Not so long ago the media believed it was a failed-state in the making.

However, in the last year, Mexico went from being the next Afghanistan to the next China. In December of 2012 a new government, the Institutional Revolutionary Party (PRI), was elected to lead Mexico into its next step. Enrique Pena Nieto has some aggressive goals for Mexico in his six years as president.

Where the Mayans Wrong?

Federico Benavides Tostado

Federico Benavides Professor Jones May 3, 2013 Executive Summary The Mayans predicated that the world was going to end in December of 2012. They could not have been more wrong because Mexico is growing as never before. Mexico is the stranger next door for the majority of Americans. Not so long ago the media believed it was a failed-state in the making. However, in the last year, Mexico went from being the next Afghanistan to the next China. Since the crisis of 1994, Mexico has been able to pick itself up and show the world its ability and potential to excel as a nation. Its current positive macroeconomic landscape yields a promising investment outlook. In December of 2012 a new government, the Institutional Revolutionary Party (PRI), was elected to lead Mexico into its next step. Enrique Pena Nieto has some aggressive goals for Mexico in his six years as president. He is specifically backing up three industries such as banking, information technology and the pharmaceutical industry. Hes expansionary governmental policies in these three sectors have made them extremely interesting for national and foreign investors alike. The graph below shows one of the most important, if not the most important indicator that Mexico is moving in the right direction. Opportunities and jobs are opening up in Mexico and there is no more need for Mexicans to risk their lives crossing illegally into the U.S. Mexicans can now stay in their own country and provide for their families.

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The Mayans Where Wrong

Over the past decade, Mexicos promising economy has made the country an extremely attractive investment target for foreigner and national investors alike. Since the crisis of 1994, Mexico has been able to pick itself up and show the world its ability and potential to excel as a nation. Despite Mexicos unending run of bad luck in recent years including the steepest recession, since the 1930, in 2007, a plague of H1N1swine flu and a deeping war against organized crime, the country has not only pull through, but has thrived. In 2009, the Pentagon had gone as far as issuing Mexico a warning of eventually becoming a failed state1. However, after all of these road-bumps, a new government was elected in 2012 to lead Mexico into its next stage. The new government party is the Institutional Revolutionary Party (PRI) that had been in power for 71 years before giving it to the National Action party (PAN) for a short-lived twelve-year period between 2000 and 2012. Today, Mexicos new leader is Enrique Pena Nieto, a young president with an aspiration to grow the economy faster. For that reason Mexico has become an interesting investment target. Several recent governmental policies have made the banking, information technology and pharmaceutical sectors extremely attractive investments. Much of Mexicos success in recent years can be attributed to the North American Free Trade Agreement (NAFTA), signed in 1994, by the United States, Canada and Mexico. This free trade agreement revolutionized the Mexican export market and eliminated countless trade barriers between these nations. It created a trilateral trade bloc in North America. Unfortunately, for many Mexicans and foreign investors in Mexico, the peso was significantly devalued, making 1994 a tragic year for many. However, this caused Mexican goods to appear cheap in the eyes of many foreigners. Hence, it began to fuel increasing exports. The graph below shows how the devaluation of the peso and the creation of the NAFTA agreement caused Mexicos export to increase for the next two decades as shown below.

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Mexicos positive macroeconomic landscape also yields a promising investment outlook. Since 2005, the average growth in Mexico has been 2.3 percent, excluding the 2008 financial crisis. This is relatively good compared to other nations that also suffered from the crisis. It is good to note that Mexicos GDP growth was double Brazils last year. Its inflation has been on average for the past five years 4 percent and its employment in the past two years has been of around 5 percent. All of these numbers indicate that Mexico has a really stable economy. The graph below shows that, since the start of 2006, Mexico continuously outperformed the U.S., with the exception of two quarters in early 2009. Additionally, the real GDP growth has been 3.8 percent over the past five years. Last year Mexicos GDP growth was of 3.9 percent, Brazils was 2.7 percent, and the U.S. was only 1.7 percent.2

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Naturally, the recent recession impacted Mexico along with its close trading partners, and the rest of the world. However, after the 1994 crisis, Mexico learned from its mistakes and vowed never to undergo another such crisis. Hence, due to precautionary measures executed on the Federal Reserves, Mexico was not affected as severely as other countries in the 2008 great recession. After the crisis in the 1990s, Banco de Mexico (Banxico) prepared for any downturns and their preparations paid off. Because Mexico had low inflation, low unemployment rates, asserted macro-economic policies and a highly-structured job market, they could protect the principal macro indicators from dropping during 2008. The country was also helped by almost a decade of stability in the price levels and tightened monetary policy by Banxico.3 Since April 1994, Banxico has, as its constitutional mandate, the main objective of
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preserving the purchasing power of the currency, which means price stability. This is why Banxico, the central bank, gears monetary policy toward adjusting inflation, aiming for 3 percent each year. During the last five years inflation has never been below a 3 percent however the inflation has lowered after the crisis. In 2009 Mexico had an inflation of 5.3 percent and in 2011 we had 3.4 percent. This means that the governmental policies of Banxico are working. Mexico is currently the world trade leader with 44 free trade agreements, with plans to increase this number in the near future with the Trans-Pacific Partnership (TPP). The TPP is one of the most ambitious free trade agreements ever attempted. This partnership includes nations with a border on the Pacific Ocean: such as Australia, Canada, Chile, Malaysia, Mexico, Peru, United States and several more. It is expected that this partnership will substantially decrease tariffs and help open trades in goods and services.4 In addition it will deepen economic ties between the nations involved, it will boost investment flows between the nations and it will boost their economic growth. However, the Mexican economy shows a negative balance of payments in the last three years, mainly caused due to lower demand of national products from the US and Europe due to 2008s financial crisis. Slow recovery effects are observed in 2011, which permitted a 17 percent growth on exports, for a less negative balance of payments. A negative balance of payments does not mean that Mexico will in anyway try to devalue their currency. They did that in 1994 and they never want to do it again.

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One of the most optimistic sectors in Mexico is banking due to the lack of private credit penetration it has compared to the rest of Latin America. Private credit penetration in Mexico is limited compared to its regional and global competitors, at around 20 percent. Brazils GDP penetration is of 55 percent and Chiles is of about 70 percent.5 In Mexico every day more and more people are being accepted for credit card due to the constant growth of the middle class. Although many Americans and people around the world still imagine a country dominated by few wealthy elite, thousands of middle class families are crowding new Walmarts, driving Nissans and maxing out their credit cards. In real terms, over the past 10 years, total credit has barley increased, although the business sector has grown by 81 percent. From 2004 to 2008 banks decreased lending to companies, but right after 2008 the banks started to lend again. However, it has stagnated in relation to countries with which it competes internationally. According to the BBVA (the Spanish bank), total banking credit has a growth rate approximately at a given nominal annual average of 15 percent.6 At the end of 2011, annual nominal growth rates of consumer credit (24.3 percent), credit to businesses (16 percent) and housing loans (8.4 percent) reflected a dynamic performance of credit activity. This has continued up until April 2012, with consumer credit continuing to post a high rate (23.4 percent), as well as credit to businesses (11.7 percent) and housing loans (10.4 percent)7. All of these numbers are expected to continue to grow because the banking sector of Mexico is becoming more mature and people are beginning to start to trust banking institutions to ask for loans. Interest rates are becoming cheaper for the public as well and mortgages are starting to become accessible. More importantly, the opportunity for small and medium enterprises (SME) lending in Mexico is what is really attractive. Only 20 percent of SMEs with less than a hundred employees seek financing from a merchant bank meaning that the banks are currently giving extremely high interest rates and are not being able to capture this market.8 A major factor that affects the existence and growth of these SMEs are financial constraints, which is a lack of access to finances and this disables SMEs to move forward to their growth potential. These small businesses cannot reach their potential because there are few opportunities for financing at reasonable costs for SME and, as a consequence, they usually rely on costly supplier credit (two thirds of finance for small enterprises in 2005). Commercial banks only account for 13.7 percent of financial small businesses.9 As the economy in Mexico has depicted positive signs of growth potential, the SME market is becoming a strategic sector for Mexico credit institutions. It is a major problem that SMEs are not receiving the appropriate credit opportunities therefore the government has launched several policies to promote and to provide credits to the small and medium sized enterprises. They launched a consultancy training program for them and have started several
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funds to provide them with credits at a low and accessible interest rate. One of the biggest ones is called Fondo Pyme (SMES fund) which is a program that seeks to support individual companies and entrepreneurs in order to promote national economic development. Through this fund, the government provisions temporary support to programs and projects that promote the creation, development, competitiveness of micro, small and medium enterprises. The next step would be to provide a consultancy programs to not only be able to finance the entrepreneur bought to teach them how to correctly run their business, including how to files taxes, how to be more efficient etc. The SME market segment represents approximately 150,000 companies and 98 percent of the total market in Mexico. The fact that a large majority of them lack funding is a sign for investors that there is an investment opportunity here. 10

Brazil
10% of 2012 GDP on Technology

Mexico
16% IT spending increase in 2011

Colombia
Free Trade Zone for IT service companies

Another sector that is booming in Mexico is the informational technology sector. Mexico is the second largest IT market in Latin America. According to KPMG, Mexico is the country with the most competitive operation costs in software design, compared to a lot of countries in Europe, Asia and Latin America.11 The IT industry benefits tremendously from the United States demand; firms are increasingly outsourcing projects to lower costs in Mexico. Mexicos cheap and talented labor is impressive. Based on Mexican IT estimates, there are close to 600,000 IT professionals in Mexico, including approximately 400,000 professional software specialists. In addition, 65,000 new professionals specialized in the industry graduate from Mexican institutions every year.12 Consequently, companies have the advantage of hiring qualified engineers in Mexico for US$30,000 a year versus American companies, which would need to pay their employees perhaps US$100,000 a year. This is why there are over 2,000 IT companies established in Mexico. Another factor that benefits Mexico is that it has the same time zone than in the US. This is where Mexico has a competitive advantage over India. The industry is in a
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stage of rapid growth, therefore providing an abundant amount of opportunities for investment that would confidently yield high returns. Strategic location, innovative leadership, and public support all contribute to robust growth in Latin Americas IT industry. Multinational corporations increasingly realize such attributes and either build new sites in the region, or find IT companies as prime targets for acquisition.13

Strengths of the IT and Software Services Industry in Mexico

Infrastructure Talent Competitive Cost

Mexico is also exceptionally prepared to support its growth in the IT sector because of its infrastructure. Something that Brazil does not have. According to Morgan Stanly, Brazil must double its infrastructure investment rate to live up to the expectations for a BRIC member.14 Mexico does not have a problem with this issue because Mexico is the 9th IT talent hub in the world and the most important tech talent pool in America.15 Mexico has a strong infrastructure to support the growth that it is facing because it has more than 33 IT clusters located in 20 states, grouping more than 700 companies nationwide. In addition there are countless governmental policies being passed to support this movement. Private universities, corporations and government have coordinated efforts to develop 24 technology parks around the country. One of the recent projects that the government is working on is called Smart City in Guadalajara. The Smart City will be a world-class creative, digital, and entertainment industry hub in Latin America. It includes innovative urban design linked to technology to attract world-class firms and investment in the fields of digital production and technology. There are also 223 registered development centers evaluated on at least one kind of quality process (standards such as CMMI or MoProsoft), in 21 Mexican states. The IT industry in Mexico is strong and growing because Mexico has the infrastructure, the taken and the competitive cost for companies and investors both foreign and nationals. The Mexican pharmaceutical industry is also one of the fastest growing industries in Mexico. The industry is the tenth largest pharmaceutical industry in the world and the second in Latin America behind Brazils. It generates revenues of US$12 billion a year and grew 14
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percent between 2007 and 2009.16 The sector continued growing even when Mexicos GDP growth fell by 6 percent in 2008. Because of Mexicos free trade agreements medicine exports are expected to increase from US$1.82bn in 2012 to US$2.9bn by 2017, at a compound annual growth rate of 13.8 percent in local currency terms.17 This sector has always been stable and in a growth stage however, it is going through rapid transformation because of the governments regulations and with the patents of medicines expiring.

The Mexican government has passed government policies to promote the ongoing growth of this industry. There are several government organizations that are promoting its expenditures in the pharmaceutical industry. This first one is the Seguro popular, the social security institution that will eventually give universal healthcare to all Mexicans. In 2011, the Seguro Popular, the Mexican Universal Health Care, managed to cover 55 million Mexicans. Not only are they increasing in numbers but the public is also demanding higher quality products. The government expenditures from 2005 to 2011 have increased by 86 percent according to the COFEPRIS (Mexicos Federal Commission). This, coupled with the changes in regulatory landscape by the organization enables foreign companies to expand, distribute, and sell products in Mexico more freely. The COFEPRIS is working extremely hard to make the process of regulation move a lot smoother so that the growth of the industry can develop at a faster pace. Felipe Calderon, the former president of Mexico, wants to triple or even quadruple the investment in Mexican Clinical research because Mexico has so much potential to make it work with the Social Security. He wants to achieve this through the government organization that is called Camara Nacional de la Industria Farmaceutica (CANIFARMA). Calderon wants to make the Mexican pharmaceutical industry the biggest manufacturing sector in the next five or six years. Currently pharmaceutical manufacturing represents 7 percent of manufacturing GDP in Mexico, and Calderon wants to push it into the first place. With the new administration, with Enrique Pena Nieto he hopes they can put the procedures in place to reach these goals together.18
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The private pharmaceutical industry in Mexico is also growing because of the generic medicine. The generic medicines account for 60 percent of the sales in the private sector making them affordable for the general public.19 All of the aforementioned factors are why the pharmaceutical industry in Mexico is a great place to invest in. There are countless government policies that are promoting its growth because they want foreign companies to come to Mexico and they want all of the Mexicans to have healthcare. Mexico appears to be the perfect place to invest but there is always a risk even when investing at a top emerging market. One of the biggest threats that Mexico currently has is its organized crime. In the past five years Mexico has experienced unprecedented increase in drug related crime and violence. Around 47,000 people have died in related violence during this period.20 This increased in violence occurred because of the governmental policies that Felipe Calderon established. He launched a frontal assault against organized crime because he thought that the drug lords were having too much control of the country, even more then he did. Nevertheless, since the new government administration, the violence has steadily decreased with Enrique Pena Nieto. Both Mexico and the United States need to come up with bi-national security strategies to overcome this problem. Another problem is the amount of corruption that Mexico has at every level. Studies have shown that contrary to the notion that corruption is a relatively minor cost of doing business; analysts have found that corruption has a stifling effect on foreign investment and economic growth. The studies show that, reducing the level of corruption from the Mexican level to that in Singapore would have the same effect on
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foreign investment as reducing the tax on capital income by 50 percentage points. (Wasow)21 This means that corruption reduces as much money as 50 percent of net income tax. Hopefully as Mexico starts to become a first world country there will be strict governmental policies that will fight corruption. Luckly, Enrique Pena Nieto, has made it clear that has re-election is not s signal to return to the old days of corruption of the Institutional Revolutionary Party (PRI) that virtually ran the nation unopposed for 70 years. Organized crime and corruption are two of the main problems in Mexico among others such as poverty and monopolies. But, it seems that the new administration is fighting these difficulties with the full power of the government and its citizens. Mexico is the stranger next door for the majority of Americans. Not so long ago, newspapers and the T.V. said that Mexico was the next Afghanistan. They said that is was poor, violent, lawless and a failed state in the making. In early 2009 a U.S. Joint Forces Command report speculated that, in the next quarter-century, Pakistan and Mexico could prove the most worrisome flash points for American security.(Martinez) However, in the last year Mexico went from being the next Afghanistan to the next China. It has become dramatically attractive for investors and the top three industries to invest in are banking, industry technology and pharmaceuticals. These three are particularly attractive because of the government support that they have. The new administration goals include that these three industries flourish for the good of Mexico. Manufacturing is another huge industry for Mexico but is not as governmentally backed up as the three other. This is because generally manufacturing does provide lots of jobs but not quality jobs like the other industries. The graph below shows one of the most important, if not the most important indicator that Mexico is moving in the right direction.

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Thousands of jobs are opening up in Mexico; this is why the immigration to the U.S. from Mexico has dramatically decreased. Mexicans want to stay and work in their country where their family live for the first time in five decades. They do not need to risk their lives crossing illegally into the United States anymore. The Mayans predicted that the world would end in December of 2012. Luckily, they could not have been more wrong, because Mexico is ready to become a first world nation by 2050.

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Works Cited
1

"From Darkness Dawn." The Economist. N.p.. Web. 2 May 2013. <http://www.economist.com/news/specialreport/21566773-after-years-underachievement-and-rising-violencemexico-last-beginning>. 2 "The World Bank." World Bank.org. N.p.. Web. 2 May 2013. <http://www.economist.com/news/specialreport/21566773-after-years-underachievement-and-rising-violence-mexico-last-beginning>. 3 (2012). National account statistics portal. World Bank national accounts data, Retrieved from http://www.oecd.org/topicstatsportal/0,3398,en_2825_495684_1_1_1_1_1,00.html
4

Smith, . "Mexico at the Top of Emerging Markets." n. page. Web. 3 May. 2013. <http://www.bbc.co.uk/news/business-21782080>. 5 KKR, . "Global Macro Trends." Emergence of Brazil: An Unfinished Story.... n. page. Web. 3 May. 2013. <http://www.kkr.com/company/insights/global-macro-trends-8>. 6 BBVA, . "Banking Outlook Mexico." BBVA Mexico. n. page. Web. 3 May. 2013. <http://www.bbvaresearch.com/KETD/fbin/mult/1206_BankingOutlookMexico_Jun12_tcm348333287.pdf?ts=2042013>. 7 BBVA, . "Banking Outlook Mexico." BBVA Mexico. n. page. Web. 3 May. 2013. <http://www.bbvaresearch.com/KETD/fbin/mult/1206_BankingOutlookMexico_Jun12_tcm348333287.pdf?ts=2042013>. 8 Banco de Mxico, Evolucin del Financiamiento a las Empresas 2011 9 Garcia, Jacobo. "Successful Practices and Policies to Promote Regulatory Reform and Entrepreneurship at the Sub-national Level." OECD. n. page. Print. <http://www.oecd.org/gov/regulatory-policy/45083032.pdf>. 10 "Fondo PYME." n. page. Print. <http://www.fondopyme.gob.mx/>. 11 PROMEXICO, . "Succes Stories IT." Internatiional Expansion Services. n. page. Web. 3 May. 2013. <http://operationsinmexico.com/it-and-software-success-stories>. 12 PROMEXICO, . "Succes Stories IT." Internatiional Expansion Services. n. page. Web. 3 May. 2013. <http://operationsinmexico.com/it-and-software-success-stories>. 13 PROLOG, . "Mexico Information Technology Report Q2 2011." Press Release Distribution. n. page. Web. 3 May. 2013. <http://www.prlog.org/11486251-recently-released-market-study-mexico14 Morgan Stanly, . "Brazil Infrastructure Paving the Way ."Morgan Stanly Research Group Global. n. page. Web. 3 May. 2013. 15 Pro Mexico Ciudad Creativa Digital 16 Urtueaga, Raul. "Mexicos Pharmaceutical Industry A new Opportunity Sector." Ministry of Economy Embassy of Mexico. n. page. Web. 3 May. 2013. <http://www.mexicotradeandinvestment.com/pdf/2012/octubre/26/Presentacion Taller Farmaceutico RU.pdf>.
17

Business Monitor, . "Industry Forecast - Pharmaceutical Trade - Mexico - Q2 2013." Business Monitor Global. n. page. Web. 3 May. 2013. <http://www.businessmonitor.com.ezproxy.babson.edu/cgibin/request.pl?view=articleviewer&article=718940&SessionID=2F23DDE8AD2D11E2802DDD157B297F78&iso=MX &metaid=190&service=3>. 18 Jhonson, . "Pharmaceuticals in Mexico." Pharma Global. n. page. Web. 3 May. 2013. <http://www.pharma.focusreports.net/index.php 19 "The Pharmaceutical Industry in Mexico." Russel Reynolds. n. page. Web. 3 May. 2013. <http://www.russellreynolds.com/content/pharmaceutical-industry-mexico>. 20 "Considering New Strategies for Confronting Organized Crime in Mexico." Wilson Center. n. page. Web. 3 May. 2013. <http://www.wilsoncenter.org/publication/considering-new-strategies-for-confronting-organized-crimemexico>. 21 Wasow, Bernard. "Greasing Palms: Corruption in Mexico." Globalist. n. page. Web. 3 May. 2013. <http://www.theglobalist.com/storyid.aspx?Storyid=4640>.

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