A large number of companies considering relocating their business abroad have turned their eyes to Mexico, which has become an attractive place for investors to relocate their business, mainly because it is close to the United States and Canada (nearshoring), the labor costs are relatively low, the availability of IMMEX (maquiladora) program, and because there is a preferential treatment to originating goods and foreign investments from the United States and Canada that are protected under the USMCA, among other factors.

From a Mexican perspective, we can identify 3 different forms of foreign investment: direct, indirect, and neutral, respectively.  Direct investment is when the foreign investor intends to create a long-lasting relation with business and entrepreneurship purposes.  Indirect investment refers to investing in financial assets, such as stocks or bonds seen as short-term relations (both direct and indirect are subject and limited to the specific percentages allowed for foreign investment).  Neutral investment does not make a distinction on the source of the capital, thus, under certain circumstances is not subject to the limited percentages of foreign investment participation.  Normally, countries focus and promote foreign direct investment because this type of investment brings long lasting and permanent benefits to the economy of the recipient country.    

There are many countries investing in Mexico as it is open to attracting almost all business from around the world.  Currently, the most relevant countries in terms of the value of foreign direct investment are the United States at the top, followed by Canada, Spain, Japan, Germany, Belgium, Netherlands, United Kingdom, and France.  The investment from the United States is considerable in comparison to other countries.  For example, from January-September 2022, it invested 12,576.1 US billion Dollars, followed by Canada with 2,283.0 US billion Dollars. Historically, the U.S. has accounted for roughly 50% of FDI in Mexico.

Therefore, the ties between Mexico the United States and Canada are stronger than ever. Prior to investing in Mexico, investors should understand the legal provisions regulating its specific industry and business operations to ensure legal certainty and are  protected as much as possible.  The following is the main legal framework governing foreign investment in Mexico which is listed hierarchically:

1. Mexican Constitution
2. International trade agreements signed by Mexico, such as the USMCA
3. Foreign Investment Law & Regulations to the Foreign Investment Law and to the National Registrar of Foreign Investments
4. General Determinations from the National Commission of Investments

1. Mexican Constitution

It is the Supreme law and gives Congress the authority to issue laws that regulate foreign investment.  Also, it sets forth that everyone in Mexico shall enjoy the rights under international treaties signed by Mexico.

2. USMCA

The USMCA, along with the Mexican Constitution, are the Supreme Law in Mexico, and hierarchically speaking the USMCA is under the Constitution but still has more legal weight and authority than any federal law in Mexico.  This is relevant, because foreign investments from the countries members could enjoy a higher level of certainty because per the USMCA, in case of armed conflict, civil strife, expropriation, nationalization, they should be treated in accordance with customary international law, including fair and equitable treatment and full protection and security.  In addition, any compensation due to expropriation or nationalization must be paid without delay, and be equivalent to the fair market value, among other considerations.

  Furthermore, Chapter 14 of this treaty sets forth that each Party shall accord National Treatment (no less favorable than the one it accords to its own investors) and Most-Favored-Nation Treatment (no less favorable that the one it accords to investors of any other Party or of any non-Party). 

Chapter 14 of the USMCA also applies to measures adopted by Mexico, United States and Canada relating to investors and covered investments.  Article. 14.1 defines investment as every asset that an investor owns or controls, directly or indirectly, that has the characteristics of an investment, including such characteristics as the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk.  Also, it defines covered investment “with respect to a Party, an investment in its territory of an investor of another Party in existence as of the date of entry into force of this Agreement or established, acquired, or expanded thereafter”.

In accordance with the USMCA, foreign investment may include: a) an enterprise, b) shares, stock, and other forms of equity participation in an enterprise, c) bonds, debentures, other instruments, and loans, d) futures, options, and other derivatives, e) turnkey, construction, managements, production, concessions, revenue-sharing, and other similar contracts, f) intellectual property rights, g) license, authorizations, permits, and similar rights conferred pursuant to the MX, US or CA law, and h) other tangible or intangible, movable or immovable property, and related property rights, such as liens, mortgages, pledges, and leases.  

3. Foreign Investment Law & Regulations and the National Registrar of Foreign Investments

Article 2, of the Foreign Investment Law defines it as a) any percentage of equity participation of foreign investors in MX companies, b) foreign investment by MX companies with foreign equity, and c) foreign investors´ participation in activities and transactions as set forth under the law.  Unless specifically restricted by the law, some examples of foreign investment may include purchasing fixed assets, development of business, production of new lines of products, opening and operating facilities, expanding, or relocating existing ones.  

Although there are some screening rules applicable for certain industry sectors in general, foreign investment in Mexico is open to almost all types of business.  However, foreign investors are limited and/or restricted to participating in certain industries exclusively reserved for the Mexican government, or for Mexicans, or open for foreigners but their participation is limited to a specific percentage, or where an authorization from the corresponding foreign investment government office is required.

Industries exclusively reserved for the Mexican government: 

1. Exploration and extraction of petroleum and hydrocarbons
2. Planning and control of the Mexican electric systems, as well as transmission and distribution of electric energy.
3. Generation of nuclear energy
4. Radioactive minerals
5. Telegraphs
6. Radiotelegraphy
7. Postal service
8. Printing bills
9. Coins production
10. Control, supervision and surveillance of ports, airports, and heliports , and 
11. Miscellaneous.

Industries exclusively reserved for Mexicans:

1. Land transportation for passengers, tourism, and freight, does not include delivery services
2. Developing banking institutions
3. Professional and technical services set forth under the law.

Transactions and acquisitions with restrictions on the participation of foreign investment participation, limited to specific percentage:

1. Up to a 10% cooperative production entity
2. Up to 49% for fabrication and trading of explosives, firearms, cartridge, munitions, and fireworks, does not include the acquisition and use of explosives for industrial and extraction activities or the production or explosive mixtures to be used for such purposes.
3. Printing and press release in Mexico
4. Capital shares on companies owning farming, agriculture, or forest land
5. Freshwater, offshoring, and economic exclusive area fishing
6. Integrated port administration
7. Port services for boat pilot
8. Specific maritime companies 
9. Supply of fuel and lubricants for maritime, aerospace and railroad equipment
10. Broadcasting in reciprocity with the country of the investor
11. Air transportation services, air taxis and specialized air transportation services.

Economic activities and industries requiring authorization from the Foreign Investment Commission for a foreign investment participation over 49%:

1. Port services for some inland navigation
2. Maritime companies for international shipping
3. Aerodromes companies
4. Private services of kindergarten, elementary, junior high, high school, undergraduate, graduate, and mixed services
5. Legal services
6. Construction, operation, and exploitation of railroads.

Any foreign investment must register before the Foreign Investment Commission (Registro Nacional de Inversión Extranjera) within 40 working days following the date of business incorporation, participation, and completion of documents related to foreign companies.  This registration must be renewed annually.

IV.  General Determinations from the National Commission of Investments

These determinations involve the application of legal provisions about foreign investment.  The purpose of these determinations is to provide additional details, information, clarifications about specific topics under the corresponding foreign investment law, but which require specific clarifications or details for its implementation, such as limited percentages for foreign investment participation, annual registration renewal, among other topics.

In addition, investors should also be aware that there are other areas of the law (other legal frameworks) that may govern its investment in Mexico.   For example, tax and customs law for the determination, calculation, reporting and payment of taxes, customs duties, and fees, import and export compliance, environment law for the application of permits and licenses to trade certain goods, foreign trade law for compliance with import licenses, quotas, application for programs to promote foreign investment, etc.

In conclusion, nearshoring, low labor costs, IMMEX (maquiladora) program, and the USCMA are some of the factors influencing the growth of foreign investment in Mexico.  Even though Mexico is open to attract business from any place from around the world, the United States and Canada are Mexico’s major business partners.  Any foreigner wanting to invest in Mexico must be aware of the legal framework applicable to its business and industry.  This will allow it to make informed decisions and protect its business.  Investors should also know that in parallel to foreign investment law, there are other laws (environmental, intellectual property, customs, tax, etc.) that may also apply to their business.  Failure to comply with the applicable legal provisions makes the investor vulnerable and at risk of losing their investment.