Emerging Market Report

EmergingMarket Report

Anemerging market is basically a country with some characteristics of adeveloped market although it fails to meet the standards of adeveloped market. This means that, such a country had once been adeveloped market or will achieve the status in the future. Emergingmarkets generally lack the level of efficiency and stringentstandards in accounting and securities measure to match advancedeconomies like the United States, Japan or Europe. However, thesemarkets have physical financial infrastructure such as stockexchange, banks and a common currency. Mexico’s economy meets thecriteria of an emerging market. Its GDP per capita beats majority ofits counterparts in the developing world even though it falls shortof the threshold expected of a developed economy. Emerging marketsare important because they provide an opportunity for investors toexplore the market and expand their business margins. Unlikedeveloped markets, emerging markets are easy to penetrate. A perfectmodel of an emerging market is Mexico.

Mexicois a trillion dollar economy making it the second largest economy inLatin America and 15thlargest in the globe. The economy of Mexico recovered completelyafter a decline in 2009 standing at 4.4% in the period of 2010-2012.Nevertheless, the economy has slowed beginning 2013 mainly because ofoil production and a significant decline in world oil prices. In aneffort to salvage the economy, the government has put into placepolicies to curtail public sector spending over a two year period of2015-2016 to shield the effects of low oil prices. The World Bankpredicts that, the gradual recovery of Mexico’s economic activitywill continue with the growth strengthening up to 3.0% in 2017 from2.3% in 2015. For this reason, Mexico meets the criterion of anemerging market.

Thecurrent report seeks to explore Mexico’s economic, social,political, and ideological factors that place it as an emergingmarket. These parameters are important in accessing a country’seconomy. Failure to meet the set criteria for a developed market, andsurpassing the criterion for developing markets places Mexico as asuitable emerging market as will be seen in this report. Eachparameter will be explored in depth giving the reader a deepunderstanding of the country as an emerging market.

Globaloverview of Mexico

Mexicois in North America and borders the Gulf of Mexico and Caribbean Sea,between Belize and the U.S and neighbors Pacific Ocean, between theU.S and Guatemala. These boundaries open Mexico to great businessopportunities. It is has several ports that enable it to carry outbusiness with the United States including exports and imports (Jain,Hausknecht &amp Mukherjee, 2013). Nevertheless, the borders exposeMexico to natural hazards. Tsunamis along the greater pacific coastare a potential hazard. In addition, there are volcanic activitiesand destructive earthquakes in the south and central as well ashurricanes on the Gulf of Mexico, Caribbean coasts and the Pacific.These borders are also porous and allow free trade including illegaltrade. As such the country makes revenue from legal trade whichcontributes to the country’s economy.

Mexicois situated in the southern part of North America and covers a periodof more than 200 years. It has an area of over 1.9 square kilometers.The country’s population is huge standing at about 112,468,855people as at (Laurell, 2015). The main language spoken in Mexico isSpanish which doubles up as the ethnic language. Mexico City is thelargest City and the Capital of the country. It is estimated that,over 22 million people live around the area of Mexico City making itthe most populous region in the Western Hemisphere. The country isknown for its fashion, sports and recreation, and great recipes. Witha rich social, cultural, political and economic demeanor, Mexico isone of the most lucrative emerging markets not only in North America,but also in the world.

Mexicohas been engaged in various disputes along its borders particularlywith the United States. Lack of sufficient rainfall in the recentpast along U.S-Mexico border has revolutionized periodically stressedwater sharing agreements. As such, the U.S heightened securitymeasures to man and control legal and illegal people and transport ofcommodities across its borders with Mexico. Besides, Mexico is forcedto deal with thousands of poor Guatemalans among other CentralAmericans who perforate through its borders looking for work in theU.S and in Mexico. However, Mexico and Belize are working to resolveminor border separation issues arising from inconsistencies in theborder treaty of 1898. The strenuous relationship between Mexico andits neighbors harms the country’s trade relations.

Socialfactors

Understandingof social sections allows an organization to understand customerdemographic through distribution of income, rural urban segmentation,health care, education and centers of influence. Mexico is the mostpopulated country of Spanish descent in the world and is the secondmost populated state in Latin America followed by thePortuguese-speaking Brazil. More than 76 percent of the people inMexico dwell in urban areas. Most natives immigrate from the villagesto seek employment in the urban. The underdeveloped states in thesouth and the overpopulated central plateau to developed urbancenters along the Mexico United States border. It is estimated that,more than 22 million people reside in areas around Mexico City whichmakes it the most populous region in the Western Hemisphere. Inrecent years, cities bordering the U.S including Tijuana and CiudadJuarez, cities in the interior like Guadalajara Puebla and Monterreyhave seen significant rises in their population.

Thesocial cultural aspects of the environment entail customs, values andlifestyles that characterize the community in which organizationsoperate. Social cultural aspects of the environment determine theability of a firm to acquire resources, produce its goods orservices, and function in the confinement of the society (Berkman,Kawachi &amp Glymour, 2014). Social cultural aspects entail anythingwithin the confinement of the society which has the potential ofinfluencing a firm. Population demographics, norms and values, risingeducational levels, as well as attitudes on social responsibility area reflection of socio-cultural variables. Mexico as a country hasmade considerable progress in improving access to education as wellas literacy rates in the last decades. In a 2006 World Bank report,primary level children enrollment was almost universal with almostall children completing their basic education. The average schoolingyears in the country rose to 8 years for 15 year olds between2004-2005 periods from the previous decade’s 6.8 years (Berkman,Kawachi &amp Glymour, 2014). This is high but still low whenmeasured against other countries in OECD (Organizations for EconomicCooperation and Development).

Drugsare a major issue facing Mexico as an emerging market. Main drugs areproduced and transported through Mexico. Mexico is the second largestopium poppy cultivator in the world. In 2009, poppy cultivationincreased by 31 percent as compared to 2008 where 19,500 hectares ofland were under poppies (Dube, Dube &amp García-Ponce, 2013). Thewar on drugs has been a hot issue in Mexico and U.S. drug issue isalso highly politicized hindering its success. This has led toincrease in other illegal business including cartels. This may affectMexico’s potential as an emerging market (Hennart, 2012). Thecurrent government has joined forces with the U.S to fight drugsalthough it has not been successful. Ideologicalfactors

Mexicolike most countries in the 21stcentury believes in neoliberalism, which is in essence the last phaseof capitalism (Laurell, 2015). For the last three decades, neoliberalpolicies of Mexico followed a free market replica (stipulated by theWorld Bank and IMF) by hugely ending subsidies for production ofgrains in particular maize (Munck, 2013). Under NAFTA, cornprotective tariffs ended in 2008. Most campensino produces plantcorn both for self consumption and for home markets providing asource of revenue for goods that campensino families are not able toproduce on their own for instance tools, school supplies, medicine,cookware etc. by reducing prices in domestic markets, compensinoshave to look elsewhere for a source of livelihood while continuing toproduce for subsistence purposes (Greenberg, Browning-Aiken,Alexander, &amp Weaver, 2012). Mexico’s neoliberalism ideology hasseen increased benefit to majority of population but has alsoresulted to surging among the populace (Eckstein, 2014). Economicfactors

Mexicohas a $1.3 trillion economy and has continuously become inclinedtowards manufacturing in the last two decades since the enactment ofthe North American Free Trade Agreement (NAFTA) (Simon, 2014). Thecountry’s per capita income is almost a third that of the U.S.However, income distribution still remains significantly unequal. Itis the United States second biggest export market and stands atposition three in terms of import source. During the year 2014, tradebetween the United States and Mexico exceeded $550 billion. It hasseveral trade agreements with about 46 other states placing over 90percent of its trade under free trade contracts. Mexico joined theTrans-Pacific partnership agreements in 2012 forming the PacificAlliance with Columbia, Peru and Chile.

Duringthe first two years of President Enrique Pena Nieto’s government,emphasis was placed on economic reforms in the first two years ofpower. These include the passing and implementation of comprehensiveeducation, financial, energy, telecommunication and fiscal reformlegislations to mention a few which aimed at enhancingcompetitiveness and economic development across the country’seconomy.

Mexicohas an economic freedom of 66.4 which makes its economy the 59thfreest in the 2015. This score declined by 0.4 index from 2014 withimprovements being realized in three of the ten economic freedomsamong them freedom from corruption, labor corruption, fiscal freedom,business freedom, and offset by reduction in the management ofgovernment spending. The country is positioned at number three out ofthree nations in North America region although this score is wellabove the global average.

Inthe last five years, economic freedom in Mexico has fallen by 1.4points. Worsening in the fiscal and regulatory environments hasoccurred in a situation of slow economic growth in spite of reformoriented leadership which is focused on boosting competition andopening the economy to investment and trade (Kobrin, 2013).

Mexico’seconomic growth has been influenced mainly by integration with theU.S and Canada in NAFTA, although economic performance is still belowpotential. Regardless, a more open financial environment, traderegulations continue to destabilize economic efficiency (Solis,2013). To achieve a more dynamic growth will need wide based changesto enhance the investment climate and improve the rule of law.

Thetop personal income tax rate in Mexico has been increased to 35percent while the corporate tax rate remains at a flat rate of 30percent. Value added tax is also applicable. Tax revenues amount to10 percent of local income and public spending amount to 27.1 percentof local production. In addition, public debt equals to 46 percent ofthe country’s gross domestic product.

Mexicohas a 2.2 % average tariff rate. It has unilaterally minimized tariffand non tariff hurdles and through trade treaties like the PacificAlliance (Kobrin, 2013). A legislation enacted in 2013 will partlyexpose the energy sector to overseas investment. The financial sectoris quite small and has limited dynamism. Mexico therefore needs tocreate deeper and more accessible banking system to supportinvestment and development.

Despitethe economy being projected to experience vehement growth in 2015 dueto increased investment and high demand for exports from Mexico,growth is projected to be below potential due to corruption,inefficiencies, with a huge part of the economy and workforce in theinformal industry. On a short term basis, the economy is susceptibleto global economic pressure including increasing interest rates,lower external demands, and falling oil prices considering that morethan a third of government’s income is accrued from the governmentowned oil company, PEMEX (Solis, 2013). Ultimately, the risingintegration of supply chains, growth of energy industry, andgovernment to government interest on trade facilitation will go onmaking North America region more competitive and contribute to theeconomic development and strength of Mexico.

Politicalfactors

Thepolitical system of a country is very important in influencing new aswell as existing markets. It is the federal government in Mexico thatis responsible for enacting and enforcing legislation in regard tothe entire country’s operations. Government actions affect asignificant number of businesses and are usually consistent acrossthe different states or provinces. The political landscape in Mexicois quite stable with democracy being practiced (Smith, 2015).

Povertyin Mexico is a major problem resulting not only from individualfactors, but from political and geographic factors. Nevertheless,poverty in the country is due to poor political economy in thecountry. The World Bank and the International Monetary Fund had inthe past advocated for structural adjustment in policies in thecountry, since the government did not carry out sufficient policiesto support successful development and investment. These institutionshave therefore been forced to withhold funding to the country oncondition that Mexico open up its economy and reduce social spendingto be able to repay its debts. The projects by the World Bank and IMFare meant to reduce poverty in the country but it appeared that theywere aggravating the situation. Mexico has a better position toaddress its social and political issues to achieve sustainabledevelopment. Nevertheless, the country’s leadership realizes theimportance of investment and has made significant reforms to attractinvestment and create employment.

Currently,president Enrique Nieto who took oath of office in 2012 has madeextensive progress in constitutional reforms in different areasincluding education, telecommunication and energy but it stillremains unclear whether or not new legislations will supportcompetition (Smith, 2015). The authority has focused on centralizingpower further with an economic reform that increased taxes andpromised returns to curtail spending. The newly introduced anti-trustlegislation has also raised uncertainty among investors. Efforts toreform the judiciary and fight endemic corruption that mushroomed in2008 have not been successful and are far from fulfilling the 2016projections (Kearney, 2012). In addition, the recent migration issueson the U.S-Mexico border and the increase in militias in Michoacanportray weakness in the country’s security forces. However, PenaNieto government maintains that there has been a decline in homiciderate whereas other sources indicate otherwise as organized crimeremains high.

Corruptionis extensively rooted culturally and remains persistent at all levelsof the society, supported by and establishing the power of partybosses, monopolists, along other criminals. Billions of narco-dollarsfrom the U.S entering Mexico year in year out affect the politicallandscape in both state and local levels (Ahmed &amp Zlate, 2014).Generally, contracts are upheld although courts remain deficient andare susceptible to political interference.

Inthe past, reforms have improved the regulatory framework although thepace of reform has lagged as compared to other emerging markets. Tocomplete licensing needs takes up to three months. Strict andoutdated labor laws create incentives for organizations to operateoutside the formal industry. The current government has implementedcomprehensive energy and fiscal changes but should further minimizesubsidies and inflation.

Resourcebased view theory

Thistheory sees resources, both tangible and intangible as essential tobetter performance by an organization. Resources are key to acquiringsuperior performance by the organizations. It is an approach toattain competitive advantage. Resources allow organizations toachieve and uphold competitive advantage. Therefore, an organizationneeds to asses itself and identify its sources of competitiveadvantage rather than focus on its competitive environment. For acountry like Mexico, which is rich in economic, social, political andcultural resources, economic enterprises stand a better to chance toachieve competitive advantage.

Institutionaltheory

Thistheory emphasizes on how social structures such as norms, rules,schemes, and routines get established as authoritative principles forsocial behavior. For organizations to survive, they have to conformto systems of rules and beliefs that exist in its environment(Scott,1995). For examples, organizations that operate in differentcountries that have varying institutional environments are faced withdiverse pressures. Such pressures in the home and host environmentcan significantly impact on competitive strategy of an organizationPolitical, social, and economic factors make up an institutionalstructure of a certain environment which gives businesses advantagesfor carrying out specific activities in that environment. A businessis likely to thrive better if it gets institutional support. Thepolitical stability in Mexico has provided a favorable environmentfor both existing and emerging businesses to operate.

Thesetheories explain how various factors affect the success of anemerging market. The more market-friendly the environment is, thehigher the chances of success.

Conclusion

Mexico’slocation in North America makes it a perfect hub for business. Itshares a border with the world super power, the United States.Although there are various challenges that face Mexico in regard toits boundaries, Mexico is able to carry out business with the UnitedStates. The country enjoys trade agreements with about 46 countrieswhich has helped the country interconnect and do business with othercountries. The political climate in Mexico is quite stable underEnrique Pena Nieto leadership. The government has undertaken variouspolicy changes to enhance trade and investment in the country. Onsocial factors, the country has had its own share of issues startingfrom massive rural urban migration. Over 75 percent of the populationlives in the urban. Mexico City is the most populated city in thecountry with over 22 million people living in areas neighboring it.The literacy level in the country has increased three fold over thelast two decades. The drug issue is not only a political issue, butalso a social economic one. Mexico is one of the largest drugproducers and large drug consignments make their way through Mexicoto the United States and other parts of the world (Shirk, 2014). Thewar on drugs is greasy and usually yields little or no success.Organized crime has been able to flourish due to drug cartels. Thishas made Mexico unattractive for investors. Nevertheless, the reformsundertaken by the government to fight corruption, crime and drugs aswell as improving trade treaties with other countries have made asignificant progress in the country’s economy. Ultimately, Mexicoremains an attractive emerging market in North America and in theworld at large. Its souring population, location and neoliberalismideologies have achieved great progress both socially andeconomically.

References

Ahmed,S., &amp Zlate, A. (2014). Capital flows to emerging marketeconomies: a brave new world?. Journalof International Money and Finance,48,221-248.

Berkman,L. F., Kawachi, I., &amp Glymour, M. (Eds.). (2014). Socialepidemiology.Oxford University Press.

Dube,A., Dube, O., &amp García-Ponce, O. (2013). Cross-border spillover:US gun laws and violence in Mexico. AmericanPolitical Science Review,107(03),397-417.

Eckstein,S. E. (2014). Thepoverty of revolution: the state and the urban poor in Mexico.Princeton University Press.

Greenberg,J. B., Browning-Aiken, A., Alexander, W. L., &amp Weaver, T. (2012).Neoliberalismand Commodity Production in Mexico.&quot O`Reilly Media, Inc.&quot.

Hennart,J. F. (2012). Emerging market multinationals and the theory of themultinational enterprise. GlobalStrategy Journal,2(3),168-187.

Jain,N. K., Hausknecht, D. R., &amp Mukherjee, D. (2013). Locationdeterminants for emerging market firms. ManagementDecision,51(2),396-418.

Kearney,C. (2012). Emerging markets research: Trends, issues and futuredirections. EmergingMarkets Review,13(2),159-183.

Kobrin,S. J. (2013, January). Strategic integration in fragmentedenvironments: Social and political assessment by subsidiaries ofmultinational firms. In Strategiesin Global Competition (RLE International Business): Selected Papersfrom the Prince Bertil Symposium at the Institute of InternationalBusiness(p. 104). Routledge.

Laurell,A. C. (2015). Three Decades of Neoliberalism in Mexico TheDestruction of Society. InternationalJournal of Health Services,45(2),246-264.

Munck,R. (2013). Weaver, Thomas, James B. Greenberg, William L. Alexander &ampAnne Browning‐Aiken(eds). Neoliberalism and commodity production in Mexico. xi, 354 pp.,maps, figs, tables, bibliogrs. Boulder: Univ. Press of Colorado,2012. $65.00 (cloth). Journalof the Royal Anthropological Institute,19(4),898-898.

Scott,W. R. (1995). Institutions and Organizations. Thousand Oaks, CA:Sage.

Shirk,D. A. (2014). Thedrug war in Mexico: confronting a shared threat(No. 60). Council on Foreign Relations.

Simon,S. (2014). Sustainingthe Borderlands in the Age of NAFTA: Development, Politics, andParticipation on the US-Mexico Border.Vanderbilt University Press.

Smith,P. H. (2015). Labyrinthsof power: political recruitment in twentieth-century Mexico.Princeton University Press.

Solis,L. (2013). Economicpolicy reform in Mexico: A case study for developing countries.Elsevier.

3