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Do your homework before you do business in Mexico. Funding, leadership, taxes, and other critical issues can be keys to success for you and your stakeholders.

Global expansion

Doing Business in Mexico: What To Do Before Crossing the Border

  • 8/29/2013

Doing Business in Mexico: What To Do Before Crossing the Border

Not too many years ago, only large multinational corporations were interested in expanding internationally. Now privately held companies of all sizes are going global, and realizing the benefits of participating on the world stage. But even a short jump over the border to Mexico raises many questions that must be answered before you make a move.

Often, a major customer or an emerging market opportunity will either entice or require a private company to establish an operation outside of the United States. Mexico is again becoming an attractive location for domestic businesses looking to set up a foreign operation. In its 2013 Investment Climate Study, the U.S. State Department points to Mexico’s attractiveness for foreign direct investment, citing its macroeconomic stability and its proximity to the United States. American investors account for nearly 50 percent of all foreign direct investment in Mexico.

Mexico is the third largest U.S. trading partner; cross-border trade totaled $500 billion in 2011. It is the second largest export market for U.S. products and services. According to the World Bank, Mexico is the 12th largest country in terms of gross domestic product.

While Mexico is in relatively close proximity, it remains a foreign country with very different labor laws, tax structures, and business customs. There are a number of questions and considerations to take into account before moving south of the border.

Create a clear picture of success

Entrepreneurs often hear customers tell them they value (or require) a local presence from their suppliers. But when the business owner sees an opportunity in Mexico, he or she may be tempted to race ahead to take advantage of the market or cost reductions. In the long run, it is wiser to take the time to define what success looks like for you and your other stakeholders (customers, suppliers, joint venture partners), and how a varied level of results may influence everyone’s support. Do this well before you commit to the investment, and you may avoid some difficult discussions about gaps in expectations.

Develop a funding plan

Start with a clear plan for how you are going to fund your global expansion. Your plan should include the capital requirements and the investment of time. Also remember that few businesses stand alone; most have significant outside stakeholders, whether they are suppliers or joint venture partners. Your stakeholders may also need to make certain investments in your expansion. Make sure they are willing and able to do so before making a commitment.

Choose a local leadership team

Whether you are exporting to customers or setting up an operation outside the U.S., you will need local representation to support your sales. Time and communication differences make local leadership critical to success, and a part-time effort is often inadequate. A local leadership team can guide you through important differences in ways of doing business, while still allowing for a common customer experience between locations.

Mexico is the largest Spanish-speaking country in the world. Beyond the language differences, you may notice some important cultural differences. For example, in the United States, we tend to attach a great deal of importance and a sense of urgency to all our communication. Emails beep on our smart phone the second they arrive and we respond accordingly. In Mexico, you may notice a less formal perception of time, where relationships take precedence over clocks and calendars. Yet ensuring your customers have a consistent experience is critical. Consequently, it is very important to have local management that can integrate company values with local cultures.

Keep an eye on operations

We’ve all heard stories of misleading information coming from a remote operation, whether intentional or not. How will you get trustworthy information from the expansion to determine if it is achieving expected results? With the diverse local reporting requirements throughout the world, it is not uncommon for local advisors to view the remote operation and local management as their client, and have limited communication with the shareholders and stakeholders back here at home. Misunderstandings, misperceptions, and mistrust often result.

A best practice is to establish your own board of advisors, and hire your own independent advisors to “oversee” or review the reporting from the non-domestic enterprise. These independent advisors should have the shareholders’ interests at heart, not the business or local management. They can help determine if you are receiving accurate, timely, and complete information, and can help ensure that communication barriers are effectively bridged.

Plan to get the money out

The goal for most everyone is to build a successful operation that ultimately is profitable and builds value for the owners. But a common mistake is the failure to plan on how to get the capital investment back out of the country, whether it is loan repayment or dividends.

Planning from the outset can significantly affect your ability to reap the rewards of your investment. The way you initially structure your investment and plan for success will directly affect the rate of return you can expect.

Bottom line: do your homework

Mexico is not far away in miles, but if you don’t ask the right questions and do your homework, it may still stand worlds apart. Know what you’re getting into, set realistic expectations, and learn from others before you take the plunge.

View a checklist for doing business in Mexico.