Mexico City — Foreign direct investment (FDI) in Mexico increased in the first half of 2023 amid the nearshoring boom in the country, however, of the billions of dollars of inflows, only 7% is new investment.
In the first half of this year Mexico has received $29.04 billion in FDI; 6% higher than the figure published for the same period of 2022, when inflows totaled $27.51 billion, the Economy Ministry reported Wednesday.
The SE stated that the increase in FDI in the first half of the year is 41% higher than the first half of last year if the almost $7 billion of investment in the the Televisa-Univision merger and the restructuring of Aeromexico are not taken into account.
The amount of FDI captured in the first half of the year is the highest figure reported for the same period since 2006, according to the report released by the SE.
However, when reviewing the type of investment coming into Mexico, preliminary data show that of the $29.04 billion captured between January and June 2023, 78% corresponds to reinvestment of company profits, 15% to inter-company accounts, and only 7% to new investments.
The percentage of new investments was well below that observed in the first half of 2022, when 43% of incoming investment was new (including the Televisa-Univision and Aeromexico deals), and was the lowest percentage as a proportion of FDI observed for a first half of the year since 2014.
Is Mexico feeling the effects of nearshoring in FDI?
For the SE, the fact that most of the investment is reinvestment means that these flows did not return to their country of origin and that companies and investors have confidence in Mexico and its economic stability to maintain and expand their investments.
On the other hand, for Rafael de la Fuente, chief economist at UBS for Latin America, the high percentage of reinvestment of profits could reflect that the nearshoring boom has not yet reached Mexico.
The economist pointed out in a May 30 analysis note that at UBS they do not want to be perceived as “deniers” of nearshoring, as they recognize the growth potential for Mexico of this process, however, they do not agree with the opinion that FDI data confirms that foreign investment is already being underpinned by the relocation of companies.
In the note, De la Fuente referred to the FDI data for the first quarter of 2023. He said that most of the investment (90%) was explained by profits reinvested by companies already operating in Mexico, while new investment was only $932 million (5% of total FDI as of the first quarter).
UBS noted that the entry of new foreign companies into Mexico, characteristic of nearshoring, was not visible in the first quarter.
De la Fuente, who was recognized this 2023 by Focus Economics as Mexico’s second best economic forecaster, said it is true that profit reinvestment tends to be seasonally high in the first quarter, and there is nothing inherently wrong with such a high level of reinvested profits, as it may be evidence of continued confidence in investing in Mexico.
“We believe that nearshoring should be characterized, at least in part, by the entry of new foreign companies into Mexico, which in turn should translate into new FDI inflows. This was not visible in the first quarter”Rafael de la Fuente, head economist at UBS for Latin America
Which states and sectors benefited from FDI?
So far during 2023, FDI registered in Mexico endorsed the United States as the country’s main trading partner, as 43% of the $29.04 billion invested came from that country.
In second place was Spain with 15% of foreign investment, in third place Germany with 9%, and the rest came from Argentina, Japan, the Netherlands, Canada and the United Kingdom.
Meanwhile, 60% of FDI is located in five Mexican states: 35% in Mexico City, 10% in Nuevo León, 5% in Baja California, 5% in Jalisco and 5% in the state of Mexico.
Fifty-seven percent of the investment corresponds to the manufacturing sector, with the following industries standing out: transportation equipment, metals, beverages and tobacco, chemicals, food, electrical appliances and computer equipment.