As supply chain diversification gathers pace in the wake of the pandemic, Mexico is emerging as a major production base for multinationals wanting to be closer to North America. Since October last year, the country has attracted some $9bn of nearshoring investment from the likes of Tesla, Unilever, Mattel and BMW. According to fDi Markets, US companies switching production closer to home accounted for just over 40% of the $40bn of Mexico’s foreign direct investment in 2022.

As a stable, economically resilient democracy with low labour costs, an increasingly skilled workforce, growing industrial capacity, tax incentives and the US–Mexico–Canada (USMCA) free trade agreement, Mexico is a staging post for companies looking to secure disruption-free exports to the north.

Foreign companies must continue to be aware of the country’s operational threats, most notably corruption, organised crime and political risks, especially the unpredictability of populist, economic nationalist president Andrés Manuel López Obrador (Amlo). Yet Mexico’s recent progress in tackling these business risks is cause for confidence among firms looking to establish a presence in the country.

Corruption crackdown

Corruption is a serious drain on the Mexican economy, costing around 10% of its gross domestic product. In Transparency International’s latest Corruption Perception Index which ranks 180 countries, it in sits lowly 126th position, between Gabon and Niger. In 2020, around half of government officials were sanctioned for graft offences.

Organised crime also poses risks to supply chains. Highway and train robberies threaten logistical operations, and the country’s role as a transit hub fuels drug smuggling and money laundering. These activities are facilitated by the country’s biggest macroeconomic risk for foreign investors: the informal economy, which accounts for roughly 55% of employment. Its size partly explains why authorities are so keen to protect the official economy through highly bureaucratic regulation, a longstanding investor headache.

Financial crime, then, places a big compliance burden on foreign companies. Failure to mitigate these risks, including via in-depth due diligence when sourcing local goods and services and selecting local partners, leaves investors in danger of breaching international anti-corruption laws like the US Foreign Corrupt Practices Act.

However, Mexico’s efforts to counter some of these risks have helped restore a degree of confidence among international investors. Under the presidency of Enrique Peña Nieto, from 2012 to 2018, a co-ordinated institutional and judicial approach to tackling graft got under way. It has been further developed by his successor, Amlo, to include broader consultation with stakeholders, notably encouraging ordinary citizens to play a role in fostering greater transparency and accountability. There are now, for instance, procedures that allow them to complain about instances of corruption.

Under Amlo’s presidency, other corruption-combating authorities such as the Attorney General’s Office, the Federal Investigation Agency and the Financial Intelligence Unit have stepped up their activities with high-profile probes into alleged wrongdoing. The USMCA and its predecessor, Nafta, have also promoted good governance in Mexico, monitoring pro-business transparency policies and advancing cooperation over curbing cross-border crime.

Recent UK guidance on overseas business in Mexico notes that the Ministry of Public Administration and Court for Administrative Justice are being strengthened, with plans to entitle the latter to sanction government officials and companies involved in corruption. Public procurement processes are also being strengthened, though the guidance notes this can lead to the lowest bid winning without consideration of quality and other loopholes that may be exploited.

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After Amlo

The president’s unpredictability and statist policy tendencies are viewed widely as the main political risk facing investors. Attention has focused on Amlo’s ambivalence towards the private sector and preference for nationalisation — especially in the energy sector, where he has favoured hydrocarbon development at the expense of renewables. Congress and his own party, Morena, have curbed his more anti-business urges, testament to the country’s resilient democracy. Yet, investors are advised to maintain a watching brief.

They will need to remain alert after Amlo stands down ahead of next June’s elections, as Morena’s recently named presidential candidate, the former mayor of Mexico City, Claudia Sheinbaum, is cut from the same political cloth. If elected, she will need to deliver more than Amlo has to maintain the current nearshoring trajectory.

Mexico’s geographical advantages and incentives makes it likely to remain a nearshoring hotspot for the foreseeable future. But multinationals must be vigilant when entering the country. This requires more intensive wide-ranging interrogation of the integrity of potential partners, local supply chains and customers than might normally be undertaken when investing in an emerging market. While Mexico’s leaders take some time to properly address commercial threats, businesses must work conscientiously to mitigate them.

Manuela Uribe Ruan and Paul Gibson are associates at risk management consultancy Risk Advisory. Email: info@riskadvisory.com