Foreign direct investment in Mexico and the 1994 crisis; a legal perspective.

• Author: del Toro, Guillermo Emiliano

1. Introduction

2. Foreign Direct Investment in Mexico

   1. Introduction

   2. From the 1917 Constitution to the 1989 Regulations

   3. The Law to Promote Mexican Investment and to

      Regulate Foreign Investment

   4. The 1989 Regulations

   5. The 1993 Foreign Investment Law

      1. Participation of Foreign Investment in Different

         Economic Sectors

      2. Real Property

      3. Neutral Investment

      4. The Comision Nacional de Inversiones

         Extranjeras--A New Approach

   6. The NAFTA: The Entrance of Mexico into the Globalization Era

      1. The NAFTA and the Foreign Investment Law

      2. Performance Requirements.

      3. Transfers

      4. Expropriation

      5. Dispute Settlement

   7. Competition Law as the Last Regulatory Scheme tit an

      Era, of Deregulation

      1. MNCs and Competition Law

      2. The Ley Federal de Competencia Economica

      2. Houston Journal of International Law [Vol. 20:1

      1. Mergers and Acquisitions

      2. Sanctions

      3. Remedies

   8. Other Rules Affecting FDI

      1. Domestic Level

      2. International Level

3. FDI and the Crisis of December 1994

   1. The Need for Capital in Mexico

      1. National Conditions

      2. The Competition for FDI

      3. Conclusion

   2. The Debt Crisis and the IMF "Conditions"

   3. The December 1994 Crisis

      1. Short-Term Foreign Investment As a Cause of the

         1994 Crisis

      2. Market-Based Debt Reductions

4. An alternative scheme to enhance (long-term)

   foreign direct investment

   1. FDI as a Long-Term Investment Remedy

   2. FDI's Role After the Crisis

   3. The Rule of Law and FDI

   1. Recent Developments in the International Arena

   2. Lack of a Multinational Agreement in FDI

   3. Protection Against Risks

   1. Multilateral Investment Guarantee Agency

   2. Exchange Risks (Devaluation)

5. Conclusions

1. INTRODUCTION

   Presently, the world is experiencing an unprecedented revival of liberal, free trade theories. Globalization is the word of today. It mirrors the process of economic integration that is occurring worldwide. Markets are no longer isolated-they are interrelated in such a manner that domestic acts that appear to be circumscribed to a specific territory have important consequences abroad.

   Within this context, flows of capital become the main factor in the development of specific countries, regions, and the globalized world itself. Mexico, as a participant in this movement, has a specific role to play. Globalization implies the interrelation of markets. Hence, any aspect, such as economic developments, regulations, and policies that Mexico experiences will have consequences within the global community.

   The primary focus of this Article is foreign direct investment (FDI) in Mexico. FDI is the flow of capital that mainly multinational corporations (MNCs) supply in their operations throughout the world. This study is divided into three areas of analysis and examines links between economic development and FDI. It also examines how a country like Mexico can enhance FDI to foster economic growth and improve the wealth of its people.

   The first area of analysis begins in Part II, which describes the different regulations that have ruled FDI in Mexico since its independence until the present day. First, a historical analysis of the regulation of FDI in Mexico is provided. The reader can see how Mexico has evolved from a protectionist, suspicious viewpoint towards FDI to a policy of FDI promotion. In Part II, the main subject is the past and present regulations governing FDI, such as the 1917 Mexican Constitution, the 1973 Law (Ley Para Promover la Inversion Mexicana y Regular la Inversion Extranjera), the 1989 Regulations (Reglamento de la Ley para Promover la Inversion Mexicana y Regular la Inversion Extranjera), the 1993 Foreign Investment Law (Ley de Inversion Extranjera), the Competition Act (Ley Federal de Competencia Economica), the North American Free Trade Agreement (NAFTA), and their institutions.

   Part III explains the circumstances under which Mexico has entered into the era of globalization. First, it analyzes the need for capital flows in Mexico to achieve necessary economic development. Second, it shows how Mexico has mainly relied on debt to promote economic growth and the resulting consequences in its economy. Third, it examines the economic difficulties Mexico experienced in 1994 after entering the globalization process. This Part demonstrates how reliance on short-term capital flows influenced the 1994 crisis.

   Part IV focuses on the important role FDI plays in Mexico. It studies the advantages of FDI. It compares the effects of FDI with the effects of short-term investments and debt. Hence, after demonstrating that FDI as a long-term investment gives stability to the Mexican economy, the study turns to the different possibilities Mexico has in the domestic and international arena to enhance FDI. It focuses on the impact of the rule of law in attracting FDI and evaluates whether the present domestic system is sufficient to attract efficient capital to the Mexican market, or if more rules, both domestic and international, are necessary.

2. FOREIGN DIRECT INVESTMENT IN MEXICO

   1. Introduction

      To understand the recent developments in the regulation of FDI in Mexico, one cannot ignore the history from which it has evolved. Mexico(1) is a representative, democratic, and federal republic whose territory covers an area of 1,958,201 kilometers(2) divided into 31 states and the Federal District, with a population in 1994 of 92,202,199.(3) Since its independence from Spain in 1821 until the end of the so-called Mexican Revolution in the 1920s, Mexico has struggled with invasions, coups d'etat, and wars. Because of these violent conditions, Mexicans did not have the opportunity to think about social, economic, and political reforms. It was only during the dictatorship of Porfirio Diaz (1876-1911) that the promotion of foreign investment became a primary government policy, and the country flourished with the construction of railroads, some infrastructure, banks, industry, and a stable exchange rate. However, the few benefits of this policy led to the revolution of 1910.(4)

      Thus, it was during the Porfiriato that FDI came to Mexico. In a short period of time, foreign investment, mainly from American and English capital, dominated the main exporting sectors.(5) It was also during this period that Mexico experienced its first economic boom as an independent nation.(6)

      The 1917 Constitution emerged from the revolutionary struggle and remains in force with several modifications.(7) Since this Constitution originated as an agreement among the parties that won the revolution, it departs from individualist doctrine.(8) It considers human rights not as the basis and object of social institutions, but as a group of individual guarantees (garantias individuales) the State grants to its inhabitants.(9) The 1917 Constitution creates the concept of social guarantees (garantias sociales), which are rights the State grants to certain social classes (contained mainly under Articles 27 and 123) that, as Professor Burgoa states, reflect the fundamental revolutionary aspirations for wealth of the helpless people, peasants, and workers.(10)

      Nevertheless, the Mexican economy is, and has been, unstable ever since. It suffers from extremely inadequate income distribution among different regions and economic sectors.(11) A 1994 survey by Forbes magazine stated that prior to the 1994 crisis, Mexico was home to twenty-four billionaires--more than any other country outside the United States, Germany, and Japan.(12) Yet, at the same time, there was a rebellion in the state of Chiapas in which people were struggling and dying of hunger, with nothing to lose and everything to gain.(13)

      Despite the 1917 Constitution and its "nationalistic" approach towards foreigners,(14) FDI since the revolution has been an important factor in the national economy. In the 1940s Mexico initiated the period known as the Institutionalized Revolution.(15) During this period the Mexican economy experienced sustained economic development. This was the result of a mixed economy in which the State acted in an interventionist manner, providing infrastructure in basic branches of the economy such as oil, railroads, and electricity, while participating in several other areas in which the private sector could not or would not participate.(16) The private sector was protected and grew because of this "Import Substitution Regime."(17) However, FDI entered slowly into the Mexican economy during this period, mainly because of American MNCs which also benefited under the protectionist policies. They entered areas in which neither the Mexican government nor the private sector had the capital or knowledge to compete in sectors such as chemicals, steel, automobiles, and machinery.(18) Nevertheless, Mexico's approach to FDI since the Porfiriato has been interpreted, mainly by the United States, as attempted domination, and this sentiment can be observed within the 1917 Constitution.(19)

   2. From the 1917 Constitution to the 1989 Regulations

      With respect to the regulation of FDI in Mexico, the 1917 Constitution departs from an individualist theory.(20) Article 27, which defines private property ownership as a social function, restricts the ability of foreigners to take over specific types of property.(21) Furthermore, the "Calvo Clause"(22) was imposed to restrict the enjoyment of real property owned by foreigners.(23) While the Constitution did not contemplate an absolute prohibition on a foreigner's right to hold property, it was used to affect international interests in natural resources.(24) Article 27, however, simply maintains the civil law concept by which all rights to the nation's subsoil belong to Mexico-a principle incorporated in the 1783 Reales Ordenanzas para la Mineria de la Nueva Espana.(25)

      Article 27 of the Constitution states:

      Ownership of the lands and waters within the

      boundaries of the national territory is vested originally

      in the Nation, which has had, and has, the right to

      transfer title thereof to private persons, thereby

      constituting private property.

      ...