The United States is overdue for a recession – at least historically speaking. That’s because, since 1954, the world’s largest economy has faced a financial downturn once every five and a half years. That’s one reason America’s small and medium-sized companies (SMEs), have looked outside the U.S. borders as a way of offsetting a sputtering domestic economy.
A growing number of firms are eyeing countries beyond the usual trading partners, Canada and Europe. Two new destinations – India and Mexico – are drawing a measure of attention as places with tons of potential.
Both countries have large populations and increasingly prosperous middle classes, in India’s case, estimated to hit almost 600 million by 2025.
These economies are growing faster than the United States with India projected to expand by more than 7% into 2017. Mexico’s overall gross domestic product (GDP) is moving ahead at a comparative crawl - 3% in 2017. That is still at a faster rate than the American economy.
Still, smaller firms looking to jump into these markets need to ponder some troublesome issues.
Mexico: Security and Other Concerns
Mexico’s government under Enrique Pena Nieto started off strong when he was elected in 2012 and passed sweeping economic changes. His administration, however, now faces a growing list of political and financial woes.
For one thing, the central government failed to push reforms with a recalcitrant bureaucracy, leading to uneven results. On the plus side, increased competition in telecommunications has pushed down consumer prices while banking changes have boosted available credit. However, things have not gone so smoothly with efforts to break up private semi-cartels, such as in the retail sector. As well, attempts to relax labor rules have upset labor unions.
The end result – spotty economic improvement and weak GDP growth - have hurt Pena Nieto’s approval. In a 2015 poll, almost seven out of ten Mexicans said the country was headed in the wrong direction.
In addition, U.S. companies are worried about security in Mexico. A recent survey by the American Chamber of Commerce in Mexico found that nearly one in five of the firms surveyed had been the victim of extortion or kidnapping in 2013-2014. While down from 25% in its previous survey, the chamber found 13% of respondents feeling less safe in Mexico now.
Corruption remains widespread. Mexico currently stands 95 out of 167 countries in the Transparency International’s 2015 corruption index. And the country posted a woeful 126th out of 138 nations in the ethics and corruption ranking for the World Economic Forum’s global competitive index.
India: Bureaucratic Morass
India, by contrast, faces more prosaic problems by Mexican standards but ones that are still burdensome given the country’s history of bureaucratic sluggishness. India placed 130th in the World Bank’s ranking of best places to do business. That’s more than three times below Mexico and behind such pro-business stalwarts as Cambodia and Ghana.
In India, it takes six months to get a construction permit in Mumbai province and about 31 working days to compute the taxes you have to pay annually. If you run into a legal problem, the World Bank estimates that it takes 1,400 days to resolve contractual disputes in India, three times the OECD average.
Just as problematic are certain of India’s labor laws. For example, one rule requires government permission to fire workers if the firm has more than 100 employees. There are also other laws about how many times a workplace must be painted and the correct place where workers should spit.
U.S. Business Still Eager
Despite these challenges, however, more American firms are doing business in India.
U.S. direct investment there jumped to more than $4 billion in 2016, five times what it was only two years earlier. In addition, with the government changing existing rules to allow Apple stores to open in India, there is renewed chatter that the company might start manufacturing iPhones in that country.
Still, in economic terms, Mexico remains the more attractive destination for U.S. dollars.
U.S. direct investment in Mexico reached $107 billion in 2014 and American exports in 2016 were almost double the level a decade earlier.
Caution Remains Key
In the end, some U.S. companies may need to diversify where they do business to mollify the effects of slowing economies in Canada, the United States and Europe. So, whether companies enter Mexico or India might come down to concerns such as safety. The State Department has a long-standing warning about traveling to Mexico; Washington has no such advisory for India.
Mexico does have stronger economic ties to the United States than India, making it a more comfortable destination today for American business. But, with Pena Nieto lagging in popularity opinion, Mexico’s aggressive economic reform agenda might be in danger.
That leaves American small businesses with a dilemma: on the one hand, looking to countries such as India and Mexico is a potential way to get out of relying too much on economically sputtering trading partners like Canada and the United Kingdom. But, these firms cannot ignore the risks of going into unfamiliar territories where the culture and language might be different and the commercial practices most certainly are. In the end, companies should reach out to consultants or trade associations who know these countries better because a phone call now could prevent a headache later.