Comparative Analysis of Country Suitability I:
An introduction to 3M, Chile, and Mexico
Catherine R. Durgin
D. Edward Durham
Louise K. Graf
Yitshak Merin
Aihua Z. Palmour
University of Maryland University
College
Comparative Analysis of Country
Suitability I: An introduction to 3M, Chile, and Mexico
As part of
a semester-long assignment for their MBA seminar, a student team was tasked to
first provide an overview of a publicly traded company and one of the company's
major product lines, and to select a pair of countries from a given list. In this first portion of the assignment, the
team was to identify the company, and prepare a collaborative profile to
include a major product or service line and technology, the scope of the
company's business in terms of geographical region and industry, information
about the company's strategic and/or other business plans to date, and a
discussion of the company's performance over the past three years, identifying
key competitors. The team was also to
identify the country pair, discuss their reasons for selecting the countries,
prepare an overview of the business environment in each country, and present a
webliography of relevant sources. This
three-pronged report is to be published via the team's web site. This five-member team selected the company
3M for its Post-it Notes, and the countries Chile and Mexico. There was a significant amount of discussion
among team members resulting in the above choices. Team members wanted to research a company that had innovative
products, global interests, and a proven track record. One team member vetoed automobile companies,
another vetoed tech companies. Team members
submitted ideas, and put five companies up for a vote, and selected 3M. The countries were selected based on the
fact that team members wanted to research countries with which they had little
personal experience, in order to maximize the learning experience and minimize
bias. This excluded all of Asia, the
Middle East, North America, and Europe, leaving Africa and Latin America. Only one country pairing fit these criteria,
and won the vote easily - Mexico vs. Chile.
The report
is divided into three major sections, a company profile on 3M, and country
business environment overviews for each Chile and Mexico. The 3M profile contains a general overview
of the company, as well as specific information on the Post-It Notes product
line, business segmentation and competitors, and financial history. The country overviews focus on the business
environment, with foci on the national economy, trade, and the business
environment. A webliography is combined
with the report references at the end.
Creation
of 3M
3M (http://www.3m.com) was founded in 1902 by five
Minnesota businessmen Henry S. Bryan, Hermon W. Cable, John Dwan, William A.
McGonagle, and Dr. J. Danley Budd to mine a mineral deposit for grinding wheel
abrasives. The newly founded Minnesota
Mining and Manufacturing Company quickly switched to sandpaper products
business when the deposits were found to be of little value (History,
2003).
The first
sandpaper was made in 1904. In 1925,
the company reached a milestone in product diversification when a lab assistant
invented the masking tape. The company
continued its innovative spirit and Scotch Cellophane Tape was discovered in
the following years. In addition to
3M's expertise in bonding and adhesives, 3M also moved into the roofing granule
business. This ceramic coated bits of
rock helps to make asphalt shingles last longer (History, 2003).
In the next few decades, 3M experienced rapid growth and
diversification in product lines, and global expansion. Like many other companies in early 1940s, 3M
was engaged in the productions and research of defense materials for World War
II. New inventions such as reflective
sheeting for highway markings, magnetic sound recording tape followed from the
research. In the following decades, many of today's commonly known and used
products such as videotape, carbonless papers, transparent tape, overhead
projection systems were invented. 3M
then continued its diversification and expanded into medical and dental products,
pharmaceuticals, radiology, energy control, to name a few, in the 1970s and
1980s. During the same period, 3M also
extensively expanded its presence globally (History, 2003, International facts,
2003).
3M
product line and technology
3M is truly
a high-tech company. The research
fields range from aerospace and medical equipment to home and leisure. Accompanying the extensive research areas
are an impressive list of product lines that range from consumer to industrial
products. 3M’s major products include
reflective sheeting, commercial graphics systems, respirators, automotive
components, safety and security products, optical films, medical and surgical
supplies, skin health and infection-prevention products, pharmaceuticals, drug
delivery systems, dental and orthodontic products, health information systems,
microbiology products, closures for disposable diapers, tapes, coated and
non-woven abrasives, and specialty adhesives, sponges, scouring pads, high
performance cloths, consumer and office tapes, repositionable notes, carpet and
fabric protectors, energy control products, home improvement products, floor
matting and commercial cleaning products, visual systems, packaging and
interconnection devices, insulating and splicing solutions for the electronics,
telecommunications and electrical industries, specialty materials for
automotive, electronics, telecommunications, textile and other industries, and
roofing granules (2001 Annual report, 2001, pp. 22-23, p. 50). For an ever-expanding complete list of
products, please visit 3M's product index page at http://www.3m.com/product/index.jhtml.
Post-it
Notes: A famous 3M product line
Without a
doubt, one of 3M's best-known products is Post-it Notes. For this reason, the team will focus its
research on Post-it Notes by 3M throughout the seminar. Currently, the Post-it trademarked products
are sold in more than 100 countries. 3M
has trademark protection on the canary yellow color for Post-it Notes in 19
countries, including the United States and Canada. Today, Post-it Notes are sold in eight standard sizes, 25 shapes
and 62 colors and have many accompanying products such as Post-it Flags,
Post-it Pop Up Notes and Dispensers, Post-it Easel Pads and other products
(2001 Annual report, 2001, p. 21).
The
invention of Post-it Notes involved some creative thinking. A man named Spencer
Silver was working in the 3M laboratories in 1970 researching for a strong
adhesive. Silver did succeed in
developing a new adhesive but it is weaker than the adhesive that was already
being manufactured. Four years later on
a Sunday, another 3M scientist Arthur Fry was singing in the church, whose
markers of his hymnal kept falling out of the book. Fry remembered Silver's adhesive and put a coat of this adhesive
on his markers. It was an instant
success. The weak adhesive allowed the
markers to stay in place and lift off without damaging the pages. After the discovery of the usefulness of the
adhesive, 3M began distributing Post-it Notes nationwide in 1980 in three sizes
(Art Fry and the invention of Post-it Notes, 2001; 2001 annual report, 2001, p.
21).
Scope of
3M's business
Today, 3M
is known for its role as a leading technology company from international consumer
market to industrial operations. 3M's
innovation is also well recognized in electronics and health care. Some of the products of 3M began to make
worldwide appearance in 1929. In 1951,
3M established an International Operations organization and made its first
direct investments abroad.
The
International Operations of 3M today are grouped into three areas: Asia
Pacific, Europe and Middle East, Latin America, and Africa and Canada. In 2002, 3M has operations in more than 60
countries; its products are sold in almost 200 countries; and more than half
sales originate from abroad (International facts, 2003). Twenty-nine of 3M's international companies
have manufacturing capabilities and thirty-two have laboratories that support
the research and development, and business plans. In 2002, 3M's worldwide sales were $16.332 billion with
international sales of $8.906 billion, which represents 55 percent of company's
total sales (International facts, 2003).
For an ever-expanding complete list of countries, please visit 3M
Worldwide at http://www.3m.com/
More
specifically, 3M is divided into six business segments according to the 2001
annual report (pp. 22-23, p. 50). Below
is a list of the business segments along with the major products that each of
these segments oversees.
3M
corporate strategies
For over 100
years, 3M has demonstrated consistent growth through diversification. Long term
planning and thinking has helped the company achieve its current status. Today,
the company’s slogan is “Innovative and Practical Solutions from a Diversified
Technology Company.” Innovation and
change has been part of the company culture long before it became common in
American business. 3M was an early global and technological competitor creating
a multicultural, multilingual, and multidisciplinary organization.
From 1929
to 1949, CEO William McKnight created multiple divisions that divided as they
grew so that new businesses would have a head start. McKnight is well known for
his enduring philosophy -the best way to find business it to "look behind
the smoke stacks." Move beyond the
purchasing office and find out what your real customers need. During the 1980s, the company reorganized
and instituted strategic planning across all business groups and units
worldwide (3M, 2002). When the economy
in the Pacific Rim turned sour, its impact on 3M was significant. Under the leadership of L.D. DeSimone, the
company decided to keep its long-term investment in the region. “3M held firm
and the decision continues to pay off” (p. 234).
In 2002,
the Company celebrated its centennial anniversary and vigorously affirmed its
commitment to sustainable development through environmental protection, social
responsibility and economic progress. The company is committed to meeting the
needs of society today while respecting the ability of future generations to
meet their needs. The company reports that its sustainability policies and
practices are directly linked to four fundamental corporate values:
• Satisfying our customers with superior
quality and value.
• Providing investors an attractive return
through sustained, high-quality growth.
• Respecting our social and physical
environment.
• Being a company that employees are proud to
be part of.
3M actions
are guided by their corporate values of uncompromising honesty and integrity
(3M, 2003). W. James McNerney, Jr., is
the current CEO and the company’s first leader to come from outside 3M. He
wants to fully capitalize on the power of the 3M brand. In 2002, he changed the official name of the
company from Minnesota Mining and Manufacturing to 3M Company. “We will continue to invest in successful
technology platforms, and our rich culture of innovation will always be the
springboard for new products. A the
same time, we are infusing that culture with new energy and aggressively
pursing multiple avenues for growth to complement and leverage 3M’s historical
organic grow engine” (3M, 2002, p. 235).
3M’s
performance in recent years
Headquartered
in St. Paul, Minnesota, 3M is one of the 30 stocks of Dow Jones Industrial
Average and is also part of the Standard & Poor's 500 Index. As stated above, international sales in 2002
accounted for 55 percent of company's total sales ($16.332 billion), the
reported net income figure was $1.974 billion, the diluted earnings per share
was $4.99, the R&D and related expenditures was $1.070 billion, and the
capital spending was $763 million (3M facts, 2003). In 2002, 3M had 68,774 worldwide employees, of which 35,024 were
employed in the United States (3M facts, 2003).
According
to Hoover’s Online (3M company, 2003), 3M’s main competitors are Avery Dennison
Corporation (http://www.averydennison.com),
Imperial Chemical Industries PLC (http://www.ici.com),
Johnson & Johnson (http://www.jnj.com). These companies are also diversified leading
companies in technology and innovation with a worldwide market presence.
A summary
of selected 3M’s balance sheet and income statement information below ($ in
millions) provide a better insight in to the company:
FY 12/02 FY 12/01 FY 12/00 FY 12/99 FY
12/98
Total
Assets 15,329 14,606 14,522 13,896 14,153
Total
Liabilities 9,336 8,520 7,991 7,607 8,217
Stockholders’
Equity 5,993 6,086 6,531
6,289 5,936
Revenue 16,332 16,054 16,724 15,748 15,094
Cost of
Sales 8,496 8,749 8,787 8,126
8,020
Gross Profit
7,836 7,305 7,937
7,622 7,074
Operating
Expenses 4,790 5,032 4,879
4,666 5,035
Operating
Income 3,046
2,273 3,058 2,956
2,039
Total Net
Income 1,974 1,430 1,782
1,763 1,175
Basic EPS 5.06 3.63 4.50
4.39 2.91
Diluted EPS 4.99 3.58 4.46
4.34 2.88
Dividends/Share
2.48 2.40 2.32
2.24 2.20
The above
snapshot of 3M’s balance sheet and income statement shows that 3M has
maintained its financial positions steadily.
From an investor’s point of view, the EPS figure in 2002 is much higher
than 1998 and the dividend payments remain strong. Such smooth line figures provide confidence that 3M’s financial
team is well managing and choosing the spending on R&D, and capitalizing on
its research.
The
Republic of Chile sits between Argentina and Peru in southern South America,
bordered on the West by the Pacific Ocean.
Chile has a total land mass of 756,950 sq km (302,778 sq. mi.), or
nearly twice the size of California, including Easter Island (Isla de Pascua)
and Isla Sala y Gomez. The capital city
is Santiago, home to about 6 million of Chile’s 15 million people. Over 90 percent of the population is under
age 65, with just over 25 percent under age 14; 85 percent of the country’s population
resides in urban areas. Chile’s
official language is Spanish, and the country boasts an adult literacy rate of
95 percent. GDP in 2001 was $153
billion, with a real growth rate of 3.1 percent, and inflation estimated at 3.5
percent. The currency is the Chilean
Peso.
Economy
(Note:
unless otherwise cited, the information in this section comes directly from the
U.S. State Department Background Notes, Chile, 2002). After a decade of highly impressive growth rates, Chile
experienced a moderate recession in 1999 brought on by the global economic
slowdown. The economy recovered with 5.4 percent growth in 2000, with Asian
markets rebounding and copper prices edging up. GDP growth in 2001 slowed to
2.8 percent and is projected to be around 3.3 percent in 2002. The government's limited role in the
economy, Chile's openness to international trade and investment, and the high
domestic savings and investment rates that propelled Chile's economy to average
growth rates of 8 percent during the decade before the recession, are still in
place. The 1973-90 military government sold many state-owned companies, and the
three democratic governments since 1990 have continued privatization at a
slower pace. Policy measures such as the privatization of the national pension
system encourage domestic investment, contributing to an estimated total
domestic savings rate of approximately 22 percent of GDP in 2000.
Unemployment
peaked well above Chile's traditional 9 - 11 percent range during the recession
and is stubbornly remaining in the 8 - 10 percent range well into the economic
recovery. Despite recent labor troubles, wages have on average raised faster
than inflation over the last several years as a result of higher productivity,
boosting national living standards. The share of Chileans with incomes below
the poverty line--defined as twice the cost of satisfying a person's minimal
nutritional needs--fell from 46 percent of the population in 1987 to 21 percent
in 2001.
Maintaining a moderate inflation level is a foremost Central
Bank objective. The establishment of a compulsory private sector pension system
in 1981 was an important step toward increasing domestic savings and the pool
of investment capital. Under this system, most regular workers pay 10 percent
of their salaries into privately managed funds. This large capital pool has
been supplemented by substantial foreign investment. Public and private investment in the Chilean economy has remained
high despite current economic difficulties. The government recognizes the
necessity of private investment to boost worker productivity. The government
also is encouraging diversification, including such nontraditional exports as
fruit, wine, and fish to reduce the relative importance of basic traditional
exports such as copper, timber, and other natural resources.
Chile's welcoming attitude toward foreign direct investment
is codified in the country's Foreign Investment Law, which gives foreign
investors the same treatment as Chileans. Registration is simple and transparent,
and foreign investors are guaranteed access to the official foreign exchange
market to repatriate their profits and capital. The Central Bank decided in May
1999 on the removal of the 1-year residency requirement on foreign capital
entering Chile under Central Bank regulations, generally for portfolio
investments. A modest capital control mechanism known as the
"Encaje," which requires international investors to place a
percentage of portfolio investment in noninterest-bearing accounts for up to 2
years, has been effectively suspended through reduction to zero of the
applicable percentage; the mechanism could be resurrected depending on economic
circumstances.
Total foreign direct investment flows in 2001 grew to $4.6 billion,
up from $3.6 billion in 2000 but down from $9.2 billion in 1999. In 2000, Chile
experienced an inflow of $.64 billion, largely the result of increased inward
foreign investment and diminished levels of Chilean direct investment abroad
($3.8 billion).
Trade
Chile's economy is highly dependent on international trade.
In 2001, exports decreased to $17.4 billion from $18.2 billion in 2000, and
imports decreased to $15.9 billion from $16.7 billion the previous year.
Exports accounted for about 25 percent of GDP. Chile has traditionally been
dependent upon copper exports; the state-owned firm CODELCO is the world's
largest copper-producing company. Foreign private investment has developed many
new mines, and the private sector now produces more copper than CODELCO.
Nontraditional exports have grown faster than those of copper and other
minerals. In 1975, nonmineral exports made up just over 30 percent of total
exports, whereas now they account for about 60 percent. The most important
nonmineral exports are forestry and wood products, fresh fruit and processed
food, fishmeal and seafood, and wine.
Chile's export markets are fairly balanced among Europe,
Asia, Latin America, and North America. The U.S., the largest-single market,
takes in 18 percent of Chile's exports. Latin America has been the
fastest-growing export market in recent years. The government actively seeks to
promote Chile's exports globally. Since 1991, Chile has signed free trade
agreements with several countries, including Canada, Mexico, Venezuela,
Colombia, and Ecuador. Chile, a member of the Asia-Pacific Economic Cooperation
(APEC) organization, is seeking to boost commercial ties to Asian markets.
Chile signed a free trade agreement with the European Union in 2002.
In keeping with its trade-oriented development strategy,
Chile negotiated a free trade agreement with the U.S. in December 2002 (U.S.
Chamber of Commerce, 2002) that is expected to be approved by the U.S. Congress
early in 2003. Chile's 1996 free trade agreement with Canada was modeled
largely on NAFTA in anticipation of an eventual trade pact with the United
States; similarly, Chile broadened its bilateral free trade agreement with
Mexico in August 1998. Chile has been a strong proponent of pressing ahead on
negotiations for a Free Trade Area of the Americas (FTAA) agreement.
Imports were down in 2001, reflecting reduced consumer demand
and deferred investment. Capital goods make up about 22 percent of total
imports. The United States is Chile's largest-single supplier, supplying 22.4
percent of the country's imports in 2001, up from 18.5 percent in 2000. Chile
is unilaterally lowering its across-the-board import tariff--for all countries
with which it does not have a trade agreement--by a percentage point each year
until it reaches 6 percent in 2003. Higher effective tariffs are charged only
on imports of wheat, wheat flour, vegetable oils, and sugar as a result of a
system of import price bands. The price bands are under challenge in the WTO.
Finance
Chile's financial sector has grown faster than other areas of
the economy over the last few years; a banking law reform approved in 1997
broadened the scope of permissible foreign activity for Chilean banks. The
Chilean Government implemented a further liberalization of capital markets in
2001. Domestically, Chileans have enjoyed the recent introduction of new
financial tools such as home equity loans, currency futures and options,
factoring, leasing, and debit cards.
The introduction of these new products has been accompanied
by increased use of traditional instruments such as loans and credit cards.
Chile's private pension system, with assets worth roughly $36 billion at the
end of September 2000, has provided an important source of investment capital
for the stock market. Chile has maintained one of the best credit ratings (S+P
A-) in Latin America despite the 1999 economic slump. In recent years, many
Chilean companies have sought to raise capital abroad due to the relatively
lower interest rates outside of Chile. There are three main ways Chilean firms
raise funds abroad: bank loans, issuance of bonds, and the selling of stock on
U.S. markets through American Depository Receipts (ADRs). Nearly all of the
funds raised go to finance investment. Combined public and private foreign debt
was roughly 50 percent of GDP at the end of 2001, low by Latin American
standards.
Investment
Climate
(Note: unless otherwise cited, the information in this section comes directly
from Chile’s Foreign Investment Committee, 2003). Chile’s work force of nearly 6 million is allocated as follows:
Services and government--36 percent; industry and commerce--34 percent;
agriculture, forestry, and fishing--14 percent; construction--7 percent;
mining--2 percent (CIA, 2003).
According to Chile’s Foreign Investment Committee, between 1974 and
2001, foreign direct investment in Chile totaled US$ 57.9 billion. Of this
amount, nearly 90 percent entered the country after the 1990 elections.
Multinational companies have been steadily making a way into different sectors
of the Chilean economy, either by developing new projects in Chile or through
mergers & acquisitions. Today, more than four thousand companies from 64
countries have investments in the country.
FDI plays a vital role in Chile's modernization, not only helping to
sustain economic growth, but has also bringing improvements in social
conditions and overall development, and by creating new jobs around the
country, it has encouraged decentralization.
In addition, foreign capital has helped to introduce new technology and
know-how, increasing Chile's commercial and financial integration with the rest
of the world. As well as efficiency gains, that has brought new training
opportunities and management techniques, as well as improving customer services
and fostering local entrepreneurship.
Chile is a good business
partner for foreign investors because it is a stable country that values
private initiative, transparency, creativity and innovative ideas. It has solid
institutions and is open to change.
Among emerging countries, Chile has a respectable record in areas such
as country risk, economic and political freedom, competitiveness, and quality
of life.
The Foreign Investment Statute
is the main gateway for incoming foreign capital. Building on rights enshrined
in Chile's Political Constitution, the Foreign Investment Statute provides a
stable and transparent legal framework, characterized by clear and enduring
rules based on the principles of non-discrimination, neutrality, and equal
treatment for local and foreign investors. Chile has signed over fifty
Bilateral Investment Treaties, providing increased security for foreign
investors in Chile as well as for Chilean investors abroad. The Chilean
government appears committed to strengthening Chile's comparative advantages
through improvements in educational standards, increased job training and
schemes to develop infrastructure and information technology.
Chile's attractive business
environment is the result of a policy-driven strategy that has focused on
building sound macroeconomic fundamentals and strong institutions, promoting
competition and international integration and creating a fairer society in
which all citizens benefit from economic development. In turn, this business
environment has been a key determinant of Chile's success in attracting foreign
investment. Economic growth has been
accompanied by decreasing inflation, a sharp drop in public debt, stable
external accounts and strong international reserves. This achievement is the
result of Chile's commitment to economic liberalization and free-market
policies, as well as of its pledge to maintain sound and responsible economic
management. The country's solid
economic fundamentals, together with the existence of clear and transparent
rules, a dynamic and innovative private sector, a skilled and increasingly
productive labor force and an independent, accountable and efficient judiciary,
are among the main incentives that Chile offers foreign investors.
These comparative advantages
are further enhanced by Chile's open economy, which has meant greater
competitiveness, lower tariffs, increasing levels of foreign trade and rapid
integration into world markets. Moreover, the country's modern
telecommunications system, its internationally competitive and solid banking
sector, improved infrastructure, excellent quality of services and increasing
access to Internet have also proven to be key factors that favorably impress
foreign investors.
Mexico is the
fifth largest country in the Western Hemisphere. With over 100 million people
in the land about three times the size of Texas; Mexico is the most populous
Spanish-speaking country in the world and the second most-populous country in
Latin America after Portuguese-speaking Brazil. In 2000, 74% of Mexicans
resided in urban areas, with half of those citizens living in cities of 100,000
or more. (Central Intelligence Agency, 2002). In Mexico, the literacy rate is over 90%. Mexico's
currency is the Peso. 1 MXP is equal 0.9 USD. Mexico and the United States
share a border of 1,900 miles, the longest international border in the world
between a developing county and a highly developed country. This proximity has
influenced Mexico's internal and external migration pattern, and also affects
the culture of both Mexico and the United States.
Economy
Mexico has
one of the 15 largest economies in the world. In the past seven years, the
country has gone through economic crisis, recovery, and growth. In the year
2001, its normal GDP is $557 billion. Its per capita GDP is $5,300, the highest
in Latin America. The annual real GDP growth: 2001 (0%); 2000 (5.5%); 1999
(3.8%); 1998 (4.8%); average real GDP growth (1998-2001): 3.5%. Inflation rate
(2001): (4.4%), 2000 (9.0%); 1999 (12.3%); 1998 (18.6%) 1997 (15.7%). Its
natural resources are petroleum, silver, copper, gold, lead, zinc, natural gas,
timber. Agriculture (5% of GDP) produces corn, beans, oilseeds, feed grains,
fruit, cotton, coffee, sugarcane, and winter vegetables. Industry (21% of GDP)
includes manufacturing, petroleum and mining. Services (66.8% of GDP) include
commerce and tourism (20.7%), transportation and communications (9.5%) (U.S.
Department of State, 2003).
In Mexico, political
instability prevented significant economic growth for much of the 19th
century and the first half of the 20th century. Since World War II,
the country has moved away from an agrarian-based economy; its economy now
relies heavily on light manufacturing and exports. The country's enormous
petroleum reserves rank it among the top ten countries in the world. Mexico is
a major exporter of crude oil and remains one of the top producers and exports
of silver. Although petroleum dominated the economy in the 1960s and 1970s,
recent governments have encouraged economic diversification. Manufacturing,
tourism, and assembly industries in northern Mexico are now important sectors
of the economy. (Mexico from Encarta, 2003).
Trade
Mexican trade policy is among the most open in the world,
with Free Trade Agreements with the U.S., Canada, the EU, and many other
countries. The country has more agreements in place (32 in total) than any
other nation. Mexico is an active and constructive participant in World Trade
Organization (WTO) matters, including the launching of the Doha trade round.
The Mexican Government and many businesses support a Free Trade Area of the
Americas. Since the 1994 devaluation Mexican governments have improved the
country's macroeconomic fundamentals. (The World Bank Group, 2002). Moody's (in March 2000) and Fitch
IBCA (in January 2002) have issued investment-grade ratings for Mexico's
sovereign debt. The upgrade from Fitch IBCA was based in part on the
determination that Mexico has not been significantly affected by "contagion"
from Argentina's debt crisis.
Mexico is
one of the world's most trade dependent countries. From January to September,
2001, Mexico's exports are $119 billion and imports $125 billion. Exports to
U.S. are $105 billion, and imports from U.S are $86 billion. Its significant
trade partners are U.S., EU, Japan, Canada, and China. Its export composition
(est.) is manufactured products 90%, petroleum products 7%, and agricultural
products 3%. The import composition (est.) is intermediate goods 77%, capital
goods 14%, and consumer goods 8%.
Mexico's largest trading partner is the United States. The US is the
destination for 88% of Mexico's exports and the source for 68% of Mexico's
imports in 2001. Mexico's exports to the U.S. account for almost one quarter of
the country's GDP. Mexico is the third largest trading partner of the United
States (after Canada and Japan). Top U.S. exports to Mexico include motor
vehicle parts, electronic equipment, and agricultural products. Top Mexican
exports to the U.S. include petroleum, cars, and electronic equipment. There is
considerable intra-company trade. Given the overall size of trade between
Mexico and the United States, there are remarkably few trade disputes,
involving relatively small dollar amounts. These disputes are generally settled
in WTO or NAFTA panels or through negotiations between the two countries. The
most significant areas of friction involve trucking, sugar, high fructose corn
syrup, and a number of other agricultural products. (U.S. Department of State,
2003).
As the result of close trading relationship with the U.S.,
the Mexican economy is strongly linked to the U.S. business cycle. With the
downturn in the U.S. economy in 2001, there was little or no growth in Mexico
in 2001. There was also a marked deceleration in domestic demand growth, as
disposable income was adversely affected by a contraction in employment and
confidence sagged. Recession of 2001, which was characterized by a 0.3 percent
decline in real GDP, was the first in Mexico's recent history not associated
with a domestic economic crisis. The 12-month inflation rate slowed to 4.4
percent at end-2001, well under the target of 6.5 percent. The weakness in
domestic demand last year contributed to a narrowing of the external current
account deficit to 2.8 percent of GDP from 3.1 percent of GDP in 2000.
(IMF, 2002).
Finance
The Mexico financial sector is small by international standards due to 1)
country's historical experience with high inflation and macroeconomic
volatility; 2) vulnerability to external shocks due to the high level of
correlation between Latin America market; and 3) numerous internal and
structural factors, such as the legacy of directed credit, financial
repression, and the closely held ownership structure of the domestic corporate
sector. The inefficient banking industry was hit hard by the 1994-1995 crisis.
(Giuale, Lafourcade & Nguyen, 2002).
The Mexican financial sector has undergone mass changes since the crisis. The
banking industry has shown significant improvement in terms of quality of
capital, profitability, and risk management practices. The efficiency has been
increased in the financial markets such as bank lending, debt market, equities
market and institutional investor. The banking system has stabilized and has been
consolidated with strong foreign presence. The Credit Suisse First Boston
Financial Group, a subsidiary of the Swiss banking giant Credit Suisse Group,
for instance, has been authorized to operate in Mexico. The goal of Mexico
financial industry is to continue increasing its efficiency, improving
accessibility, and ensuring stability and soundness. (Giuale, Lafourcade &
Nguyen, 2002).
Investment climate
Mexico has a stable, free market economy, democratic
government that is a strong advocator of free trade and foreign investment, and
fairly reliable constitutional and legal systems. Foreign Direct Investment
(FDI) presents a bright picture in the Mexican economy. In 2000, Mexico was the
largest recipient of FDI ($22.5 billion) in Latin America. Net U.S. FDI in
Mexico in 2000 was $3.2 billion, and the 2000 U.S. stock of FDI in Mexico was
$34.5 billion (U.S. BEA numbers). U.S. FDI is concentrated in the manufacturing
(mostly maquiladora or in-bond plants) and financial sectors. Final numbers for
2001 have not been published; the largest U.S. investment in 2001 was
Citigroup's $12.2 billion acquisition of Banamex. This investment was the main
reason Mexico received more FDI than Brazil in 2001.
Mexico has a stable, free market economy, democratic
government that is a strong advocator of free trade and foreign investment, and
fairly reliable constitutional and legal systems. Foreign Direct Investment
(FDI) presents a bright picture in the Mexican economy. In 2000, Mexico was the
largest recipient of FDI ($22.5 billion) in Latin America. Net U.S. FDI in
Mexico in 2000 was $3.2 billion, and the 2000 U.S. stock of FDI in Mexico was
$34.5 billion (U.S. BEA numbers). U.S. FDI is concentrated in the manufacturing
(mostly maquiladora or in-bond plants) and financial sectors. Final numbers for
2001 have not been published; the largest U.S. investment in 2001 was
Citigroup's $12.2 billion acquisition of Banamex. This investment was the main
reason Mexico received more FDI than Brazil in 2001 (U.S. Department of State,
2003).
Mexico's large population provides rich resource of labors.
In the manufacturing industry, the hourly wage is 1/7 of that in the US. And
the workers are fairly educated because of the high literacy rate. Mexico's
infrastructure is reliable and efficient for foreign business operations. The
country has the one of most extensive land transportation network in Latin
America. More than 2,400 miles of four-lane highway have been built through
government concessions to private sector contractors since 1989. Its airports
and ports have grown more efficient. A number of international airlines serve
Mexico, with direct or connecting flights from most major cities in the United
States, Canada, Europe, Japan, and Latin America. Most Mexican regional
capitals and resorts have direct air services to Mexico City or the United
States. Mexico also has modern telecommunication system. Several U.S.
telecommunications firms such as AT&T and SBC are active in Mexico. Shares
of Telmex, Mexico's incumbent dominant carrier, are traded on the New York
Stock Exchange. The teledensity rate in Mexico (around 13%) is among the lowest
in Latin America. In 2001 Mexico's satellite service sector was opened to
competition, including limited foreign direct investment (U.S. Department of
State, 2003).
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