreign exchange
transactions on a model year basis, and no more than
20 percent of foreign exchange earnings may be
generated by in-bond industries. The decree reserves
the medium-sized truck market for majority-
Mexican-owned companies and provides for the con-
tinuance of price controls.
This last provision has effectively frozen Chrysler
Corporation?Mexico's largest medium-sized truck
producer?out of the domestic market. Although
Chrysler attempted to comply with the decree by
linking up with a Mexican partner, the government
rejected the proposed joint venture. According to
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press accounts, Chrysler's proposal was received after
the Mexican Government had approved joint ventures
involving General Motors (GM) and Daimler-Benz.
Government planners announced that two truck
builders were preferable to three because fewer firms
would allow the industry to achieve greater economies
of scale.
In a related example, US Embassy reporting indicates
Ford Motor Company was so upset by certain sections
of the automotive decree that it threatened to post-
pone indefinitely construction of its new $500 million
assembly plant in Hermosillo unless the government
revised them. Since the Hermosillo project is the
largest foreign investment announced since de la
Madrid took office, a postponement would have been
a real blow to Mexico's already fragile investment
climate. While the FIC gave Ford's plan preliminary
approval in 1984, company officers claim that they
were not granted 100-percent ownership because of
any flexibility in the 1973 Law's application. Ford
officials stated the plant simply would not have been
built if the Mexican Government had limited their
ownership rights to 49 percent.
The Pharmaceutical Decree. This was announced in
February 1984 but was not effective until April 1985,
when amended regulations were published. The de-
cree seeks to increase the participation of Mexican-
owned firms in this sector and to conserve foreign
exchange by reducing Mexico's dependence on im-
ported pharmaceuticals. The decree institutes require-
ments for local content, export performance, and
domestic research and development. In addition, the
regulations require retail generic sales, uniform label-
ing and packaging, import substitution of active ingre-
dients, and price equalization of equivalent drugs. It
also calls for an expanded role of the government in
the licensing, production planning, sourcing, pricing,
and marketing of retail drugs.
The decree was given a hostile reception from 16 drug
companies that sought injunctions against the decree
in Mexican courts. Eventually, a subsidiary of Up-
john?a US-based multinational corporation?won a
ruling in the courts that declared the decree unconsti-
tutional. Other US-based pharmaceutical manufac-
turers enlisted the backing of the US Government,
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which linked the issue to the signing of a bilateral
trade agreement benefiting Mexican exporters. Under
this combined assault, Mexico decided to soften the
impact of these strictures. The April 1985 version of
the decree guarantees that firms developing new
medicines will retain exclusive marketing and produc-
tion rights and that newly developed products will be
exempt from generic labeling requirements for 10
years as opposed to three years as originally stipulat-
ed. Secretary Hernandez insisted that the revisions in
no way affected the essence of the original decree.
All three decrees focus on areas where foreign inves-
tors are major players. In the computer arena, IBM
will immediately dominate the field with projected
output 10 times greater than its nearest competitor.
Mexico's five largest automotive producers?GM,
Chrysler, Ford, Volkswagen, and Nissan?are all
foreign owned. While only 75 of the approximately
310 pharmaceutical laboratories in Mexico are for-
eign owned, they account for an estimated 75 percent
of pharmaceutical sales in Mexico.
Reports have been circulating for some time that the
Mexican Government is preparing new sectoral de-
crees for the electronics and food-processing industry.
If implemented, these decrees almost certainly would
impinge on the operations of large foreign investments
made by General Electric, Westinghouse, Interna-
tional Telephone & Telegraph, and Ericsson in the
electronics industry, and on Nestle, General Foods,
Anderson Clayton, and Carnation in the food-
processing industry.
Institutionalized Stumblingblocks
Beyond the laws and decrees that specifically dis-
criminate against foreign investors, several other ma-
jor impediments affect all private-sector investment.
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These include subsidized government enterprises, the
credit crisis, price controls, discriminatory incentives,
accelerated taxation, import restrictions, and frustrat-
ing labor legislation.
The Pervasive State. A major problem facing poten-
tial foreign investors is the presence of state-supported
competition in almost every industry. According to
the Secretariat for Budget and Planning, the state's
share of GDP was about 25 percent in 1983. The
public's share of accumulated gross fixed investment,
however, has been estimated to be over 50 percent in
some press reports.
According to US Embassy reporting, the Mexican
Government owned 820 companies at the end of 1985.
The state has virtual or absolute monopolies in bank-
ing, petroleum and other hydrocarbons, basic petro-
chemicals, radioactive materials and nuclear energy,
electricity, certain mining areas, railroads, and tele-
graph and wireless communications. The state also
operates companies that produce a wide array of
products, including food, steel, machinery, automo-
biles, chemicals, appliances, railroad cars, and ciga-
rette tobacco. The number of state-owned firms has
grown substantially in recent years because
Nafinsa?a government-owned development bank?
or other government organizations have taken over
ailing private companies to save jobs.
Competition from state-owned enterprises can be
intense and often unfair because of heavy subsidies.
For example, the 10 largest state-owned companies,
excluding Pemex, received 51 percent of their total
revenues from federal transfers and external borrow-
ing in 1985, according to US Embassy reports. The
Embassy further indicated that Mexico planned to
transfer 13 percent of the total proposed budget to
state-owned companies in 1986.
Although the Mexican Government announced anoth-
er program to reduce the number of state-owned
enterprises in June 1986, several factors diminish
the likelihood of its success. According to US Embas-
sy reporting, the companies provide government offi-
cials with opportunities to siphon off money, to pro-
vide sinecures for friends and cronies, and to gain
5
patronage through public employment, which is esti-
mated to be 750,000. Press reports indicate many
state-owned companies are industrial derelicts that
would be unattractive to private investors, even if the
government were making a serious attempt to sell
them. In May 1986, Mexico City announced the
closing of a large state-run steel mill in Monterrey,
which was estimated directly and indirectly to have
resulted in the loss of 30,000 jobs. Some Mexicans
assessed the closure as a token act for the benefit of
Mexico's international creditors, and others believe
the increase in unemployment resulting from addi-
tional closures is politically unacceptable, according
to US Embassy reporting.
The Credit Crisis. The growing difficulty in obtaining
local financing has further deterred potential inves-
tors. To finance current deficits and, more important,
to service existing debt, the government has increas-
ingly monopolized credit. Because banks are national-
ized, the government can easily restrict private-sector
access to credit by changing the loan portfolio re-
quirements of the banks.
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Defusing Mexico's Debt Crisis With
Foreign Investment
Billion 1985 US
L
Net external borrowing ME Net foreign investment
30
25
20
15
10
_ . 11 ? L. FL.
0 197^ 5^ 76 77 78 79 80 81 82 83 84 85
We believe foreign direct investment is largely com-
plementary to bank lending and should not be seen as
a substitute for it. In our opinion, the decline in
foreign direct investment is, in many ways, related to
Mexico's debt servicing problems. For example, the
Mexican Government has implemented price con-
trols, restricted imports, accelerated taxation, and
monopolized access to domestic credit in response to
its current debt problems. All of these measures have
also acted to discourage potential foreign investors.
Our analysis indicates a significant rise in foreign
investment requires that there first be an improve-
ment in the debt situation and in growth prospects for
Mexico. Although we believe a substantial increase in
foreign investment would contribute to Mexico's
structural adjustment, development, and capacity to
repay debt over the long run, it seems equally clear
that foreign direct investment itself cannot solve the
debt crisis. Even if Mexico were now able to attract
as much foreign investment as it did in 1982?its
peak year?the inflow would represent less than
25 percent of the outflow in interest due on the
external debt in 1986.
310319 9-86
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Exacerbating an already difficult credit situation was
the announcement in March 1986 by Pemex and
several other state-owned industries of a temporary
suspension in payments to their suppliers. Pemex is
the largest consumer of goods and services in Mexico,
and its decision to delay payments is expected to
impact over 3,500 companies. There is speculation
that many small- and medium-sized companies might
be forced into bankruptcy.
Additional credit problems stem from recent changes
in Mexican banking regulations reducing the amount
of foreign exchange individual banks are allowed to
retain, which is aggravating the difficulties of con-
ducting international business transactions. Many
MNCs are reluctant to increase their foreign ex-
change exposure by borrowing outside Mexico. Press
reports state most managers believe that, by sticking
to local borrowing and paying dollar liabilities as soon
as possible, they are doing about as much as they can
to limit foreign exchange losses if there is an accelera-
tion in the peso's rate of devaluation.
Discouraging Price Controls. Price controls have
undermined market forces and limited profitable in-
vestment opportunities on a broad range of goods. A
presidential decree in December 1982 revamped the
price control system and institutionalized the three-
tiered price control regime in use today. The levels are
as follows: products for which prices are frozen,
products for which companies may petition for price
hikes, and products subject to price registration
(appendix E gives a detailed breakdown of each
group). The Secretariat of Commerce and Industrial
Development (Secofi) takes a tough stance against
violators. Some 6,000 wholesale and retail outlets
were temporarily closed in 1984; fines totaling 1.1
billion pesos were levied; and, for the first time,
wholesalers who intentionally kept basic foodstuffs
from the market were imprisoned.
Producers reached an agreement with the Secofi in
early January 1986 that will permit goods formerly
requiring petitioned increases to rise by 80 percent of
the previous month's inflation rate, according to US
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Embassy reporting. Any increase above the 80-
percent level will require a justification and an exami-
nation of the company's accounts. Press reports, how-
ever, indicate that firms operating in socially sensitive
areas, such as basic foods and pharmaceuticals, will
continue to be hard hit by rigid price controls.
Price controls discourage production and investment
in almost every industry. In the automobile industry,
GM reports that its suppliers are allowed to raise
prices at the inflation rate, whereas the government
restricts GM's increases to less than the inflation rate.
In the food processing industry, the US Embassy
reports that in response to price controls?the con-
trolled price for a liter of milk was 28 cents while the
free market price was 74 cents at the end of 1985?
milk producers in the State of Jalisco have ceased
production and have begun to sell their livestock for
meat. A spokesman for the pharmaceutical industry
claims that from December 1984 to December 1985
the government authorized a 44- to 52-percent price
rise, yet operating costs jumped 82 percent. In many
cases, companies suspended production of unprofit-
able items until price relief was granted.
Discriminatory Incentives. Where special incentives
put foreign-owned operations at a competitive disad-
vantage with Mexican firms, they discourage foreign
investment. While a few majority-foreign-owned
firms have been able to negotiate for some incentives,
special incentives are generally reserved for majority-
Mexican-owned companies. The government offers a
broad range of generous incentives that include tax
credits, preferential financing, and import duty ex-
emptions.
The Mexican Government granted about $143 million
worth of tax credits (Ceprofi) to Mexican firms in
1984. The value of Ceprofi ranges from 10 to 30
percent of federal corporate taxes, depending on the
location of the investment, the type of industry, the
number of jobs created, the purchase of equipment
and machinery made in Mexico, and the size of the
company?with small companies being favored.
Ceprofi are valid for five years and may be used for
payment of most federal taxes.
7
Secret
The government also offers qualified Mexican compa-
nies reduced income tax rates in mining, agriculture,
fishing, construction, and book publishing. State-
owned banks provide funds to:
? Companies in priority development areas and indus-
tries to capitalize small- and medium-sized compa-
nies by purchasing shares of stock.
? Subsidize loans for export and preexport.
? Subsidize Mexican manufacturers whose products
replace imports.
? Export industries at subsidized interest rates for
equipment purchases.
Companies establishing or expanding operations in
certain priority zones of the country can qualify for
subsidized petroleum products, natural gas, or elec-
tricity.
Accelerated Taxation. Much to the dismay of poten-
tial investors, the Mexican Government is seeking to
generate more revenue to finance its debts by increas-
ing the taxes paid by private business. President de la
Madrid's administration proposed a new tax package
in April 1986 that would mean greatly accelerated tax
payments, selective rate hikes, and elimination of
some incentives. In particular:
? Advance income tax payments would occur monthly
instead of every four months, which is an important
change in a high-inflation economy.
? The deadline for paying value-added taxes would be
moved up from the 20th to the 10th of the month
following a transaction, penalizing those who sell on
credit, since the tax is charged from the time of
billing.
? The schedules for other tax payments would be
stepped up as well.
? The maximum fine for late tax payment would
increase from 300 to 500 percent of the total
amount due.
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? Benefits derived from tax credits would be added to
taxable income, cutting the value of the credit by
more than half and increasing obligatory profit-
sharing contributions paid by employers.
? Mandatory social security taxes paid by companies
would be raised from 9.4 to 11 percent, while
contributions paid by the government would be
reduced by the same spread.
The proposed bill would also repeal Article 8 of the
Mexican Foreign Trade Bank's regulations?allowing
5-percent import financing for capital goods?in an
effort to stimulate greater local production.
The tax laws already have been changed once this
year. Changes enacted in January severely restrict the
opportunities of small businesses that had been re-
ferred to as minor taxpayers. Another part of this
revision increases tax revenues by requiring businesses
to adjust all income to show the effects of inflation
and exchange rates.
these
changes have caused large numbers of former taxpay-
ers to take the risk of dropping off the taxpaying rolls.
Tax specialists estimate that 70 percent of the taxpay-
ing population evades taxes to some degree.
income tax payments, both
corporate and personal, make up about one-fourth of
total government income, and 90 percent of the
income tax contributions are paid by 10 percent of the
contributors, primarily MNCs.
Restricted Imports. Import barriers force many Mexi-
can producers to use overpriced and low-quality do-
mestic inputs. This discourages foreign investments
that require low-cost inputs to compete in the interna-
tional marketplace. A major tenet of Mexico's eco-
nomic strategy has been import substitution, and, as a
result, Mexico has instituted high tariffs. In many
cases, Mexico calculates tariff duties based on "offi-
cial value" rather than customs value. According to
the US Embassy, the "official value" is not related to
the product's actual value; rather it reflects the
Mexican Government's determination of what consti-
tutes a fair value and appropriate production cost.
Secret
In July 1985 the Mexican Government began liberal-
izing its import regime, removing most licensing
requirements, and reducing tariffs on a wide array of
products. Despite this liberalization, Mexico contin-
ues to control about 900 items through permit re-
quirements, and very high tariffs generally have
replaced the import permits on other goods. Where
import licensing remains, applications are reviewed on
a case-by-case basis and permits are not granted if
acceptable substitutes are manufactured locally or if
the reviewing officials do not deem the import accept-
able. Furthermore, Mexican officials have suggested
that import restrictions in the agricultural and certain
industrial sectors?steel, automotive, petrochemical?
might need to be retained permanently.
Recent measures to liberalize import restrictions have
been undertaken by Mexico largely to accelerate its
admission as a contracting member to the GATT,
which was effective in August 1986.
one of Mexico's main objec-
tives in joining the GATT is to gain most-favored-
nation (MFN) trading concessions from the other
participant nations. While many Mexican exporters
will immediately benefit from MFN status, Mexico
City will have until 1994 to reach full compliance
with GATT regulations. Because most companies
entered Mexico under a protectionist system focused
on developing domestic industries without regard to
international competitiveness, we expect Mexican and
foreign-owned companies will petition the Mexican
Government to delay implementation throughout the
eight-year transition period.
Frustrating Labor Legislation. In our judgment,
Mexican labor laws also discourage foreign investors.
Large severance benefits have saddled many firms
with incompetent and superfluous workers, making
foreign investment in Mexico less profitable. The
Federal Labor Act of 1970 stipulates that, unless they
are dismissed for incompetence or other justifiable
causes, laid-off employees are entitled to three
months' pay and 20 days' additional pay for each year
of service. Workers employed over 12 years are
eligible for even greater compensation. If an employee
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decides to appeal a dismissal, the employee must be
paid from the last day of work until the Mexican
courts reach a final decision.
The Labor Act establishes several other onerous
regulations, which annoy private-sector investors. The
Act generally requires that 90 percent of a firm's
skilled and unskilled workers be Mexican nationals,
that companies with more than 100 employees main-
tain a fully equipped infirmary, and that firms with
more than 300 employees establish hospital facilities.
Although Mexican labor costs are low by internation-
al standards, additional payments cut into profit
margins:
? Employers are obliged to pay their employees 125
percent of normal pay during vacation periods.
? A Christmas bonus of 15 days' pay is also obligatory
and must be paid before 20 December.
? Companies must also contribute to employee profit
sharing, the social security system, and the national
workers' housing institute.
Despite these considerations, most firms still find
Mexican labor plentiful and relatively cheap. The
serious shortage of skilled labor and management
personnel is of greater concern to most companies
than is the approximately 60-percent increase in base
payrolls caused by fringe benefits. Employee absen-
teeism and turnover are also serious problems, which
disrupt production and raise training costs.
Ways To Gain Majority Control
Although a combination of foreign investment laws,
sectoral decrees, and institutionalized stumbling-
blocks create a foreign investment climate that is less
than hospitable, some intrepid investors continue to
submit new proposals for Mexican operations. Few
proposals gain immediate approval from the FIC for
both 100-percent foreign ownership and access to the
domestic market. Foreign businessmen, however, who
are determined to maintain control over their invest-
ments are finding ways. Beyond conventional approv-
al by the FIC, three other methods for obtaining
majority ownership are becoming increasingly com-
mon: investing in maquiladoras, buying out Mexican
partners, and Section 511 swaps.
9
The Maquiladora Program. Maquiladoras?also
known as in-bond plants?represent 51 of the 70 cases
where foreigners gained majority ownership in 1984.
The government created the maquiladora program in
1966 to boost employment along the US-Mexican
border, but the program did not become popular until
the 1980s. Enthusiasm for the maquiladora program
stems from internationally competitive labor costs,
which are primarily the result of the peso's dramatic
devaluation. According to press reports, direct labor
savings per employee in the maquiladoras total
$15,000 to $20,000 annually over US labor, and, as a
result, 52 percent of the total value added in maquila-
doras is directly attributable to labor.
Besides relatively low-cost Mexican labor, a number
of special exemptions are given to maquiladora
investors:
? Maquiladoras are not required to have 51-percent
Mexican ownership as stipulated in the 1973 Law.
? Capital equipment, components, and raw materials
for the operation are allowed duty-free entrance.
? Foreign management and technical personnel may
be issued unlimited business visas.
Most maquiladoras utilize the US tariff schedule,
which stipulates in items 806.3 and 807 that US-
made components assembled abroad will be subject to
US duty only on the value added, upon reentry.
Maquiladoras are typically required to export all of
their output. According to press reports, less than 4
percent of all maquiladoras have won government
permission to sell some of their product in the domes-
tic market. As Mexican corporations, maquiladoras
are also subject to all corporate taxes and labor laws.
Although the value-added tax applies, it is paid at a
lower rate and is refundable. Detailed operation re-
ports must be submitted to the Bank of Mexico each
month. A deposit equal to one month's operating
expenses must be placed with a Mexican bank. Ma-
quiladoras must also post bonds equal to 40 percent
of the value of components and raw materials and 60
percent of capital equipment.
Buying Out Mexican Partners. Although the export-
oriented maquiladoras represent the bulk of new
majority-foreign-owned companies, some foreigners
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Table 1
Selected LDC Debtors: Summary of Foreign Investment Regulations
Country a
Entry
Ownership
Remittances
Argentina (2.1)
Prior approval by the National Ex-
ecutive is required for, inter alia,
investments in most public utilities,
communications, energy, and in fi-
nancial and insurance institutions;
as well as for all investments ex-
ceeding $20 million.
Prior approval by the National Ex-
ecutive is required for investments
that involve changing the national
ownership structure of a local firm
with net assets exceeding $10 mil-
lion. No prior approval is required
for new investments that do not
exceed 30 percent of the registered
capital of the receiving firm.
Annual aftertax profits on registered
foreign capital are subject to an addi-
tional, progressive tax when they ex-
ceed 12 percent of registered capital.
In times of severe foreign exchange
constraints, profit transfers can be sus-
pended and foreign investors will re-
ceive the equivalent sum in external
public debt securities.
Registered foreign investments may be
repatriated after three years, unlesss a
longer period was fixed when the in-
vestment was approved.
Brazil (2.3)
Foreign investment in certain sec-
tors (for example, mining and com-
puters) is restricted.
Inward transfers are generally un-
restricted but, together with any
reinvested profits, must be regis-
tered to assure repatriation of capi-
tal and profits. Oil exploration is
controlled by the state petroleum
monopoly.
Prior approval is required and some
sectors require majority local own-
ership.
No limit on dividend remittances, but
net remittances above 12 percent of
total registered capital are subject to
supplementary taxes of 40 to 60 per-
cent. Profit remittances are subject to
a 25-percent withholding tax. Remit-
tances of royalties by a branch or
subsidiary to its head office are not
allowed when 50 percent or more of
the local firm's voting capital is held by
its foreign parent company. Capital
repatriation is subject to a capital
gains tax.
In all cases, the government reserves
the right to suspend remittances and
repatriation.
Korea (0.2)
A list of activities and projects
closed to foreign investment is
maintained by the Ministry of Fi-
nance; however, 80 percent of all
industries are open to foreign in-
vestment.
Prior approval is required for all
investments, unless foreign owner-
ship is less than 50 percent and the
capital invested is less than $1 mil-
lion.
No legal restrictions, according to US
Embassy.
Mexico (2.2)
New foreign direct investment in
Mexican banking, insurance com-
panies, and investment funds is
prohibited. Certain sectors (includ-
ing radio and television, public
transportation, and forestry) are re-
served exclusively for Mexicans.
Other sectors (including petroleum,
basic petrochemicals, electricity
and nuclear energy, railroads, and
telecommunications) are reserved
for government investment. All for-
eign direct investment must be reg-
istered.
Foreign acquisition of more than
25 percent of the capital of a Mexi-
can company requires prior autho-
rization by the National Foreign
Investment Commission. All new
investments must have a majority
participation of Mexican capital,
except for cases specifically ap-
proved by the Foreign Investment
Commission.
Profits and dividends are freely remit-
table, subject to foreign exchange
availability, and provided a company is
registered, meets legal reserve require-
ments, and meets tax obligations.
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Table I (continued)
Country a
Entry
Ownership
Remittances
Philippines (0.8) All investment is subject to the
prior approval of the Central Bank.
Preference is given to projects ap-
proved by the Board of Investments
(BOI), to export-oriented indus-
tries, and to other industries not
utilizing domestic credit resources.
New enterprises where investment
by non-Filipinos exceeds 30 per-
cent, and that are not covered by
the Investment Incentives Act, re-
quire prior approval by the BOI. If
purchases of shares by foreign na-
tionals would reduce Philippine
ownership in a firm to less than 70
percent, permission from BOI is
required. There are different ar-
rangements for "pioneer" and
"preferred" investments. Normal-
ly, enterprises owned or controlled
by foreigners are allowed only in
"pioneer areas of investment," and
at least 60 percent of outstanding
voting capital stock of enterprises
in "preferred areas of investment"
must be owned by the Filipinos.
Profit remittances are permitted in
full, provided they are not financed
from domestic borrowing. Full repatri-
ation is guaranteed by law for cash
investments made after March 1973 in
export-oriented industries and for en-
terprises approved by the BOI.
Noncash investments and cash invest-
ments made before March 1973 can be
repatriated in a number of annual in-
stallments, according to the category
of the investment and its net foreign
exchange earnings.
a Indicates net foreign direct investment expressed as a percentage
of gross fixed investment for 1976-85.
Source: Chase Econometrics and the International Monetary Fund.
have been able to increase their participation in
companies where they formerly held minority control
by getting government authorization to buy out their
Mexican partners.
Ithe government approved a plan in July 1985
for a foreign electronics firm to buy out its Mexican
partner. The company had been under increasing
pressure from the government to increase exports, but
the Mexican partner had been unable to provide any
capital for improvements or expansion. In fact, the
Mexican partner originally borrowed from the foreign
firm to purchase 51 percent of the company's stock.
Because the Mexican partner had very little equity
and was limiting the company's export potential, the
government allowed the foreign firm to assume full
ownership.
11
Officials also approved the reorganization of a Mexi-
can chemical company to 85-percent foreign equity
and control. The foreign partner agreed to buy out the
Mexican investors because they were unwilling to
infuse additional capital to modernize the plant/
the foreign company had concluded similar nego-
tiations for 100-percent ownership and control of two
other chemical plants earlier in 1985. I
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Section 511 Swaps. Debt-equity swaps also represent
a new method for obtaining majority foreign owner-
ship in Mexican companies. The Mexican Secretariat
of Finance (SHCP) is reviewing an increasing number
of proposals from foreign banks and investors interest-
ed in converting discounted Mexican foreign-held
debt into foreign investment in Mexico. According to
US Embassy reporting, the Mexican Government is
developing a system to expedite these transactions,
which are often referred to as Section 511 swaps
because that part of the debt restructuring agreement
provides their authorization.
According to the US Embassy, one very recent exam-
ple of a Section 511 swap was completed by the US
chemical company, Rohm and Haas. The company
negotiated the purchase of a Matamoras plastics
manufacturing company for $1.5 million. Rohm and
Haas purchased $1.5 million of Mexico's public-
sector debt for 65 cents on the dollar from a commer-
cial bank. In turn, they sold the debt to the Mexican
Government, at the controlled rate, for 100 cents on
the dollar to obtain pesos. The plastics company ended
up costing Rohm and Haas about $1 million plus fees.
the SHCP
already approved three other investment projects uti-
lizing discounted Mexican public-sector debt: a $40
million investment by Nissan of Japan, a $17 million
investment by Club Med of France, and a $5 million
investment by a US consumer products company
already in Mexico. Another project reported to be
nearing approval involves Dina-Komatsu, a joint ven-
ture between a state-owned company and a Japanese
firm. Approval would convert the venture to Japanese
equity control.
Even though investors have redeemed Mexican debt
obligations for less than 100 cents on the dollar, swaps
have generally worked well so far. Nevertheless, they
could result in two very serious problems. First, if
Secret
Mexico prints pesos to give investors, inflation would
accelerate. Second, if a big market develops with
commercial banks selling discounted debt to foreign
investors, foreign bank regulators may force the banks
to write down the value of their remaining Mexican
loans.
Impact on Foreign Investment
While some foreign investors are finding ways to gain
majority control over their assets, the influence of
foreign investment in the Mexican economy remains
limited. Fidel Velazquez?head of the powerful Mexi-
can Confederation of Workers?asserts that Mexico
would lose its character as an independent and sover-
eign nation if the foreign investment laws were
changed, but Under Secretary Hegewisch stated that
foreign investment represents only 2.5 percent of total
investment in Mexico, or about 4.5 percent of total
private-sector investment.
net foreign direct investments have
averaged only 2.2 percent of annual gross fixed
investments during the last decade (see table 1). Even
at its peak in 1982, foreign investment represented
only 4.7 percent of total investment (see figure 1).
/total authorized foreign direct
investment in 1985 amounted to a single-year record
of $1.8 billion. These statistics are compiled by the
Directorate General of Foreign Investment and are
the numbers most frequently quoted by Mexican
officials. The number is based on the total value of
projects approved by the FIC plus new foreign invest-
ment that is entered in the National Registry for
foreign investment without the need for approval. The
statistics do not reflect current actual investment
because the authorized projects may occur over a
period of years, or they may never materialize. The
actual capital flow resulting from foreign investment
is calculated by the Bank of Mexico. The two mea-
sures are quite different concepts. In fact, the flow as
measured by the Bank of Mexico has been declining
as a percentage of authorized investment as measured
by the Directorate General in each of the last three
years. The flow represented 67.1 percent of autho-
rized foreign investment in 1983, 27.1 percent in
1984, and 26.5 percent in 1985.
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Figure 1 Table 2
Mexican Investment by Type, 1975-85 Cumulative Number
Foreign Capital
Billion 1985 USS
of Mexican Firms With
Participation, 1981-85
1.11 Net foreign
OM Domestic
private Total
Foreign Participation
Number
Public
Up to
Above
of
49 Percent
49 Percent
80
Firms
Number Share
of of
Number Share
of of
70
Firms Total
Firms a Total a
1981 5,731
3,081 53.8
2,650 46.2
60
1982 6,129
3,451 56.3
2,678 43.7
1983 6,390
3,680 57.6
2,710 42.4
50
1984 6,684
3,904 58.4
2,780 41.6
1985 6,964
4,114 59.1
2,850 40.9
0 1975 80
a Includes new maquiladores (in-bond plants), which typically are
restricted from selling to the domestic market.
Source: Directorate General of Foreign Investments.
Embassy estimates that 68 percent of the maquila-
85 doras are either wholly or majority US owned. There
are also Japanese, British, Hong Kong, South Korean,
Finnish, Spanish, French, Dutch, and Mexican ma-
quiladoras.
310620 986
Majority Ownership. Despite Mexico's announced
receptiveness to 100-percent foreign ownership in
specified sectors, the percentage of majority-foreign-
owned companies has declined relative to the number
of firms with foreign participation throughout the
1980s. The absolute number of majority-foreign-
owned companies, however, increased by 70 per year
in 1984 and 1985. Most of the increase was due to
new maquiladoras or existing operations where for-
eign participation increased from a minority to a
majority position (see table 2).
Maquiladoras accounted for more than 70 percent of
new firms with majority foreign ownership in 1984.
there are 800
maquiladora plants, representing more than one-
fourth of all majority-foreign-owned firms. The US
13
The Investor Countries. Despite a stated policy of the
Mexican Government to achieve a greater balance
among foreign investment sources, the United States
accounts for more than two-thirds of cumulative
authorized foreign direct investment, according to US
Embassy reporting. For 1985 the US share of total
authorized foreign direct investment jumped to 83.5
percent. Although less than one-third of cumulative
authorizations for direct investment has gone to West-
ern Europe and Japan, Mexico has particularly tar-
geted these areas to provide greater diversification in
its sources of foreign investment (see figure 2).
Where more complete data are available, as in 1984,
it is interesting to note that Mexico rejected more
than 60 percent of the combined value of new direct
investment proposed by West Germany and Japan
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Figure 2
Cumulative Authorized Foreign Investment
in Mexico, 1975-85
Percent
Others 9.5
Spain 1.1
France 2.1
Japan 2.1
Switzerland 4.2
United Kingdom 5.3
West Germany 6.3
United States
France 0.9
United Kingdom 2.8
Spain 2.8
Switzerland 5.5
Japan 5.5
West Germany 8.3
1975=$9.42
1980=$11.0a
Others 4.6
United States
Others 5.9
France 1.7
Spain 2.6
United Kingdom 2.9
Switzerland 4.6
Japan 6.0
West Germany 8.1
1985 =$14.72
United States
'Billion 1985 US S.
3103219-86
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(see table 3
Hotels and maquiladoras
that are subsidiaries of foreign companies are paid for
their services by the foreign company, which generally
collects receivables and retains profits outside Mexico.
In most cases, direct foreign investment in 1985 came
from the same countries that have traditionally invest-
ed in Mexico. The largest non-US authorizations in
1985 came from West Germany, with 4 percent;
Japan, with 3.9 percent; and Switzerland, with 1.8
percent. According to the US Embassy, the most
important West German investments in Mexico be-
long to Volkswagen, Hoechst, Bayer, BASF, and
Siemens. The principal Japanese investors are Nissan
and Komatsu. Leading Swiss investors are Nestle,
Ciba-Geigy, and Sandoz. Other noteworthy invest-
ments are by ICI of the United Kingdom, Renault of
France, Ericcson and SKF of Sweden, Olivetti of
Italy, and Aurrera of Spain.
Over two-thirds of all investments made by non-US
sources in Mexico during 1984 resulted from foreign-
ers increasing their capital stock in existing firms,
according to US Embassy reporting. Although this
increase resulted in higher total investment, it does
not necessarily reflect increased optimism by foreign-
ers doing business in Mexico. With foreign exchange
difficult to obtain, companies may have decided to
place earnings, which might have otherwise been
repatriated, back into their operations. The alterna-
tives include depositing the funds in Mexico's nation-
alized banking system at what have often been nega-
tive real interest rates.
Industrial Composition. Manufacturing industries
have accumulated about 78 percent of all foreign
investment in Mexico and 95 percent of all investment
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Table 3
Proposals and Approvals for New Direct
Foreign Investment in Mexico, 1984
Million US $
Proposed
Approved
Approved as
a Share of
Proposed
Amount (percent)
Denied
Pending
Total
1,185.8
913.1
77.0
79.0
193.7
United States
971.2
747.3
76.9
35.8
188.2
Liechtenstein
31.3
31.3
100.0
0
0
West Germany
30.8
10.6
34.4
20.2
0
Canada
25.0
17.8
71.2
7.0
0.1
United Kingdom
23.7
23.7
100.0
0
0
Sweden
22.7
22.2
97.6
0
0.5
The Netherlands and Belgium
17.2
11.7
67.9
4.0
1.6
Switzerland
17.0
16.9
99.5
0.1
Panama
16.0
13.7
86.0
2.2
Japan
7.9
4.3
54.2
3.6
Spain
6.0
5.6
93.1
0.4
France
5.7
4.2
73.7
0
1.5
Denmark
4.6
0.5
10.3
4.1
0
Others
6.6
3.3
50.7
1.5
1.8
Note: Approved investment does not represent the actual inflow of
foreign direct investment during a year. The flow as reported by the
Bank of Mexico was only $391 million in 1984. Proposed may not
equal the sum of approved, denied, and pending due to rounding.
Source: National Commission for Foreign Investment.
authorized in 1984, according to US Embassy report-
ing. A more detailed breakdown shows that the areas
of greatest investment are also the areas regulated by
the automotive, pharmaceutical, and personal com-
puter decree. Foreign participation is particularly
important in the following segments of Mexican
manufacturing: all aspects of ground transportation
equipment and components; mainframe and personal
computers; chemicals; pharmaceuticals; office equip-
ment; soups, sauces, bottled foods, and vegetable
freezing within food processing; electrical assemblies
and equipment; household appliances; cement; and
aluminum (see table 4).
15
The service industries represent the second-highest
area of accumulated foreign investment in Mexico,
with about 12 percent of the total. Within the service
industries, foreign investment is highly concentrated
in the lodging and technical consulting fields. The
commercial sector represents about 8 percent of cu-
mulative foreign investments. Mining industries still
maintain almost 2 percent of total foreign investment
even though discriminatory tax methods have been
used by the Mexican Government to remove foreign
influence. In agricultural industries, foreign invest-
ment is very small because of deep-seated and wide-
spread lack of confidence in land tenure, according to
the US Embassy.
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Table 4
Mexican Approvals for New
Direct Foreign Investment by
Economic Activity, 1984
Million US $
Activity
Approved
Subtotals
Share of
Total
(percent)
Approved Share of
Totals Total
(percent)
Total
Manufacturing
913.1 100.0
867.6 95.0
Transport 617.0 67.6
equipment
Electric 76.5 8.4
products
Machinery 56.7 6.2
and equip-
ment
Chemical 29.6 3.2
Food 29.3 3.2
processing
Other
58.5 6.4
Service
42.6 4.7
Commerce
2.3 0.2
Agriculture
Mining
0.7 0.1
0 0
Note: Approved investment does not represent the actual inflow of
foreign direct investment during a year. The flow as reported by the
Bank of Mexico was only $391 million in 1984.
Source: Directorate General of Foreign Investments.
Geographical Dispersion. Nearly 80 percent of all
foreign direct investment is located in the Federal
District and the surrounding State of Mexico, accord-
ing to US Embassy reporting (see figure 3). The
concentration of both domestic and foreign firms
around the capital city is of major concern for the
Mexican Government. Although business is attracted
by the highly developed infrastructure and the prox-
imity to the federal government in Mexico City, a
population of about 18 million is straining social
services, and pollution from the concentration of
industry and vehicles is creating a health hazard. The
relocation of businesses and government offices is an
announced government policy. The government is
offering large tax incentives, mostly to majority-
Mexican-owned firms, to relocate. Majority-foreign-
owned firms in Mexico City's metropolitan area, on
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the other hand, are finding their operations increas-
ingly restricted by the FIC's refusal to grant expan-
sions and new product lines.
Besides the Federal District and Mexico, only four
other states have accumulated more than 1 percent of
the country's foreign direct investment, according to
the Directorate General for Foreign Investment in
Mexico. The nonborder States of Puebla and Jalisco
have significant levels of foreign investment that
surround the large cities of Puebla and Guadalajara,
respectively. While all of the US border states have
pockets of foreign investment as a result of the
maquiladora program, the most notable concentra-
tions are in the States of Nuevo Leon and Coahuila.
Prospects for Change
Although foreign investors see many opportunities in
Mexico including a large domestic market, low labor
rates, and proximity to the US market, we believe it is
highly unlikely that new foreign direct investment will
play a major role in Mexico's economic recovery. The
PRI has firmly implemented policies to restrict for-
eign participation in the economy under its longstand-
ing philosophy of state-led economic growth. Even in
the peak year of 1982, net foreign direct investment
represented only a small fraction of gross fixed invest-
ment. Beyond restrictive policy, the severity of Mexi-
co's economic decline is a major deterrent to potential
investors.
While de la Madrid views foreign investment more
favorably than his recent predecessors, he has not
been able to bring about any major structural change.
Press reports indicate the established business com-
munity, government bureaucrats, labor leaders, and
leftist ideologues?all well served under the present
system?have blocked structural reforms necessary to
attract foreign investment, promote development, and
spur economic growth. As a result, we expect most
new foreign investment will be in the form of capital
stock increases to buoy existing Mexican investments.
Some new investments might be made by large
MNCs that wield significant political clout and have
extensive financial resources, but we anticipate few
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Figure 3
Distribution of Foreign Investment by Mexican States, 1985
Coahuila
2.5%
Nuevo
Leon
4.8%
/
Federal District
66.7%
Mexico
12.5%
Puebla
5.1%
Jalisco
1.2%
The remaining 7.2 percent of investment
is divided among the remaining states.
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other companies will brave the uncertainties of invest-
ing in Mexico over the next few years. Under these
conditions, we estimate foreign investment inflows
will average about $500 million annually through
1990.
On the other hand, we believe the debt issue could
spark a new wave of radical nationalism with poten-
tially disastrous results for foreign investment. If the
Mexicans perceive that their creditors are taking an
uncompromising position and Mexico City repudiates
all or part of the external debt, we would expect
inflows of foreign investment to grind nearly to a halt.
A temporary suspension in payments, however, would
probably leave foreign investors relatively indifferent.
In a less likely scenario where Mexico implemented
significant reforms, we still would not expect a dra-
matic increase in foreign investment. Most potential
investors probably would wait and see if Mexico City
were committed to lasting change. Foreign direct
investment is typically a long-term phenomenon, often
requiring more than a decade just to recover costs.
Private investors who suspect that liberalizations in
policy represent a quick fix to deal with the current
economic malaise probably would not change their
investment decisions.
Should Mexico City take sufficient steps, foreign
direct investment could make an important contribu-
tion to Mexico's long-term economic development. In
our view, the major contribution would not be finan-
cial, however, as even a doubling of last year's direct
investment inflow would represent only a small frac-
tion of the foreign borrowing expected this year.
Instead, we believe the principal benefits of increased
foreign investment arise from transfers of technology
and the management practices introduced. Further-
more, multinational corporations establishing subsid-
iaries in Mexico would allow Mexican enterprises to
form valuable customer and supplier linkages with
foreign firms.
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At the margin, there are some improvements that the
Mexican Government might make to improve the
investment climate. If Mexico were to continue to
reduce and simplify the number of forms and proce-
dures that foreigners had to complete for initial
approval and normal operations, they would reduce
the cost to both the foreign investor and the Mexican
taxpayer. The government could also eliminate re-
maining import permit requirements. Even if they
were replaced with high tariffs, this would remove
some of the government's discretionary control over
business transactions. By applying tax legislation and
fiscal incentives equitably to all firms at levels that
currently apply to foreigners, the government would
be able to preserve if not increase its revenue.
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Structural changes would be harder to implement
because of vested interests, but, in our judgment, they
would certainly make Mexico more attractive to
foreign investors in the long run. Price controls could
gradually be lifted by moving products through the
various categories of control until they were market
determined, with the results being reduced shortages
and more efficient resource allocation. A detailed
timetable could be established whereby all nonstrate-
gic state enterprises would be sold or closed, leading
to smaller public-sector deficits. Protection for intel-
lectual property?including products, processes, and
trademarks?could be strengthened, which would
provide greater incentive for research and develop-
ment. The obsession with preventing foreign majority
control might be dispensed with in a revision of the
1973 Law that specifies those sectors where majority-
foreign-owned companies would be absolutely prohib-
ited, allowing unrestricted foreign access to all other
sectors.
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Appendix A'
The 1973 Foreign
Investment Law
The stated purpose of Mexico's Foreign Investment
Law of 1973 (1973 Law) is to "promote Mexican
investment and regulate foreign investment in order to
stimulate a just and balanced development and con-
solidate the country's economic independence." The
1973 Law centralizes controls over foreign investment
within the National Commission on Foreign Invest-
ment. It states that foreign investment "will be re-
ceived when it helps to achieve the country's objec-
tives and when it acts to complement national
investments and does not displace existing business
enterprises that operate satisfactorily."
Investment Categories
Economic activity is divided into four major catego-
ries. The first is reserved exclusively for the state and
includes petroleum and basic petrochemicals, nuclear
energy, most areas of mining, electricity, railroads,
telegraphic and wireless communications, and certain
other areas as specified by law. The second category is
reserved exclusively for Mexicans with an exclusion-
of-foreigners clause. This includes radio and televi-
sion, automotive and federal highways transportation,
domestic air and maritime transportation, forestry
resources, gas distribution, and certain other areas.
The third category specifies areas in which foreign
participation is limited to less than 49 percent. For-
eign participation is limited to 34 percent for conces-
sions in national mining reserves and to 40 percent for
secondary petrochemical operations and for automo-
tive parts manufacturing. The other areas fall under
the fourth category, which allows foreign ownership
of up to 49 percent as long as the foreign interest is
not empowered to determine the management of the
business. The Government of Mexico can flexibly
administer the 1973 Law and has authorized 100-
percent majority-foreign-owned ventures, although
these are the exceptions rather than the rule.
'This appendix draws entirely on materials from "Investing in
Mexico," Overseas Business Reports, US Department of Com-
merce, International Trade Administration, December 1985.
Secret
The National Commission on Foreign Investment
(FIC) was established under the 1973 Law. The FIC
is formed by the Secretaries of Interior; Foreign
Affairs; Treasury; Energy, Mines and Parastatal In-
dustry; Commerce and Industrial Development; La-
bor and Social Security; and Planning and Budget.
Beyond its central function of administering the For-
eign Investment Law, the FIC serves as the decision-
making body regarding all foreign investment ques-
tions not already covered by law. It decides on
increases or decreases in foreign percentage ownership
allowances in Mexican enterprises?foreigners are
allowed to maintain the original proportion between
Mexican and US capital but may not increase the
percentage of foreign capital without the permission
of the FIC?and it must approve any foreign invest-
ment in Mexican companies beyond 25 percent of
capital or 49 percent of assets. FIC permission must
be sought for majority-foreign-owned investment in
Mexico, and, as a general rule, the Commission's
permission must also be sought for expansions in
existing operations.
In screening applications to invest in Mexico, the
Commission uses 17 criteria stated in Article 13 of
the law. In rather general terms, these criteria try to
ensure that the proposed investment will have a
beneficial effect on Mexico in the following areas:
balance of payments, employment, wage and price
scales, technology transfer, regional development, to-
tal national investment, and national economic policy.
Permission to make an investment is often granted
subject to meeting additional performance require-
ments that are negotiated on a case-by-case basis.
The National Registry of Foreign Investment was
created pursuant to Article 23 of the 1973 Law. It
requires that all foreign investors, Mexican companies
with foreign investment, trusts with foreign participa.
tion whose purpose is regulated by the 1973 Law,
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foreign-held shares, and FIC resolutions be registered
with this entity. Currently, the National Foreign
Investment Registry is located within the Secretariat
of Commerce and Industrial Development. Penalties
for noncompliance with the above-mentioned require-
ments are stiff. Companies that fail to register may
not pay dividends, and acquisitions that are not
registered are considered void. Offenders face expen-
sive fines and imprisonment.
Special Provisions
The law contains certain special provisions of particu-
lar interest. The first of these, known as the Calvo
Clause with its origins in Article 27 of Mexico's 1917
Constitution, requires foreigners who acquire proper-
ties of any kind in Mexico to agree "to consider
themselves as Mexican nationals with regard to these
properties and not to invoke the protection of their
government, with respect to such properties, under
penalty, in case of violation, of forfeiting to the
Nation the properties thus acquired."
In addition, foreign entities are forbidden to hold title
for land within 100 kilometers of Mexico's borders or
50 kilometers of the coast. Foreigners may, however,
obtain permission to use restricted lands for tourism
or industrial purposes through "participation certifi-
cates." These are held by Mexican fiduciaries who
hold title to the land in question. Foreigners must also
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obtain permission from the Secretariat of Foreign
Affairs to acquire real property outside the forbidden
zone.
Modifications and clarifications of the 1973 Law are
handled by the FIC, which issues occasional resolu-
tions. Several resolutions have been designed to deal
with the confusion surrounding the expansion of
existing businesses and permission to enter new ven-
tures. The most important, Resolution 16, issued in
September 1977, states that, prior to investing in a
new field of economic activity or a new line of
products, established corporations must seek the ap-
proval of the FIC and the ministry with jurisdiction
over the activity. Resolution 16 defines "new field of
economic activity" and "new line of products" in
broad terms.
Often permission to make an investment is granted
subject to a company's commitment to adhere to
certain performance criteria such as those establish-
ing minimum export and local-content levels. Specific
requirements are established for the enterprise in
order to ensure attainment of objectives set forth in
the Foreign Investment Law. These are not made
public and are negotiated on a case-by-case basis.
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Appendix B 2
The Transfer of Technology Law
In an attempt to promote the development of indige-
nous technology, Mexico promulgated the "Law on
the Registration of the Transfer of Technology and
the Use and Exploitation of Patents and Trademarks"
in 1973. It required the registration of all contracts
involving the transfer of technology. The law specified
the conditions to be met in order to receive registra-
tion and stated 14 reasons for automatic denial.
Registration Requirement
In 1982, the law was replaced by the "Law on the
Control and Registration of the Transfer of Technol-
ogy and the Use and Exploitation of Patents and
Trademarks." The revised law gives the government
increased jurisdiction in this area and expands the
number of agreements requiring registration. Failure
to register renders an agreement null and void, unen-
forceable in the courts, and ineligible for government
development support. Furthermore, failure to register
a technology agreement is subject to a fine of up to
the amount of the transaction or 10,000 times the
daily minimum wage in Mexico City.
The administrative apparatus for this law is the
National Registry of the Transfer of Technology. The
law and the registry are administered by the Secretar-
iat of Commerce and Industrial Development.
The registry carefully scrutinizes contracts based on a
number of criteria including costs and the local
availability of the technology in question. It will try to
negotiate contracts under the law so as to maximize
local management. In enacting this law, the Mexican
authorities sought to reduce dependence on foreign
technology and to provide state support to Mexican
purchasers in their negotiations with the foreign
companies. In effect, the law reinforces FIC restric-
tions on foreign control of Mexican enterprises. The
2 This appendix draws entirely on materials from "Investing in
Mexico," Overseas Business Reports, US Department of Com-
merce, International Trade Administration, December 1985.
Secret
following are the agreements, contracts, and other
acts that must be registered with the National Regis-
try of the Transfer of Technology:
? Concession of use or authorization to exploit works;
patents of inventions or of improvements and certifi-
cates of inventions.
? Assignment of trademarks and patents.
? Concession of authorization to use commercial
names.
? Transmission of technical knowledge through plans,
diagrams, models, instruction manuals, formulas,
specifications, education and training of personnel,
and other means.
? Technical assistance in any form it is rendered.
? Provision of basic or detailed engineering.
? Services of operation or administration of
enterprises.
? Counseling, consulting, and supervising services.
? Concession of copyrights that imply industrial
exploitation.
? Computer programs, that is, the transactions for
transfer of software, not the details of the programs
themselves.
The following are exempt from registration
requirements:
? Foreign technicians coming to Mexico for the instal-
lation of factories or machinery or to make repairs.
? Provision of designs, catalogues, or counseling in
general that are acquired with the machinery or
equipment and that are necessary for their installa-
tion if and when it does not imply the obligation to
make subsequent payments.
? Assistance in repairs or emergencies if and when
they derive from some act, agreement, or contract
that has been previously registered.
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? Teaching or technical training furnished by educa-
tional institutions, by personnel training centers, or
by companies to their workers.
? Industrial exploitation of copyrights relating to the
publishing, motion picture, recording, radio, and
television industries.
? International agreements for technical cooperation
executed between governments.
Denial of Registration
Certain types of agreements are automatically denied
registration. Article 15 of the revised law specifies 17
causes for denial that include: restrictions on improve-
ments in the transferred technology, interference in
the management practices of the recipient, require-
ments to accept supplies from an exclusive source,
limitations on the export of the finished product,
prohibition of the use of complementary technologies,
obligation to sell to one exclusive buyer, directives on
personnel use, limitations on volume of production or
imposition of sale or resale prices, most obligations to
execute exclusive sales or representation contracts
with the supplier, obligations to maintain the secrecy
of technical information beyond the duration of the
agreement, lack of declaration of responsibility by the
supplier for infringement of the industrial property
rights of third parties, and lack of quality guarantees.
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Moreover, ordinarily acceptable agreements are de-
nied registration when the technology is already avail-
able in Mexico, the fee is considered excessive, the
duration of the agreement is considered excessive?no
agreement may in any case last more than 10 years,
or foreign arbitration is enlisted for resolutions of
disputes related to or arising from the agreement?
the Calvo Clause. The duration standard and confi-
dentiality standard established in this law raise some
of the most difficult questions facing foreign technol-
ogy providers in determining whether to supply tech-
nology to Mexico. In essence, the Technology Trans-
fer Law has been interpreted and applied to permit
the acquisition of foreign technology only by the
installment purchase method and not by the lease
method.
In many of the areas noted above, negotiation is
possible with the registry on a case-by-case basis.
Exceptions are granted when it is considered in the
"best interests of the country."
Previously, the in-bond assembly or maquiladora
plants had been excluded from registration require-
ments under the 1973 Technology Transfer Law.
Now maquiladoras must adhere to the registration
requirements of the 1982 Law.
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Appendix C
The Law on Inventions
and Trademarks
Mexico replaced its 1942 Industrial Property Code in
1976 with the Law on Inventions and Trademarks.
The 1976 Law created new categories of nonpatenta-
ble items and increased the restrictions on the grant-
ing and use of patents and trademarks. The National
Registry of the Transfer of Technology was charged
with approving contracts concerning patents, trade-
marks and trade names. According to Article 10 of
the law, the following items are not patentable:
? Plant varieties and animal breeds as well as biologi-
cal processes for obtaining the same.
? Alloys.
? Chemical products, with the exception of new indus-
trial processes for obtaining the same and their new
uses of an industrial nature.
? Chemical-pharmaceutical products and their mix-
tures, medicines, beverages, and foods for human or
animal use, fertilizers, pesticides, herbicides,
fungicides.
? Processes for obtaining mixtures of chemical prod-
ucts, industrial processes for obtaining alloys, and
industrial processes for obtaining, modifying, or
applying products and mixtures to which the pre-
ceding paragraph refers.
? Inventions pertaining to nuclear energy and
security.
? Antipollution apparatus and equipment of the pro-
cesses for manufacture, modification, or application
thereof.
This appendix draws entirely on materials from "Investing in
Mexico," Overseas Business Reports, US Department of Com-
merce, International Trade Administration, December 1985.
23
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? Juxtaposition of known inventions, their variation of
form, of dimensions, or of materials, except when in
fact there is a combination or fusion of these
inventions involved in such a manner that they
cannot function separately or that the characteristic
properties or functions of the same are modified so
as to obtain a novel industrial result.
? Application or use in an industry of an invention
already known or utilized in another industry and
processes that consist simply of the application or
use of a device, machine, or apparatus which oper-
ates in accordance with previously known principles,
even though such application is new.
? Inventions the publication or exploitation of which is
contrary to the law, to public order, to health, to
public security, to morals, or to good customs.
Inventions referred to in the fifth, sixth, and seventh
items above may be protected through registration
and the issuance of a certificate of invention. The
certificate of invention does not provide the right of
exclusive use to the inventor. Instead, the certificate
guarantees to the inventor the right to collect royalties
from any party that wishes to use the invention. A
certificate of invention is available as an alternative to
a patent for any patentable invention as well as for
certain types of nonpatentable inventions as noted
above. The certificates have a duration of 10 years.
Patents also have a duration of 10 years and may not
be extended. Article 40 provides that patents must be
used within three years from the date of issuance.
Otherwise, during the fourth year, the Secretariat of
Commerce and Industrial Development may autho-
rize an obligatory nonexclusive license to use the
patent. Mexican authorities must approve the amount
of royalties to be paid and other terms for such a
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license. If a valid request for a compulsory license is
not made during the fourth year, the patent will
expire.
The duration of trademarks was reduced from 10 to
five years by the 1976 Law. The law allows for
registration renewal for successive five-year periods
but only if the trademark is effective and uninterrupt-
ed use during the preceding five-year period is proved.
The most troubling aspect of the law regarding
trademarks for foreign firms is the one that requires
all products produced in Mexico to carry a distinctive
Mexican trademark, equally linked to the foreign or
international mark and owned by the Mexican entity.
This provision produced so much controversy that it
has been suspended annually and has yet to be
implemented. It may, however, be invoked at any time
either in its entirety or on a selective basis.
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Appendix D 4
Potential for
100-Percent Ownership
In February 1984, the FIC published a press release
signed by several Mexican Government secretaries
that explained foreign investment policy and the
reasons for the promotion of foreign investment. It
emphasized that foreign investment would be comple-
mentary to domestic investment and contribute posi-
tively to the development objectives without displac-
ing national investments. The Mexican Government
said that it intended to promote foreign investment,
with the possibility of 100-percent foreign ownership,
in selected sectors with a view toward stimulating
activities that generate net foreign exchange inflows
and contribute to national technological development.
The Mexican authorities also said they would favor-
ably consider complex industries that otherwise could
not be developed in Mexico?industries requiring
large investments per employee, industries with high
export potential, and in-bond industries.
Following is a list of high-priority industries for
foreign investment published by the Government of
Mexico:
? Machinery and Nonelectric Equipment
Agricultural machinery and implements
Woodworking machinery
Food processing and packaging machinery
Machinery for petroleum and petrochemical
industries
Textile machinery
Extruding and molding machinery for the plastics
industry
Machinery for the graphic arts industry
Cranes, pulleys, and similar equipment
? Machinery and Electric Apparatus
High-power motors and generators
Turbines for industry
High-power turbocompressors
' This appendix draws entirely on materials from "Investing in
Mexico," Overseas Business Reports, US Department of Com-
merce, International Trade Administration, December 1985
Reverse Blank
? Metal-Mechanics
High-technology metallurgy
High-precision instruments for microsmelting
Specialized equipment
? Electronic Equipment and Accessories
Telecommunications equipment
Magnetic tapes and disks for computers
Computer systems, parts, and components
Instrumentation and process control equipment
Electronic components, parts, and elements
Electronic equipment and apparatus for engineering
and science
Consumer electronics
? Transportation Equipment
Motorcycles and similar vehicles with over 350-cc
engine displacement
Internal combustion engines for vessels and
locomotives
Ship construction and repair
? Chemical Industry
Raw materials and active pharmaceutical
substances
Synthetic resins and plastics
Chemical specialties
? Other Manufacturing Industries
Precision measuring apparatus
Medical equipment and instruments
Photographic material and equipment
New high-technology materials
? High-Technology Services
Biotechnology
? Hotel Industry
Construction and operations related to real property
for the hotel industry
25
Secret
Declassified in Part - Sanitized Copy Approved for Release 2011/11/23: CIA-RDP87T01127R001000840003-2
Declassified in Part - Sanitized Copy Approved for Release 2011/11/23: CIA-RDP87T01127R001000840003-2
Declassified in Part - Sanitized Copy Approved for Release 2011/11/23: CIA-RDP87T01127R001000840003-2
? Declassified in Part - Sanitized Copy Approved for Release 2011/11/23: CIA-RDP87T01127R001000840003-2
Declassified in Part - Sanitized Copy Approved for Release 2011/11/23: CIA-RDP87T01127R001000840003-2
Declassified in Part - Sanitized Copy Approved for Release 2011/11/23: CIA-RDP87T01127R001000840003-2
Declassified in Part - Sanitized Copy Approved for Release 2011/11/23: CIA-RDP87T01127R001000840003-2
Declassified in Part - Sanitized Copy Approved for Release 2011/11/23: CIA-RDP87T01127R001000840003-2
Secret
Appendix E 5
Products Subject
to Price Controls
List I: Products for which prices are frozen:
Foodstuffs: edible vegetable oils; purified, bottled
water; processed baby food; rice; canned tuna; oat-
meal; sugar; coffee; beef; ham; powdered chocolate;
beans; packed fruits and vegetables; crackers; corn
flour; wheat and wheat flour; eggs; pasteurized, pow-
dered, condensed, and evaporated milk; corn, corn-
meal for tortillas and corn tortillas; bread; pasta; fish;
soft drinks; salt; packed sardines.
Products of important domestic industries: medicines
of all types.
List II: Products for which companies may petition
for price hikes:
Essential raw materials: primary petrochemical prod-
ucts?acetaldehyde; hydrocyanic acid, acrilonitryle,
anhydrous ammonium, carbonic anhydride, butadi-
ene, vinyl chloride, dodecylbenzene, styrene, isopro-
panol, methanol, ethylene oxide, polyethylene; and
primary chemical products?hydrochloric acid, hy-
drofluoric acid, phosphoric acid, denatured alcohol;
ethyl alcohol, phosphorus, caustic soda, sodium
tripolyphosphate.
Basic industrial products: fertilizers?compound,
ammonium phosphate, ammonium nitrate, simple and
triple superphosphate, urea; insecticides; fungicides;
fuel oil; diesel fuel; liquefied gas; natural gas; gaso-
line; kerosene; turbosine and other fuels derived from
petroleum and natural gas; steel industry products?
special steel, wire and wire rope, arrabic, steel bars,
iron alloys, tinplate, galvanized and ordinary sheet,
mesh, bars, light and heavy shapes, plate, screen, pipe,
seamless pipe and construction rods; cellulose; asbes-
tos products; animal feed; fishmeal.
This appendix draws entirely on materials from Investing, Licens-
ing and Trading, Business International Corporation, May 1985.
Reverse Blank
27
Products of important domestic industries: ampules;
domestic appliances?home water heaters, gas and
kerosene stoves, washing machines, blenders, sewing
machines, electric boilers, radios, refrigerators, irons,
and black and white television sets; bicycles; ballpoint
pens; bottles and jars; notebooks; paper products;
detergents; light bulbs; laundry soap; bath soap; pen-
cils; toothpaste; batteries; automotive products; buses;
automobiles; trucks; agricultural tractors; truck trac-
tors; basic pharmaceutical products; packaging for
general consumption foodstuffs.
Other products: agricultural machinery and accesso-
ries; machines for making tortillas and parts; corn-
meal mills and parts.
List III: Products for which prices must be registered:
Foodstuffs: prepared cereals from corn, rice, and
wheat; cream; prepared beans; powdered gelatin; fruit
juices; butter; margarine.
Clothing: blouses; brassieres; socks; shoes; underwear;
shirts; jackets; skirts; panties; trousers; cotton T-
shirts.
Essential raw materials: basic chemical products;
citric acid; sodium benzoate; chlorine; industrial salt.
Basic industrial products: cement; lime; metals;
gypsum.
Products of important domestic industries: tooth-
brushes; mattresses; tires and tubes; razors and razor
blades; plate glass.
Secret
Declassified in Part - Sanitized Copy Approved for Release 2011/11/23: CIA-RDP87T01127R001000840003-2
Declassified in Part - Sanitized Copy Approved for Release 2011/11/23: CIA-RDP87T01127R001000840003-2
Secret
Secret
Declassified in Part - Sanitized Copy Approved for Release 2011/11/23: CIA-RDP87T01127R001000840003-2