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Leverage is the Key to Unlock 

Mexican Incentive Packages

  [ 11/1/1999 ]  By: David Hendricks   Print This Article  Reprint/License This Article  E-mail This Article To A Friend  
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In the United States, almost anything goes when it comes to economic incentives. In Mexico, incentives lurk in the shadows.

But they certainly exist. Foreign companies entering Mexico need to know what is possible and what may be requested because Mexico does not actively boast of its incentives.

As in the United States, little in the way of federal economic incentives exists. Incentives, such as tax abatements, are found mainly at the municipal level, with state-level incentives offered as sweeteners.

In Mexico, the action is at the state level, with occasional add-on incentives available from cities and individual industrial parks.

Maquiladoras among Mexico’s draws

“The Mexican government does not offer a big number of incentives at the federal level,” said Carlos Santos, trade commissioner of Mexico at the San Antonio office of Bancomext, the Mexican government bank of foreign trade.

“The government believes Mexico itself is an incentive; its geographical location, the way it is a gateway to the United States and to the Central and South American markets and with its qualified work force,” Santos said.

The federal government also sponsors the maquiladora program that allows foreign companies to set up production plants in Mexico which do not pay duties on items transported in-bond into Mexico. A duty is levied only on the value added in Mexico as items are exported for sale outside of Mexico.

The maquiladora program, however, is universal throughout Mexico and has been a Mexican standard for more than 30 years. The program therefore is not considered an economic incentive that fosters competition for industry within Mexico's states and regions.

“But states have a variety of incentives, depending on how eager states are for certain industries,” Santos said. “They may have reduced land prices, reduced payroll taxes and even a break in the value-added tax, or V.A.T.

“Some of the V.A.T. goes back to the states, and so some of them can forego some of that and exempt it for new plants as an incentive,” Santos explained.

Job creation is key

“In general, the larger the number of jobs a new project creates, the more leverage the investors have for their projects in Mexico,” the trade commissioner said.

In that regard, the acquisition of land can come into play.

“Land is tied to job creation, and in some cases land can be acquired very inexpensively,” Santos said. “If a new plant creates 3,000 to 5,000 jobs, then the states get very interested in helping a company with the land they need.

“Or if a company is willing to go into a poor region of the state where the jobs will have a special benefit to the families and communities there, a state will look into more incentives, like land, than they would normally provide.”

Incentives lure high-tech

Nuevo Leon is the northern state that is home to Monterrey, Mexico's third-largest city and industrial center that in the past has been referred to as the Pittsburgh of Mexico.

But Monterrey is trying to change that image to a degree, using a statewide package of economic incentives.

“We are seeking environmentally friendly, non-polluting industries, such as high-technology. We are trying to create jobs for the students graduating from our 26 colleges and universities, many of them with technology programs, and for our high-skilled people,” said Renata Valdez, foreign investment coordinator for the office of the Nuevo Leon secretary for economic development.

“We seek high quality jobs because the goal is to reach a higher quality of life in Nuevo Leon and Monterrey,” Valdez added.

Nuevo Leon offers an extensive package of economic incentives. For construction and permits, a fixed-rate subsidized rate is offered at $2.90 per square meter, a rate representing, in most cases, a 90 percent reduction.

A state-funded job training program for technical staff is available, equivalent to a minimum wage for up to two months and health care for the trainee and his or her family for the same time period.

Nuevo Leon also allows municipal governments to reduce land prices and property taxes as incentives. The state pledges additional support in finding suppliers as needed for new plants.

Steering your location decision

But with two other incentives, the state seeks to spread development more evenly across the state.

Reductions in payroll taxes differ. It is 50 percent if the new plant opens inside Monterrey, but the reduction swells to 95 percent if it’s located outside of the industrial center.

Likewise, 50 percent of the registration fee for real estate purchases is waived if the property is within Monterrey, but the waiver rises to as much as 95 percent outside of the capital city.

Nuevo Leon is not alone in its sophistication of targeting industries.

“Nuevo Leon, Baja California and Jalisco are the most advanced in the types of industry they want to attract with their economic incentives,” Santos observed.

Sophistication of Mexican incentives on the rise

Of course, Baja California is anchored by Tijuana, which has a large concentration of consumer-electronics maquiladoras, while Jalisco's state capital is Guadalajara, known as Mexico's Silicon Valley.

But the northern border states of Chihuahua and Sonora are examples of similar sophistication in their packages of economic incentives.

Intermex, an industrial park operator and developer active in the state of Chihuahua, lists the states' incentives: assistance in obtaining licenses and permits, worker training for start-up operations, development of area supply chains,  assistance with local-government red tape and help with land acquisition.

Chihuahua also seeks to even out development away from its main industrial cities of Ciudad Juarez on the border near El Paso and the interior capital of Ciudad Chihuahua.

The state will waive 50 percent of payroll taxes if new plants locate inside those two cities, but the waiver will be 100 percent if operations set up elsewhere.

Sonora, to the west of Chihuahua, offers new corporations an exemption from the 2 percent payroll tax and a 50 percent waiver on land registration fees across the board.

The Sonora state government also offers assistance in locating land, obtaining information, expediting applications and permits and communications with local and federal agencies.

But the big incentive in Sonora is job training. The state will pay the first eight weeks of the trainee’s salary at the minimum wage level, along with medical insurance and worker transportation to the training center.

What states are the most aggressive with their incentives packages and in economic development in general?

Santos said that in general, the northern belt of industrial states have been the most aggressive traditionally, including Sinaloa, Baja California and Tamaulipas, along with Nuevo Leon, Chihuahua and Sonora.

But further south, Aguascalientes, Queretaro, Oaxaca and education-rich Guanajuato have been getting into the act more.

Resources, logistics often are primary site factors

Incentives usually are not a factor in the first steps of site selection in Mexico, Santos explained.

“When companies come to us, we'll recommend places that, say, have water resources, if that is what is needed, or concentrations of certain industries,” Santos said.

“Once we have narrowed the choices down, we will look at states that are the most eager for that particular industry. And then we will give hints about using the company's leverage with the local  authorities to obtain economic incentives,” Santos said.

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