Mexico Pest Analysis
Mexico PEST Analysis Executive Summary Mexico has resulted in recent years as one of the most promising emerging economics nevertheless the downturn occurred in 2009 under the influence of the crisis in the United States. In 2010 the economy has restarted its growth trend, which according to the forecast will bring the Country among the elites of world economy. This short paper explains the fundamental factors determining Mexico economic growth using the PEST Analysis Framework.
In particular it focus on how International Business activities has contributed to economic development of the Country, offering also an once-over on the main industry involved in this process. Mexico PEST Analysis Introduction Approaching the research for this paper I went through an article that caught my attention and made me consider how important could be to understand the growth of Mexico in recent years. The first lines of this article tell “Mexico will overtake Italy to become the world’s 10th largest economy (in terms of GDP at purchasing power parity) by 2020.
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(Euromonitor International, July 2010) This means that in less than a decade Mexico could abandon the Next Eight group of G20 taking place of Italy, my “decayed” home-country, among the ten most developed economies of the world. Going beyond the disappointment for the bad performance of Italian economy, it’s remarkable that for the first time a country from Latin America is going to enter the elite of world economies. For this reason it was really interesting to deepen the factors that are leading Mexico growth and PEST Analysis resulted the perfect instrument for this investigation. P – Political Environment
Mexico has been a Federal Republic since 1917, year in which the Mexican Constitution was issued. After a period of instability that followed the revolution, the Government was controlled for 71 years by the Institutional Revolutionary Party (PRI) formed in 1929 (Bureau of Western Hemisphere Affairs, December 2010). Only in July 2000, after a period of economic recession in the mid-1990’s, President Vicente Fox Quesada from National Action Party (PAN) was elected in what were considered the firs democratic and fair elections in Mexican history (Bureau of Western Hemisphere Affairs, December 2010).
Since then an important period of reforms took place in order to respond to the demand for greater accountability and transparency of public institutions and to fight corruption, drug violence and crime in the Country. The following President Felipe Calderon Hinojosa, elected in 2006 from PAN, continued the reform agenda implemented by Fox, improving public safety, fighting drug cartels, promoting greater foreign investment and enhancing Mexico’s economy competitiveness through structural reforms of the pension and labor laws (Library of Congress, July 2008).
This period of reform has improved the political environment in Mexico, nevertheless several problems remain especially considering corruption and crime. As shown in Exhibit 1 Mexico ranked 89th out of 180 countries in Transparency International’s 2009 corruption perceptions index. To respond to this problem the government in 2010 fired almost 10% of federal police force (Euromonitor International, September 2011). Crime and in particular drug and people traffic across the borders with the U. S. are the main pains for Mexican political situation.
The Country also shows one of the highest murder rates of Latin America (Exhibit 2). These problems also affect business security in fact, according to Euromonitor, in 2008 the Mexican Government spent around 8% of its GDP facing the expenses generated by crime and insecurity in the Country. Mexico has benefited for several years from foreign direct investments (FDI) from the U. S. that drove the GDP growth since 2008, when the economic downturn in North America affected also Mexican economy, leading in the Government to hold public debt for Mx$5,608,941 million, equivalent to 42. % of GDP, in 2010 (Euromonitor International, September 2011). E – Economic Environment As briefly explained in the previous section, Mexican economy has been strictly dependent on U. S. economy, following its cycles and trends since NAFTA agreement signed in 1994 by United States, Mexico and Canada as established a strong economical and political cooperation between these countries. Exhibit 3 shows that Mexican GDP at PPP has had a constant growth since 2001, except for 2009 when it fell down suffering the effect of the crisis that affected the U.
S. since 2008. From 2001 to 2009 the CAGR for GDP at PPP resulted around 5. 5%, and after a 6. 5% loss in 2009 the economy has returned to grow at around 5% annually and the GDP is expected to increase in the future at an higher rate, allowing Mexico to overcome Italy in the G20 ranking (Euromonitor International, January 2011). The strong influence of U. S. economy on Mexican one is confirmed analyzing Exhibit 3 with respect to foreign direct investment and exports.
United States accounts for more than 45% of total FDI inflows in Mexico and, even if the Country is actually the largest host of FDI in Latin America, it’s undeniable that accordingly with economic downturns in the U. S. the figure of FDI in Mexico declines significantly (Bureau of Western Hemisphere Affairs, December 2010) like happened from 2007 to 2009 (Exhibit 4). The same mechanism act also with exports because U. S. attracts almost 80% of Mexican exports thus during periods of crisis in the U. S.
Mexico suffers slowdown in foreign trade (Exhibit 5). In Mexico manufacturing is the leading sector both for internal output and exports. It accounts for around 18% of GDP, 16% of labor force and more then 80% of total exports (Library of Congress, July 2008). In particular the main manufacturing industries are automotive and oil. The first is considered one of the best export platforms to meet global demand for smaller, cheaper cars, and motor and in next four years could experience a significant period of growth thanks to announced investments of US$4. billion (Euromonitor International, September 2011). The oil industry generates over 10% of the country’s export earnings and 40% of all government revenue. Pemex, the state oil company, is the world’s fifth largest oil company. However even if it still remain a monopoly of the Government for its fundamental importance for Mexican government budget, in 2008 the energy reform passed by the Mexican Congress gave the company more budget autonomy and transparency (Library of Congress, July 2008).
Tourism is also an important sector, providing employment for more than 13% of the work force, but in recent years suffered several problems which resulted in a fall of revenues by 4. 5% in 2010 (Euromonitor International, September 2011). S – Social Environment Mexico is the most populous Spanish-speaking country in the world and the second most-populous country in Latin America after Brazil (Bureau of Western Hemisphere Affairs, December 2010). Its population has grown at an average rate of 1. 3% from 1990 to 2010, when Mexico counted 109. 0 million people.
Population growth is decelerating over time and Mexico is experiencing an ageing process (Euromonitor International, January 2011). At the same time consumer expenditures and disposable income per capita have grown and are expected to keep growing in the future, nevertheless the increasing unemployment rate that remain a main problem in Mexico (Exhibit 6). The segment of population considered middle class is growing like in other emerging economics but significant differences remain between urban and rural population and different areas of the Country.
Emigrations have always been a fundamental pattern of Mexican social environment and since 1970 net migration has been negative. It has always helped Mexican economy to absorb the problem of unemployment and to generate an inflow of money and investments (Euromonitor, September 2011). However in recent also years emigrations has been influenced by the crisis of U. S. economy and as shown in Exhibit 7 since 2007 the net migrations has started decreasing due to the unattractive condition of the labor market in North America.
The population is reaching higher standard of education. In 2010 literacy ratio of the Country has reached almost 94% growing of around 4% in the last ten years (Exhibit 8) and also government investments in education have grown in recent years. The improvement in education, the stronger influence of North American culture, due to the return of many emigrants and to the advance of telecommunications and media, and the growth in disposable income are changing the culture and the social values especially among young people and middle class (Euromonitor International, March 2011).
Consumer behavior and expenditures of these segments of population are getting even more close to U. S. standards making the Mexican market extremely attractive for foreign consumer goods companies. T – Technological Environment Mexico’s technology, communications and media industry has been enjoying high levels of growth in recent years. Exhibit 9 summarizes the composition of Mexican consumer expenditures on communication in 2009. Since 1990 the liberalization of telecommunication services has openened the sector to other private carriers, and even if Telmex remains the dominant player of he market with around 80% of market share (Business Monitor International, August 2011), the reform has boosted the growth of fixed-line telephones and broadband Internet connection (Exhibit 10). However the highest growth has been experienced by mobile communications market in during the period of 2003-2008. The percentage of households in possession of a mobile phone increased from 34. 0% in 2003 to 80. 0% in 2008. As a result, the share of mobile telecoms revenues in total telecoms revenues grew from 37. 0% to 53. 5% during the same period (Euromonitor, October 2009) as confirmed by Exhibit 11.
Also in this field the influence of U. S. it’s relevant because there are currently 39 bilateral agreements that govern shared use of the radio spectrum at the borders between Mexico and North America. Recent border agreements also cover mobile broadband services such as smartphones and similar devices (Bureau of Western Hemisphere Affairs, December 2010). This cooperation results of fundamental importance not only to promote growth in the sector but also to ensure compatible services and public communications security in the border area. Conclusion
After this analysis it clearly results that a convergence of political, economical and social events are leading Mexican economy to modernization and growth. The strong ties with United States have acted like a double edge in recent years but if crisis in North America will be absorbed as expected starting from next year, also Mexico would benefit the positive upturn of U. S. economy. In this case the Government would have a fundamental role implementing the necessary structural policies to improve international business activities and at the same time sustaining the economy growth internally.
In this way Mexico could definitely find its place among the ten most developed economies of the world. References Bureau of Western Hemisphere Affairs (December 2010). Background note: Mexico. Retrieved from:
http://www. state. gov/r/pa/ei/bgn/35749. htm
http://search. proquest. com/docview/885250182? accountid=10901