What Us Companies Need to Know: Doing Business in Mexico

FINAL PROJECT II

Moving Business to Mexico and What US Companies Need to Know.

Tracey Chirhart

2/1/18

MBA 610

        Mexico has many attractive attributes for new businesses moving across the border.  Of course, proximity to the US and NAFTA have made business advantageous. .Mexico also offers significant savings in terms of labor costs.  .  Therefore, it is crucial that US businesses understand Mexico’s legal system as it connects to the country’s economic and cultural systems and can facilitate relations between US and Mexican companies.

I.  What pertinent aspects of U.S. law should companies be aware of in their goal to do business internationally?

        A. Trade

        The North American Free Trade Agreement (NAFTA) between Canada, The United States of America and Mexico constitutes one of the biggest markets in the world. On January 1, 1994, NAFTA immediately lifted tariffs on much of goods produced by the signatory nations.  This created business opportunities between the US and Mexico that makes Mexico the 2nd largest trade partner besides Canada with the US.  There are many benefits to NAFTA including lower prices, greater economic output and job creation.  The biggest disadvantage is a reduced workforce in the US with major manufacturing companies moving to Mexico for the lower cost.  When deciding to move a business to a foreign nation, they can either export goods manufactured in the US or manufacture in Mexico. If the decision is made to manufacture there, then the option of franchising, licensing or investing in a joint venture need to be looked at.

        B. Employment

        Employment and labor laws are much different in Mexico than in the US. The Federal Labor Law (Ley Federal del Trabajo - LFT) was enacted by the federal government in 1931, based on Article 123 of the 1917 Constitution, which gave workers the right to organize labor unions and to strike (between 30-70% of Mexican workers are in a union), providing protection for women and children, an eight-hour work day and equal pay for equal work. ( Legal, I. U. (n.d.)).

           Mexico does not recognize at will employment.  Employees discharged in Mexico may bring lawsuits against former employers for wrongful discharge and the employer is required to show that the discharge was legal. Both Mexican and non-Mexican employees can bring actions under Mexican employment law, which can be costly to employers in Mexico (What Multi-National Employers Need to Know About Mexican Labor and Employment Law. (March 2011))

        C. Taxes.

        Mexican tax legislation contains different laws related to each tax. The taxes are related to income, cash flow and certain specific transactions.  ln addition to specific tax laws, there are some basic laws that refer to general tax administration, such as the Federal Income Tax Law and the Federal Fiscal Code. Taxpayers, both businesses and individuals, are obligated to request a tax ID number when they register with the Ministry of Finance and Public Credit.

        Mexico requires companies to report inflation accounting. Corporations are, therefore, required to record the effects of inflation in their official records if such inflation exceeds 26% the combined inflation of the last three years and prepare their financial statements accordingly. (Doing business in Mexico. (2008)).

II. Legal implications of moving business abroad

        There is a lot to consider when moving a business abroad.  Laws in the new country, language barriers, etiquette, corruption, and employment issues are among the many factors that need to be researched before making any decision.

        Mexico’s legal system is a civil system, which means “codified”. (Mexican Law.  (n.d.)) and stems from 16th century law from Spain and  pre-Columbian indigenous law as well.  The US, on the other hand, is a common law system, with roots in the English common law.  The Constitution, legislation and regulations are recognized as law where as in civil law the documents are the law. (Mexican Law.  (n.d.)).

        Thus, U.S. businesspeople are dealing with a very different way of doing things when dealing with the Mexican legal system. In Mexico, a judge leads and regulates the course of litigation, investigating facts, examining witnesses and appointing experts and there is no jury.  In the United States, attorneys for the plaintiff or defendant may do these tasks (Mexican Legal System Overview. (n.d.)).  Any company ready to do business in Mexico need to hire a Mexican attorney since US attorneys cannot practice law in Mexico and vice versa.

III. Ethical Implications

        Corruption is a significant risk for companies operating in Mexico. Bribery is widespread in the country's judiciary and police, and business registration processes, including getting construction permits and licenses, are negatively influenced by corruption. Organized crime continues to be a very problematic factor for business, imposing large costs on companies

        The Foreign Corrupt Practices Act (FCPA) makes it illegal for companies and their supervisors to influence foreign officials with any personal payments or rewards. It is designed to prevent bribing of foreign officials to obtain foreign government contracts. Corruption is prohibited under Mexican law. The FCPA applies to any person who has a certain degree of connection to the United States and engages in foreign corrupt practices. Many of these markets are rife with corruption--but this practice is not necessarily perceived as a serious crime in some places. It's more a way of doing business. Companies that have businesses in Mexico need to build relationships with local advisers such as lawyers, accountants, bankers, customs/shipping specialists and insurance professionals and have patience.
         Though trade through NAFTA has created many jobs for Mexicans, it arguably has taken jobs away from US laborers and decreased investment in US markets. In pursuit of lower costs of labor, many large United States companies such as Goodyear and General Motors have shifted manufacturing south of the border. This is creating less jobs for American workers in the US.  It should be noted that the US may be compelled to work with local unions and may hire workers chosen by them.  Businesses should be aware of the unions and comply with working standards.

        With businesses relocating to Mexico, the influx will create environmental issues such as pollution and waste. The country is working to improve the pollution issues, but they are still behind the US in terms of standards. The Federal Attorney General for Environmental Protection is responsible for enforcement of the law and regulations implementing it.  The General Ecology Law in Mexico addresses water, air and ground pollution, resource conservation and environmental enforcement (Legal, I. U. (n.d.)).   US companies doing business in Mexico need to be aware that enforcement laws and regulations are becoming more and more stricter.  There are environmental inspectors at the border that monitor manufacturing plants for pollution and will order a business to close for noncompliance.

IV. Comply