FDI Rises in Mexico

Raymond A. Perez & Alexander P. Trueba

During the first half of 2013, Latin America received $103 billion in foreign direct investment (FDI), representing a 6.0% growth rate over the first half of 2012.

In Mexico, FDI grew at an astounding rate despite the country’s recent GDP slow down. Over $23 billion was invested in Mexico during the first half of 2013, an increase of 158% when compared to first half 2012. Meanwhile in Brazil, though the $39 billion invested was tops in the region, FDI actually contracted 10%.

A major contributor to the FDI surge was the acquisition of Grupo Modelo by Belgian multinational brewing company Anheuser-Busch InBev; the transaction closed in May for over $13 billion. InBev previously controlled 50% of Grupo Modelo; the completion of this transaction gives InBev a 100% stake in the Mexican brewer. Although the Modelo transaction accounts for a large portion of the FDI spike, the underlying numbers remain strong. Excluding this transaction, FDI still increased 15 percent. At the current pace, it is likely that Mexico will surpass its record high of $31.5 billion in 2007. It has already blown by 2012’s total of $13.4 billion.

President Enrique Peña Nieto estimates that Mexico could receive over $35 billion for the entirety of 2013. The President expects multinational firms to once again be drawn to Mexico’s investment appeal. General Motors plans to invest $691 million to expand its Mexican operations, and Mondelez International plans to invest $600 million in a new confection factory.

Peña Nieto is attempting to pass a series of market-friendly reforms by years end to rehabilitate the telecom and energy sectors. One of these newly proposed reforms, an energy bill, would surely help contribute to a spike in FDI over the next decade. For a sector that has seldom seen any foreign investment, the President’s bill is a step in the right direction. The bill will allow Pemex to enter into profit-sharing contracts with private companies, bringing much needed technical expertise and capital to oil, natural gas and shale projects. The oil, gas and power industry in Mexico has received just $360 million in FDI since 2008, a miniscule number when compared to Mexico’s net annual inflows over the same time period, $20 billion.

Outside of the Modelo acquisition, the manufacturing sector received the majority of the FDI in the first half of 2013. Chrysler Group invested $1.25 billion into factory construction in the city of Saltillo for their RAM ProMaster commercial van and four-cylinder Tigershark engine. The factories will create almost 1,500 direct and indirect new jobs in Mexico.  Danish toy maker Lego also recently announced construction of a new plant worth $125 million in Nuevo Leon. Moreover, the aerospace sector, principally in the state of Queretaro, has seen an influx of foreign investment. It is expected to garner over $200 million in investments during 2013. Canadian aerospace components manufacturer, Cormer, recently announced a $50 million investment to manufacture precision parts and Snecma, a French multinational aircraft and rocket engine manufacturer announced it will invest in its 5th plant in the Mexican state to build turbines.

Although FDI is not the only measure for a nation’s economic success, it does play an important role in economic development. Increases to FDI may indicate an improved investment climate. It also serves as a mechanism that can promote job creation, the transfer of technology and the growth of the private sector. Mexico’s cost and geographic advantages coupled with new potential progressive Presidential reforms have it positioned to receive greater FDI investment for years to come.  Now, only time will tell if these foreign investments will translate into future economic growth.

Sources: Wall Street Journal, ECLAC, Reuters, Financial Times, Global Post, and Nearshore Americas