BUSI 605 Week 8 Final Project Example

The Global Environments of Doing Business in Mexico

Introduction

Few countries matter more to American business than Mexico. The two countries share a border of nearly 2,000 miles, deeply integrated manufacturing supply chains and millions of family ties. In 2023 the United States bought more goods from Mexico than from any other country, displacing China from first place, a shift driven by U.S. tariffs on Chinese products, the pandemic's disruptions to long supply chains and the preferential terms North America's trade pact (the USMCA) gives to goods made in the region. Mexico's economy, with a gross domestic product of about $1.8 trillion and a population of nearly 132 million in 2025, is one of the largest in the world (World Bank, 2026).

Yet Mexico also presents real difficulties. Its economy has grown slowly for decades despite sweeping reforms, a large share of its workers are employed informally, organized crime affects business in many regions and recent changes to energy policy and the judiciary have raised questions among investors. Doing business in Mexico therefore requires analysis of the full range of environments that shape international business, a framework that Geringer et al. (2016) present as the set of forces, sociocultural, economic, political, legal, financial and labor among them, within which a company must operate abroad.

This paper analyzes those environments for a U.S. company considering business in Mexico. It begins with Mexico's trade and investment environment, then examines sociocultural, natural resource, economic, political, legal, financial and labor forces in turn. Recommendations for a U.S. auto parts manufacturer follow, and the paper ends by asking what a Christian view of work and neighbor adds to the assessment.

The Trade and Investment Environment

By trade share, Mexico ranks among the most open of the world's large economies. Trade in goods and services equaled about 80% of its GDP in 2025, and foreign direct investment inflows were about $45 billion in both 2024 and 2025 (World Bank, 2026). Much of this activity runs through North America. The North American Free Trade Agreement (NAFTA), which took effect in 1994, eliminated most tariffs among the United States, Mexico and Canada and turned Mexico into a manufacturing platform for the U.S. market, especially in automobiles, electronics and appliances.

Research on NAFTA's effects shows both its gains and its uneven costs. Caliendo and Parro (2015) estimated that NAFTA's tariff reductions increased trade within the bloc substantially and raised Mexico's welfare by more than one percent, with a smaller gain for the United States. Hakobyan and McLaren (2016) found that the U.S. local labor markets and industries most exposed to Mexican competition experienced slower wage growth for less-educated workers, a reminder that the agreement's effects within the United States were concentrated on particular communities. In Mexico, the gains accrued unevenly as well, flowing mostly to the northern and central states connected to U.S. supply chains.

NAFTA gave way to the USMCA in the middle of 2020. The new agreement kept duty-free trade for qualifying goods but tightened rules of origin, especially for automobiles, which now require a higher share of North American content and a share of content made by workers earning at least a set hourly wage. It also added labor provisions, including a rapid-response mechanism that allows the United States to address denials of workers' rights at specific facilities. The agreement calls for a joint review by the three countries in 2026, which has added uncertainty about its future terms.

The most important recent trend is nearshoring, the relocation of production closer to the U.S. market. Freund et al. (2024) found that after the United States imposed tariffs on Chinese goods in 2018 and 2019, U.S. imports of the affected products shifted away from China toward other countries, with Vietnam and Mexico among the largest gainers, though many of the new supply chains still depended on Chinese inputs. For a U.S. firm, Mexico's advantage is no longer only low labor cost; it is proximity combined with preferential access to the U.S. market. That advantage depends on meeting the USMCA's rules of origin. In 2025 the United States imposed tariffs on Mexican goods that did not qualify under the agreement, while goods that met its rules remained exempt, which made compliance with origin rules a central business issue.

International Organizations and Agreements

Beyond North America, Mexico participates actively in the institutions that govern international business. It has been a member of the World Trade Organization since the organization's founding in 1995 and in 1994 became the first Latin American member of the OECD, the club of advanced economies that sets standards on investment, taxation and corporate governance. It belongs to the Group of Twenty, the Pacific Alliance with Chile, Colombia and Peru, and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, which links it to Japan, Canada, Australia, Vietnam and other Pacific economies. It has a long-standing free trade agreement with the European Union, which the two sides have worked to modernize, and agreements with most of Latin America.

This network of agreements gives Mexico one of the broadest sets of preferential market access in the world, so a plant in Mexico can, in principle, serve markets well beyond the United States. In practice, most foreign investment in Mexican manufacturing is aimed at North America, but the agreements matter for firms sourcing inputs from Asia or Europe and for firms using Mexico as a regional base for Latin America. They also shape Mexico's obligations on investment protection, intellectual property and dispute settlement, which supplement domestic law for foreign investors.

Infrastructure and Logistics

The value of a location in Mexico depends heavily on getting goods across the border quickly. Most U.S.-Mexico trade moves by truck and rail through a small number of crossings, with the Laredo, Texas, crossing the busiest land port for trade in the United States. In 2023 the merger of Canadian Pacific and Kansas City Southern created a single railroad running from Canada through the United States to Mexico, which simplified rail shipments across the continent. Mexico's major seaports, including Manzanillo and Lázaro Cárdenas on the Pacific and Veracruz on the Gulf, handle imports of inputs from Asia and exports to other markets.

Infrastructure has not kept pace with nearshoring everywhere. Border crossings face congestion at peak times, highway security varies by route and, as noted below, electricity and water capacity in some industrial regions is tight. Firms planning operations in Mexico typically locate near established logistics corridors, use bonded warehouses and customs brokers experienced with export manufacturing programs and plan for delays at the border, which can be caused by inspections, protests or changes in U.S. enforcement.

Sociocultural Forces

Mexican culture places great weight on family, personal relationships and respect for hierarchy. In Hofstede's framework, Mexico scores high on power distance (81) and uncertainty avoidance (82) and low on individualism (30), compared with U.S. scores of 40, 46 and 91 respectively (Hofstede et al., 2010). The GLOBE study places Mexico in its Latin America cluster, characterized by strong loyalty to family and in-groups and relatively high power distance in practice (House et al., 2004).

These patterns appear in business relationships. Martínez and Dorfman (1998), in an ethnographic study of Mexican entrepreneurs, described business owners who saw themselves in a paternal role toward employees, valued loyalty and personal trust and blended family and business relationships. Trust, often expressed by the word confianza, is built through personal contact over time, and business is commonly conducted with people one knows. For a foreign firm, this means that relationships with suppliers, officials and employees require personal investment, face-to-face meetings and patience.

Research also cautions against applying cultural scores mechanically. Howell et al. (2003) studied leadership in Mexican maquiladoras, export assembly plants, and found that some leadership behaviors often assumed to fit poorly with Mexico's high power distance, such as participative leadership, were in fact effective, along with supportive leadership and rewards tied to performance. Mexican employees, like employees elsewhere, respond to respect and recognition. The lesson for U.S. managers is to combine a respectful, personal style and attention to hierarchy with the involvement of employees in decisions that affect their work.

Language and communication also matter. Spanish is the language of business, and while many Mexican managers speak English, communication with frontline employees, local officials and many suppliers requires Spanish. Mexican business communication is generally more indirect and more courteous in form than American communication, and building rapport before discussing business is expected. Catholicism remains the predominant religious tradition and shapes holidays, family life and social values, while Mexico's population is young relative to that of the United States, with a large working-age population entering the labor force.

The Competitive Environment

Foreign firms in Mexico compete with, sell to and buy from large Mexican business groups as well as other multinationals. Mexico's economy includes powerful family-controlled conglomerates in telecommunications, cement, beverages and retail, food, mining and banking, several of which are themselves major multinationals in the Americas. Hanson (2010) noted that limited competition in some key sectors, such as telecommunications and energy, raised costs for other businesses and contributed to Mexico's slow productivity growth, and reforms over the past decade have aimed to strengthen competition authorities and open those sectors.

For a foreign manufacturer, the competitive environment has two dimensions. In supplier markets, foreign firms often find that local suppliers capable of meeting international quality standards are in short supply, so they import inputs or bring their existing suppliers with them, which raises costs and can complicate compliance with rules of origin. In labor markets, nearshoring has intensified competition for engineers, technicians and production workers in the most popular industrial regions, raising wages and turnover. Firms that develop local suppliers and invest in training can gain an advantage over competitors that rely on imported inputs and poach workers.

Natural Resources and Energy

Mexico is rich in natural resources, including oil, natural gas, silver and other minerals, and has strong potential for solar and wind energy. Its energy sector has been shaped by state ownership. The state oil company, Pemex, held a monopoly for most of the twentieth century, and the state electricity company, CFE, dominated power generation and transmission. The 2013 energy reform opened oil, gas and electricity generation to private and foreign investment for the first time in decades, attracting new investment in exploration, pipelines and renewable generation (Alpízar-Castro & Rodríguez-Monroy, 2016).

Subsequent governments moved in the opposite direction, favoring Pemex and CFE, slowing permits for private power projects and amending the constitution to reassert the state's priority in the sector. For foreign manufacturers, the most immediate concern is the reliability and cost of electricity and the availability of clean energy, which many multinational customers now require of their suppliers. Industrial parks in some northern and central states have faced constraints on electricity and transmission capacity as nearshoring investment has grown.

Water is a second constraint. Much of northern Mexico, where manufacturing is concentrated, is arid, and droughts have strained supplies for cities and industry. Firms planning water-intensive operations should assess local water availability and the risk of restrictions, and many have invested in water recycling to reduce their exposure. Natural resource and energy conditions therefore belong in any site selection decision, alongside labor and logistics.

Economic and Socioeconomic Forces

Mexico is an upper-middle-income country, with GDP per capita of about $13,900 in 2025 (World Bank, 2026). Its economy is diversified, with a large manufacturing export sector, services, tourism, agriculture and energy. Remittances from Mexicans working abroad, mostly in the United States, reached about $65 billion in 2025, an important source of income for many households (World Bank, 2026).

The central puzzle of Mexico's economy is slow growth despite extensive reforms. Since the 1980s Mexico liberalized trade, privatized state firms, stabilized prices and joined NAFTA, yet growth in output per person has been modest. Hanson (2010) reviewed explanations and pointed to several candidates: a large informal sector that keeps resources in low-productivity firms, limited access to credit, weak competition in key industries such as telecommunications and energy, and shortcomings in education. Kehoe and Ruhl (2010) argued that reforms failed to generate growth because of remaining distortions, including weak contract enforcement, an inefficient financial system and rigidities in the labor market, comparing Mexico unfavorably with countries whose reforms produced sustained growth.

Informality is especially important. Levy (2008) argued that Mexico's social programs, by providing benefits to informal workers without the payroll taxes required in formal employment, encouraged firms and workers to remain informal, which in turn kept them small and less productive. A large share of Mexican workers are employed informally, many in small firms that do not pay social security contributions. For a foreign firm, informality affects the supplier base, since many potential local suppliers are small and informal, and competition in consumer markets, where informal businesses face lower costs.

Economic integration has also affected inequality. Verhoogen (2008) found that after the 1994 peso devaluation made exporting more profitable, the more productive Mexican manufacturing plants increased exports and upgraded the quality of their products, raising wages for their skilled workers relative to others and widening wage inequality. Atkin (2016) found that the expansion of export manufacturing between 1986 and 2000 drew some young people out of school into low-skill factory jobs, reducing educational attainment in the affected communities. These findings suggest that the benefits of export growth depend on investment in skills, an area where foreign firms can contribute through training.

Political Forces

Mexico is a federal republic with a president elected for a single six-year term, a bicameral congress and 32 federal entities with substantial powers. The political system has been dominated in recent years by the Morena party and its allies, which won the presidency in 2018 and again in 2024 with large majorities in congress. These majorities have allowed the government to pass constitutional amendments, including changes to energy policy and to the judiciary, that investors have watched closely.

Security is the most serious political risk for many firms. Violence associated with organized crime rose sharply after 2006, when the federal government intensified its campaign against drug trafficking organizations. Dell (2015) found that close elections that brought to power mayors from the party then leading the crackdown were followed by increases in drug-related violence, as the crackdowns weakened incumbent trafficking organizations and provoked struggles over territory and routes. The research shows how policy choices can reshape the geography of violence in ways that affect local business conditions.

Organized crime affects foreign investment unevenly. Ashby and Ramos (2013) found that crime reduced foreign direct investment in some sectors, such as financial services, commerce and agriculture, while investment in others, such as resource extraction, was less affected. For a foreign manufacturer, security risks include extortion, theft of cargo in transit and threats to employees. Firms manage these risks through careful site selection, security for logistics, coordination with industrial park operators and attention to the safety of employees traveling between sites. Security conditions differ greatly from one state, and even one municipality, to the next, so national averages are a poor guide; firms rely instead on local intelligence from industrial park operators, other manufacturers and specialized security consultants, and they revisit their assessments as conditions change.

Relations with the United States are a further political force. Mexico's economy depends heavily on access to the U.S. market, so U.S. trade policy, migration policy and security cooperation all affect business conditions in Mexico. The 2026 USMCA review and U.S. tariff decisions are among the largest sources of uncertainty for investors.

Legal Forces

Mexico has a civil law system, in which codified statutes rather than judicial precedent are the primary source of law. Contracts are generally enforceable, but enforcement through the courts can be slow, and Kehoe and Ruhl (2010) identified weak contract enforcement as one of the distortions limiting Mexico's growth. Many foreign firms therefore include international arbitration clauses in their contracts and rely on investment protections under trade agreements.

The judiciary has undergone a major change. A 2024 constitutional reform replaced the appointment of federal judges, including Supreme Court justices, with popular elections, the first of which were held in 2025. Supporters argued the reform would make the judiciary more accountable; critics, including business groups and many legal scholars, warned that it could reduce judicial independence and the predictability of rulings. For foreign investors, the practical effect will depend on how the newly elected courts rule in commercial and regulatory disputes, which makes this an area to monitor closely.

Other legal areas affect operations directly. Labor law, discussed below, was reformed substantially in 2019. Customs and foreign trade law matter for firms operating under Mexico's programs for manufacturing for export, which allow temporary duty-free import of inputs that are processed and re-exported, programs that require careful compliance. Intellectual property law has been strengthened under the USMCA, though enforcement varies. Anti-corruption law applies to firms in Mexico, and U.S. companies remain subject to the Foreign Corrupt Practices Act for any payments to Mexican officials.

Financial Forces

The Mexican peso floats freely and is one of the most widely traded emerging market currencies, which makes it both liquid and volatile, and its value often swings with expectations about U.S. trade policy. The peso's movements affect U.S. firms with Mexican operations in two ways: a weaker peso lowers the dollar cost of Mexican labor and local inputs, while a stronger peso raises it. Because many Mexican manufacturing operations sell their output in dollars and pay local costs in pesos, firms commonly hedge peso exposure on their operating costs. The Bank of Mexico is an independent central bank with an inflation target, which has given monetary policy credibility.

Access to finance is limited by international standards. Bank credit to the private sector is low relative to the size of the economy, and small firms in particular struggle to borrow. Bruhn and Love (2014) studied the opening of more than 800 branches of Banco Azteca in 2002 in stores of an existing retail chain, which suddenly gave many low-income communities access to bank services, and found that the change increased informal business ownership, employment and income in the affected areas. The finding shows that limited access to finance is a real constraint on Mexican businesses, and it helps explain why many local suppliers lack the capital to grow with foreign customers. Foreign manufacturers sometimes respond by helping key suppliers obtain financing or by paying them more quickly.

Labor Forces

Mexico's labor force is large, young and increasingly skilled, with a substantial supply of engineers and technicians, especially in manufacturing regions such as Nuevo León, Coahuila, Guanajuato, Querétaro and Jalisco. Labor costs remain well below those in the United States, although they have risen sharply. The minimum wage has been raised substantially each year since 2019, roughly doubling in real terms over that period, and wages in manufacturing regions with heavy nearshoring investment have risen as firms compete for workers.

The 2019 labor reform changed labor relations significantly. Workers now vote by secret ballot on their union representation and on the collective agreements that cover them, a change aimed at contracts that had been negotiated between companies and unions with little involvement by the employees, and labor disputes moved from tripartite boards to a new system of labor courts. Combined with the USMCA's rapid-response mechanism, the reform has increased the importance of genuine labor relations for foreign firms.

Human resource practices in Mexico have also evolved. Sargent and Matthews (1998) documented how multinationals in Mexico reduced their reliance on expatriate managers, developed Mexican managers and adapted their practices, including team-based approaches to work. Turnover among production workers is often high in competitive labor markets, so firms invest in benefits such as transportation, meals and savings funds, along with training and career paths, to retain workers. A respectful, personal management style that recognizes employees' families and provides stability tends to support retention.

Recommendations for a U.S. Manufacturer

Consider a composite Michigan auto parts manufacturer deciding whether to build a plant in Mexico to supply assembly plants in the United States and Mexico. The analysis suggests five recommendations. First, locate in an established manufacturing state with a proven industrial park, reliable electricity and water and an experienced workforce, such as Querétaro or Guanajuato, rather than in a region with lower costs but weaker infrastructure or higher security risk. Second, design the supply chain to meet the USMCA's automotive rules of origin from the start, since tariff-free access is the core of the investment's value, and monitor the 2026 review. Third, invest in labor relations and retention, recognizing the 2019 reform and the rising cost of turnover, and develop Mexican managers rather than relying on expatriates. Fourth, manage security deliberately, through site and route selection and cooperation with the industrial park and other firms. Fifth, hedge peso exposure on local costs and support key local suppliers with technical assistance and prompt payment, which addresses the financing constraints research has documented.

The choice of entry mode deserves particular attention. Many foreign manufacturers begin in Mexico through a shelter arrangement, in which a Mexican service company acts as the legal employer and importer of record while the foreign firm controls production. A shelter lowers the cost and risk of entry, handles payroll, customs and permits and allows the firm to learn the environment before establishing its own subsidiary. Contract manufacturing is a second option for firms unwilling to own assets, and a wholly owned subsidiary is a third, offering the most control at the highest commitment. For the Michigan manufacturer, a shelter operation in a leased building for the first two or three years would allow it to test labor availability, supplier capability and logistics before committing to its own plant.

The firm should also decide in advance which indicators would lead it to expand or retreat. Useful indicators include the outcome of the USMCA review, U.S. tariff decisions on Mexican goods, employee turnover and wage growth in the chosen region, security incidents affecting the industrial park or shipping routes and the reliability of electricity supply. Reviewing these indicators twice a year with the firm's board would turn the environmental analysis in this paper into an ongoing management tool rather than a one-time study.

The investment carries real risks, especially uncertainty about U.S. trade policy and the effects of judicial reform. Those risks argue for phased investment, starting with a leased facility and expanding as conditions become clearer, rather than for avoiding Mexico altogether.

A Christian Worldview Perspective

A Christian worldview brings several considerations to doing business in Mexico. Scripture calls for care for the sojourner and the neighbor (Leviticus 19:34; Luke 10:27), and Mexico is, quite literally, America's neighbor, linked by families, faith and work. A company that operates there has an opportunity to treat employees with dignity, pay fairly and invest in their skills, which research suggests also supports retention and productivity. The findings that export growth can draw young people out of school call for particular attention: a Christian employer might support employees' continued education or partner with local schools.

Integrity is a second consideration. In an environment where extortion and corruption are present, a firm's refusal to pay bribes and its commitment to accurate records express the biblical call to honesty in business (Proverbs 11:1). Finally, the importance of family and personal relationships in Mexican culture resonates with the biblical emphasis on community and faithfulness. Managers who build relationships of genuine trust, rather than treating suppliers and employees only as costs, reflect both good business practice and Christian love of neighbor.

Conclusion

Mexico offers U.S. firms a combination few other countries can match: proximity, preferential access to the U.S. market under the USMCA, a large and capable workforce and deep experience in export manufacturing. These advantages have made Mexico the leading destination for nearshoring. At the same time, Mexico's environments present serious challenges: security risks, slow and uncertain legal processes, energy and water constraints, informality, limited access to finance and uncertainty about U.S. trade policy and domestic reforms.

The research reviewed in this paper explains many of these conditions and suggests how firms can manage them. A U.S. firm that locates carefully, complies rigorously with trade rules, invests in its people and suppliers, manages security and currency risk and builds relationships of trust can succeed in Mexico, while contributing to the development of its communities. For most U.S. manufacturers serving the North American market, the question is not whether to consider Mexico but how to do business there well.

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