Reference no: EM131958668

case:

Located directly south of the United States, Mexico covers an area of 756,000 square miles. The most recent esti- mates place the population at around 114 million, and this number is increasing at a rate of about 1.4 percent annu- ally. As a result, with a median age of just 27.4, today Mexico is one of the “youngest” countries in the world. Approximately 25 percent of the population is under the age of 14, while a mere 6.6 percent is 65 years of age or older. Mexico’s GDP in 2011 was US$1.2 trillion, or approximately US$10,064 per capita. Although global economic uncertainty persists, Mexico has made itself attractive for foreign investment. Trade agreements with the United States and Canada (NAFTA), the EU, Japan, and dozens of Latin American countries have begun to fully integrate the Mexican economy into the global trading system. Multinationals in a wide variety of industries, from computers to electronics and from pharma- ceuticals to manufacturing, have invested billions of dollars in the country. Telefonica, the giant Spanish telecommuni- cations firm, is putting together a wireless network across Latin America, and Mexico is one of the countries that it has targeted for investment. Meanwhile, manufacturers not only from the United States but also from Asia to Europe have helped sustain Mexico’s booming maquiladora assem- bly industry. In 2005 over 1.15 million people were employed in this industry. Thomson SA, the French consumer electronics firm, has three plants in the border states that make export TVs and digital decoder boxes. And like a growing number of MNCs located in Mexico, the firm is now moving away from importing parts and materials from outside and producing everything within the country. One reason for this move is that under the terms of the North American Free Trade Agreement only parts and materials originating in one of the three NAFTA trading partners are now allowed to enter the processing zones duty-free. Anything originating outside these three countries is sub- ject to tariffs of as much as 25 percent. So the French MNC Thomson is building a picture-tube factory in Baja California so that it will no longer have to import duti- able tubes from Italy. In many cases, imported items from the European Union, however, are allowed to enter duty-free because in 1999 Mexico signed a free-trade agreement with the EU. Over 90 percent of trade is under free trade agreements. As a result, a host of firms, includ- ing Philips Electronics and Siemens, have poured large amounts of investment into the country. At the same time Mexico also has begun negotiating another free-trade pact with the four Nordic countries. As a result firms such as Nokia, Ericsson, and Saab-Scania to this point invest heavily in the country. While many European MNCs are now investing in Mexico, the United States still remains the largest investor and trading partner. Over 50 percent of all outside invest- ment is by U.S. firms. Asian companies, in particular Japanese MNCs, also have large holdings in the country, although these firms have been scaling back in recent years because of the import duties and the fact that Mexican labor costs are rising, thus making it more cost- effective to produce some types of goods in Asia and export them to North America. The largest investments in Mexico are in the industrial sector (around 60 percent of the total) and services (around 30 percent). One of the major benefits of locating in Mexico is the highly skilled labor force that can be hired at fairly low wages when compared with those paid elsewhere, espe- cially in the United States. Additionally, manufacturing firms that have located there report high productivity growth rates and quality performance. A study by the Massachusetts Institute of Technology on auto assembly plants in Canada, the United States, and Mexico reported that Mexican plants performed well. Another by J. D. Power and Associates noted that Ford Motor’s Hermosillo plant was the best in all of North America. In January of 2012, Renault-Nissan announced it would be investing more than $2 billion to build a new manufacturing plant in Aguascalientes to serve the entire Americas region. Com- puter and electronics firms are also finding Mexico to be an excellent choice for new expansion plants. Intel, for example, has invested more than $200 million in its Mexican plant. The technology industry must be very innovative to stay competitive. Intel operates out of many countries, but an investment of this size shows that Mexico is extremely valuable, and operations here will continue for years to come.

Questions

1. Why would multinationals be interested in setting up operations in Mexico? Give two reasons.

2. Would cultural differences be a major stumbling block for U.S. MNCs doing business in Mexico? For European firms? For Japanese firms? Explain your answer.

3. Why might MNCs be interested in studying the organizational culture in Mexican firms before deciding whether to locate there? Explain your logic.