Nearshore Americas

Huge Surge in FDI Expected for Mexico in 2013

Latin America is absorbing record levels of foreign direct investment, $174 billion in 2012, up almost 7% from 2011. Meanwhile the worldwide flow of FDI declined. But the sense of glee that one might expect from the FDI data, released two months ago in a widely cited report by the UN Economic Commission on Latin America (ECLAC), has been muted.

In truth, the FDI numbers already taste a bit stale, as the major trend driving FDI in the region—strong demand for commodities—no longer applies in 2013 (oil is the major exception). Curiously, it is Mexico—which suffered a 35% decline in FDI last year, leaving the country not only behind Brazil, but also Chile, Peru and Argentina, when it came to attracting FDI—that seems most upbeat.

For sure, President Enrique Pena Nieto would find it difficult not to oversee an uptick in FDI this year, if only because last year’s total for incoming FDI, $12.7 billion, was the lowest amount recorded since 1993, the year before NAFTA entered into force. But the scale of the increase that he has predicted is monumental. On July 1, Pena Nieto said that Mexico would welcome $35-40 billion in FDI in 2013, a three-fold increase over 2012 and a figure that could rival the amount of foreign investment made in Brazil.

“The size of Mexico’s video game industry is doubling in size every four years” 

Mexico attracted $5 billion in foreign investment in the first quarter of 2013, suggesting an annual pace of FDI increase at least 60% higher than the lackluster 2012 figure, but still well below the bold forecast made by Pena Nieto.

Tech Future

In dollar terms, most of this investment will continue going into Mexico’s enormous manufacturing sector, especially the car industry and the fast growing aeronautics industry. In the years’ ahead though, one of the fastest-growing sectors of the Mexican economy may relate to IT. “If you want to predict the future in the Mexican tech sector, take the previous 15 years of what happened in the Bay Area, and compress it into a single year, and then watch it happen in fast forward,” said Andy Kieffer, founder of AgaveLab, an apps builder.

Mexico has been a base for industrial software operations for years. But more recently, it has morphed into a full-blown IT hotbed, hosting developers of mobile apps and animation. According to an estimate by VG Chartz, a video game development website, the size of Mexico’s video game industry is doubling in size every four years. Mexicans are per capita the world’s largest consumers of video games. And while the industry’s first phase of growth resulted largely from the tinkering of Mexican gamers and occasional cross-border investors, the industry is now regularly drawing in US investment.

“What started out as a small nearshoring software cluster mostly aimed at California is now gaining speed and mass and competing with China, India and the Philippines as an IT outsourcing center,” said Tom Johnston, a managing director at Business Development Partners in Mexico City. As the IT industry grows, Johnston predicts it could even nurse Mexico’s underdeveloped venture capital scene into maturity.

What is Driving Growth?

The factors that have propelled Mexico’s post-2009 economic rebound—low wages, a pro-business environment, and location—are only now converging in support of the IT sector. In 2010, the global consulting firm KPMG ranked Mexico as the most competitive country in IT labor costs. Still, despite some reforms in 2007, the telecom sector was largely blocked off to foreign investment by a duopoly; that changed earlier this year when Pena Nieto unveiled his Pact for Mexico, which included rules to attract foreign competition into Mexico’s telecom industry.

Finally, odd as it may sound, Mexico’s location has improved. That is in large part because efforts to replicate Silicon Valley have yet to field much success outside of the United States. Santiago’s “Chilicon Valley” is limited by the country’s relative isolation from a major consumer market. Russia’s Skolkovo technology park is fast becoming a multi-billion dollar boondoggle. Even Bangalore’s once mighty tech-scape appears checked in its growth by India’s generally poor infrastructure and byzantine business regulations.

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In truth, the closest thing that Silicon Valley has to a peer is a technology hub that has emerged in recent years in Austin, Texas. The Austin Technology Hub, or ATI, has built on close connections with UT-Austin to lure in over 200 tech firms, even spawning a vibrant arts festival, South by Southwest, which couples film premieres with introductions of prototype tablets and other tech wizardry. For Mexican technologists, it’s a case of the mountain coming to Muhammad.

Problems remain in Mexico’s IT sector. The privatized telecom market that Pena Nieto envisions is only beginning to take shape. And Japan, which last year eclipsed Canada as the second-largest foreign investor in Mexico, has repeatedly criticized videogame piracy in Mexico; stricter enforcement of intellectual property may be a precondition for Nintendo to set up shop. But, whereas the lagging indicator of FDI attests to past economic performance, Mexico ascendant IT industry suggests the shape of things to come.

Sean is the author of ‘Axis of Unity: Venezuela, Iran & the Threat to America’ (Potomac Books, 2012).

Sean Goforth

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