Mexico's economy is characterized by contrasting because of its mixture of outmoded and advanced industries. The most attractive sectors for FDI are manufacturing, trade activities and financial activities. Although Mexico offers an open economy for foreign investors, several crucial sectors can be described as being dominated by a few companies, inhibiting competition in these sectors. Examples of these sectors are telecommunications, electricity, television broadcasting, petroleum and cement sectors.
The liberalization of trade and FDI has contributed to Mexico's economic growth (albeit slow growth compared to other Latin American countries); nonetheless, Mexico continues to exhibit high levels of poverty. According the Coneval, the Mexican government agency in charge of tracking changes in poverty, the number of people living in poverty (defined as living on 2,100 pesos or $150) increased from 49 million to 52 million between 2008, 2010 (Uranga, 2011). Moreover, wages continue to be low with the daily minimum wage in 2011 ranging from 54.47 pesos ($4.45)-57.46 pesos ($4.69) depending on the region of the country. Given the competition for foreign direct investment from other countries boasting low wages, such as China and India, a rise in Mexican wages is unlikely in the near future.
Similar to many countries in Latin America, Mexico has an active and wide ranging informal economy. According to a study by the ILO in 2003, 41.8% of all jobs in Mexico were informal with 17.9% in the informal small business sector. As in any nation, the informal economy undermines lawful business interaction since informal businesses are not complying with business regulation laws, such as taxes and labor laws. The inconsistent enforcement on the part of regulatory agencies allows informal businesses to sell pirated and “poor-quality goods at low prices undercutting the competitiveness of lawful firms”. Moreover, Mexico has experienced complications arising from the connection of the informal sector with the drug trade.
Brazil: The import substitution model that was used for economic development in Brazil in the 1980s focused on establishing domestic industries in order to limit dependence on foreign production. This model was not successful in transitioning Brazil into the new economic realities of globalization. However, the 1990s brought important reforms, including a reduction of state intervention in the economy, the liberalization of the flow of trade and capital and the privatization of state-owned companies. Furthermore, in 1994 Brazil introduced an economic stabilization plan called Plano Real in order to contain runaway inflation.
Brazil has treaties prohibiting double taxation with twenty-four countries including, the Netherlands, France, Italy and Argentina. However, it has no such treaty with the United States. Also, Brazil does not have a “bilateral investment treaty” with the United States although investments from U.S. companies are a significant part of the total FDI in Brazil, calculated at $56.7 billion in 2009.
During the mid-1990s, Brazil experienced an increase in FDI, a trend that has continued. Moreover, Brazil has taken center stage in Latin America as an attractive destination for foreign investment due to its rising middle class and growing domestic consumption. Compared to Mexico, Brazil has a larger economy and is currently ranked as the ninth largest economy by GDP. Furthermore, its economy has experienced significantly stronger growth in GDP per capita than Mexico, as indicated in Fig. 1.
Brazil is recognized for its well-developed agricultural, mining, manufacturing and service sectors and its ability to continue to “expand into world markets”, including airplane manufacturing and hydroelectric power. However, some sectors, such as non-cable television broadcasting and aviation, offer limited openness to foreign investment. In the broadcasting sector, companies are subject to regulations requiring that a minimum of 80% of programming have domestic origins. In the aviation sector, the foreign ownership is restricted to 20%.
The liberalization of Brazil's economy also had a positive impact on FDI. For example, the Brazilian government extends special tax benefits for investments in underdeveloped regions of the country. An economy considered less open than Mexico, Brazil has more FDI inflows than Mexico in recent years and is currently the largest recipient of FDI in Latin America. Figure 2 depicts a comparison of FDI inflows in Mexico and Brazil.
Like Mexico, Brazil also has a poverty problem, with about 16 million people living in extreme poverty, defined as living on 70 reais or less (equivalent to $44 a month). However, the government has developed programs, such as "Bolsa Familia”, that have helped address the needs of the poor. Nonetheless, wages in Brazil are relatively low in comparison with other countries. For 2011, the minimum monthly wage was 510 reais ($320).
Brazil parallels Mexico with an active informal economy that undermines lawful business. In 2003, a study by the ILO reported that 44.6% of the jobs in Brazil are part of the informal economy, of which 14.3% are informal micro and small enterprises.
Business structures: The legal framework of a country plays a crucial role in the regulation of the economy and businesses. As the business environments of Mexico and Brazil continue to evolve, modifications to the legal framework regarding business are highly likely in order to accommodate the changing global economy.
Mexico: In contrast to the United States and other countries with ties to the English system, the legal system in Mexico and Brazil is based on civil law, with roots in the Napoleonic law. The main difference is that the law
that is applied comes exclusively from the Constitution and codes. This detail is important to note because a person who is conducting business in Mexico will encounter many federal laws and detailed codes that affect business operations. In Mexico the legal framework affecting business organizations is primarily at the federal rather than the state level. The General Corporation Law provides for the existence of six types of commercial organizations. However, the most commonly used commercial organizations are the limited liability stock called “sociedad anónima” and the limited liability company known as “sociedad de responsabilidad limitada”.
The limited liability stock or “sociedad anónima”, which is the most widely used business structure in Mexico is estimated to represent 99% of the capital invested in Mexico. Requirements for the establishment of a "sociedad anónima" include a minimum of two stockholders and a minimum share capital of at least 50,000 Mexican pesos. The authorized capital for a sociedad anónima must be “paid or pledged” upon the incorporation. The management of a "sociedad anonima" can comprise a sole administrator or a board of directors.
The limited liability company or “sociedad de responsabilidad limitada” is “formed by members whose obligations are limited to the payment of their contributions to the capital” of the company. As with "sociedades anónimas”, the limited liability company must have a minimum of two members but not exceed fifty members. In order to establish a limited liability company, there is a minimum capital requirement of 3,000 Mexican pesos. In contrast to a "sociedad anónima”, ownership interests are not represented by negotiable certificates. Ownership interests can be transferred only in specific cases approved by the General Corporation Law.
Brazil: As is the case in Mexico, the basic legal structure of Brazil is based on civil law with businesses having to comply with various civil codes. Brazil offers various methods of conducting business, including joint ventures, corporations and franchises. The most common procedure used by foreign investors for conducting business in Brazil is business formation. As in Mexico, the most popular business structures in Brazil are the limited liability company ("sociedade limitada") and the joint-stock company
A "sociedade por acoes " (joint-stock company) can be formed by public or private subscription of its shares. Both the “sociedade por acoes” and the “sociedade limitada” must have a minimum of two partners, whether individuals or legal entities. In a joint-stock company each shareholder is "liable only to the extent that the capital stock for which it has subscribed remains unpaid” and a minimum of 10% of the capital must be paid upon the incorporation. Contrary to Mexico, Brazil has no minimum corporate capital requirements for establishing either business structure. Instead, the corporate capital may be divided among the partners according to the bylaws.
Similar to the formation of a joint-stock corporation, a limited liability company requires a minimum of two partners, whether individuals or legal entities, who do not need to reside in Brazil. Like the joint-stock corporation there is no minimum capital requirement for establishing a limited liability company. A major distinction, however, is that in a limited liability company, the liability of each partner is limited to the amount of its contributions, but all partners are jointly liable for the total amount of the capital stock until it is fully paid. Also, the corporate capital can be divided into quotas and allocated to its partners in proportions according to the bylaws. The management of a limited liability company may be appointed to either an individual or to a group of senior managers.
Mexico and Brazil share common features in their business structures within a similar legal framework. However, based on the World Bank 2011 rankings of 183 economies, Mexico is viewed as an economy where it is easier to do business in comparison to Brazil. Mexico has also been recognized as having a more liberal business environment as a result of recent reforms tha