Mexico City, the world’s second largest megalopolis, is capturing more foreign direct investment than some medium-sized countries and looks in a strong position to withstand an economic downturn in the US.

The city authorities, led by mayor Marcelo Ebrard Casaubon, are working hard to make sure that international companies see it as the gateway city to Latin America. Conveniently, Mexico City lies in the middle of the Americas: it is only four hours by plane from New York City and two-and-a-half hours from Los Angeles. The city, whose greater conurbation has a population of more than 19 million, competes directly with São Paulo in Brazil to attract inward investment.

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Mexico City, whose GDP exceeds $315bn a year in purchasing power parity terms, attracts more than $10bn a year in FDI, according to the mayor.

Its biggest advantages over São Paulo are its proximity to the North American markets and the fact that it is Spanish-speaking rather than Portuguese, opening up most of Latin America to companies that are based there.

Globally, only one other city is bigger: Tokyo, with a population of 35.2 million. As a whole, 80% of Mexico’s exports are destined for the US, but Mexico City is less exposed to a US downturn than the northern states of the country.

Inner core

Mr Ebrard, who was elected mayor in July 2006 for a six-year term, tells fDi: “I love Mexico City. It has well-educated people who are very strong-minded and work hard to fulfil their goals. The place is so innovative and has so much energy.”

Elis Rubinstein, president of the New York Academy of Sciences, who attended a science week in Mexico City at the end of September along with five Nobel prize winners, says: “It is a fantastic city. It is such a creative place and has such a bright future. The science week would not have attracted the world’s leading scientific minds if it was not for such a great place.”

Wider responsibilities

Strictly speaking, Mexico City refers to the inner core of the city, known as the Federal District, which has a population of 8.8 million. Mr Ebrard is the mayor for this area but must work closely with the leaders of the state of Mexico, in which the rest of the huge conurbation lies.

“One of the biggest lessons I have learned since becoming mayor is that it can take quite a long time to realise a project,” he says. “There are bureaucratic and administrative processes that you must work through. There is so much that I am trying to do to improve the city, and I do not want all those efforts slowed down.”

Like all global cities, Mexico City has its issues: traffic and pollution can be a problem. As a whole, Mexico has been suffering from a wave of violence, as the national government attempts to crack down on drug trafficking. Most of the violence is occurring in the northern states of Mexico but the city is not immune.

Robert Engle, professor of finance at New York’s Leonard N Stern School of Business and winner of the 2003 Nobel prize for economics, was one of the participants at Mexico City’s science week.

“I am a big fan of the city,” he says. “Mexico City has some beautiful historic neighbourhoods. Its people are wonderful. It has a such a rich and varied culture.

“There is so much talent there, and I don’t see as much of it in the US as I do there. However, the city has some issues it must still work on. For example, it is difficult for foreign companies to acquire land in the centre unless they have a local business partner. Obtaining a business licence can be complicated, too.”

Federal investment

The Federal District has an overall budget of 110bn Mexican pesos ($11bn) – 48% of the total comes from the national government and the rest from the local budget.

  However, city finance secretary Mario Delgado Carrillo, believes it does not receive enough from the national government, as the city contributes 22% of Mexico’s overall GDP and is the country’s intellectual and economic capital (the Mexico City conurbation contributes 32% to national GDP).
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For every one peso in tax contributions that the city raises for the national budget, the federal government only returns eight cents to the city.

“We used to have great federal investment in the city: the subway system, the water system and the sewage system were all built with federal resources,” says Mr Delgado. “However, for the past 10 years we have seen federal investment in the city fall. It is clear that, if the city does not grow at a healthy rate, the country will not grow.

“In a study carried out by PricewaterhouseCoopers, the city’s economy came eighth in terms of purchasing power parity in the world and was number one in Latin America. We come out top in the UN’s competitiveness ranking and have the same human development index as Portugal. The city also enjoys a highly advanced telecommunications infrastructure,” he says.

Transport tests

Mr Ebrard says his priorities for the city are to improve infrastructure, sewage, the water supply, communications and public transportation. The city’s authorities are also committed to its natural environment, and its objectives in this area: renewable energy, emission-free transportation and more efficient combustion systems for vehicles.

“We have raised local taxes by 6% in an attempt to increase the size of the city’s budget so that we can get everything done that needs to be done. We have also had better negotiations with the federal government and Congress, and secured a 20% increase in the national contribution to the city,” he says.

Mexico City’s metro system is one of the top five in the world and is the world’s deepest underground. It has 175 stations and measures 201.7 kilometres. The new line, number 12, which the city is constructing will add an additional 24.5km. Two million people use the metro every day.

The city is entering into public-private partnerships to develop hospitals, major roads across the city, trams and prisons. It is co-investing with the private sector to finance parking lots, toll roads, waste landfills and technology parks.

It is also using a Real Estate Infrastructure Trust, a special purpose vehicle, to develop multi-modal transfer stations.

“The line 12 metro initiative is the biggest infrastructure project in the country for the past 10 years, costing $2bn of public resources and set to be completed in 2010,” says Mr Delgado. “Infrastructure is key: it dictates the quality of life in a city but also its competitiveness.”

He sees improving the knowledge base as a key factor for advancing the city and believes the city is already well on the way to becoming an economy based on knowledge.

“The city’s economy has suffered a big transformation during the past 30 years, shifting from industry to services. We are now becoming a knowledge-intensive city. Some 80% of all R&D in the country takes place here and it has more than 500 institutions of higher education,”says Mr Delgado.

One of the biggest investments is the construction of new highways, costing more than $5bn shared between the city and the private sector. Enhancements will include new bridges and tunnels, and are designed to alleviate the city’s congestion problem.

Infrastructural development

The multimodal transfer stations upgrade will be financed by real estate investment trusts (REITs) to the tune of about $3bn. This involves the real estate development of commercial spaces around the stations. More than 4.5 million people use the Cetrams to commute every day.

The city and the private sector are also co-investing in technology parks, with a total commitment of $3bn. The construction and real estate development of three such parks is taking place in different parts of the city. They will host R&D centres and high-tech facilities and will include all the necessary infrastructure and communications.

The PPP model is being used to develop trams at a cost of $150m. This involves the construction of 11.6km of track and the operation of 12 units. They will undertake 59,000 daily journeys and interconnect with the city’s suburban rail systems and other communications, including the subway and bus stations.

“There are a number of opportunities for investors and financial players to take part in Mexico City’s ambitious infrastructure and development strategy,” says Mr Delgado.

“However, we must recognise that during the current volatile financial conditions and deteriorating macroeconomic outlook, investors’ risk aversion will increase, as they will likely think twice before committing capital to projects, even those with the greatest potential.”

Intellectual capital

Mexico City is of vital importance to the country’s biggest companies. Most are headquartered there or have important offices and research and engineering centres. The huge amount of intellectual capital is also the draw for multinationals looking to establish a base in the city.

For example, Singaporean sovereign wealth fund Temasek Holdings decided to open up offices in two cities in Latin America: Mexico City and São Paulo.

Lorenzo Zambrano, president of Cemex, Mexico’s biggest cement producer and one of the country’s most important companies, tells fDi: “Mexico City’s metropolitan area is very important for Cemex. Because of its sheer size, there is no doubt it is one of the most significant centres for the sale of our products.

“Furthermore, because it is the capital of the country, it acts as a shop window where we have the opportunity to demonstrate our capability to offer the best integral solutions for our clients and the way in which we are able to generate added value through acting with the same social responsibility that distinguishes us in the rest of the world.”

Locational advantages

Mr Zambrano says if he had to convince the head of a multinational to locate in Mexico City he would point out three key considerations.

First, the city has a comprehensive physical and technological infrastructure, making it an excellent platform for connecting with other parts of Latin America.

Second, there is a great wealth of talent where it is possible to find people with the knowledge and ability necessary to work in any large business. “There are outstanding universities such as UNAM, considered to be one of the top 100 educational institutions in the world,” he says. “Equally, the government has just announced its ambitious programme to create four ‘cities of knowledge’, or tech parks, inside the Federal District itself, which will focus on key areas such as health, financial services, new computer technology and education.”

He says the third and final factor for foreign companies to take into account is that the authorities’ efforts to attract fresh investment are very competitive – and offer many incentives for businesses that decide to locate in Mexico City.

CITY PROFILE:

MEXICO CITY

Population (city): 8.8 million

Population (greater): 19.8 million

Density: 5950/sq km

Area (city): 1485 sq km

Area (greater): 7854 sq km

GDP per capita: $22,696

Source: CIA World Factbook, 2008