Japan and Mexico Economic System

ECONOMIC SYSTEM

INTRODUCTION

Japan is regarded the thirteenth most attractive destination for multinational companies. Japan is leader in matters of technology, research and development. The Japanese government has also established practices that promote imports and investments through reduction of taxes (Bâlgăr and Drăgoi, 2014). Japan also offers access to the Asia Pacific. However, although it has a strong appeal its reception of FDI is very weak due to the overregulation that constrains economic growth, raises the cost of doing business and slows down investment (Bâlgăr and Drăgoi, 2014). The 2015 World Investment Report published by UNICTAD stated Mexico as the tenth largest FDI recipient. Mexico performs well in terms of political, legal and tax stability, on the other hand performs less for economic, operational, corruption and security environment (Mexico Country Reports). On the other hand, Mexico’s growth has been hindered by the increase of crime, drug related violence, corruption and administrative inefficiency (Del Toro et al, 2004). Another weak point of Mexico is its dependence on United States which makes it susceptible to economic crises. The Mexican government encourages foreign investment by trying to create an open and safe environment. Its proximity to the united states and the benefits of the North America Free Trade Agreement (NAFTA) make it an ideal destination for Foreign Direct Investment (Del Toro et al, 2004).

JAPAN

Japan has one of the largest economies in the world characterised by a well-developed manufacturing industry. There are prospects of trade agreements that will make trading easier such as Trans Pacific Partnership (TPP) with Australia, New Zealand, Peru, Chile, Mexico, Canada, Singapore etc. (Pestle Insights, 2015).

BENEFITS

Japan has a high per capita GDP which emphasises high productivity and standard of living. (Pestle Insights, 2015). It has few formal restrictions governing foreign investment in the country making the investment environment predictable and low level risk (Japan Country, 2015). In 2014 after successfully concluding negotiations on a Free Trade Agreement with Australia which allows Japanese consumers, electronics and cars to enter Australia at a reduced tariff in return for reduced import tariffs on Australian goods. Most importantly this agreement eases entry in to the Japanese market for Australia’s financial, legal, telecommunications and educational services (Pestle Insights, 2015).

RISKS

Although Japan’s budget deficit has shrunk, it will be difficult for Japan to achieve a primary surplus by 2020 (Japan Country Reports, 2015). Japans public debt was recorded at around 226% of GDP in 2014 due to the government budget deficit between 2007 and 2014 making its economic system vulnerable. Risk rises due to investors concerns over the governments debt servicing ability. More over it has not performed well in product market regulation with highly regulated sectors. This leads to increased expenses for business through higher costs of production (Pestle Insights, 2015).

COSTS

Japanese culture prefers to do business with familiar corporate sectors through exclusive supplier networks and alliances that restrict competition from foreign firms. Corporations in Japan are liable to taxes that include corporate tax, inhabitant tax, enterprise tax and special local corporate tax (Appendix one) (UNICTAD, 2015).

MEXICO

Mexico’s economy has been thriving. Economic growth has been accelerating in recent years driven by fixed investment, stronger private consumption and demand for exports (Mexico Country Reports). Sound fiscal and monetary policies have helped Mexico make huge advances in the management of its economic policies.

BENEFITS

Since opening up its economy in the 1980’s, introducing policies of economic liberalisation and trade promotion, Mexico has generated increasing levels of foreign investment (County Reports 2016). It has managed to form a network of free trade agreements with over 40 countries including European Union, Japan, Israel as well as South and Central America. One of Mexico’s strengths is its North American Free Trade Agreement (NAFTA) membership as well as its membership of most free trade agreements in Latin America. There has been a lot of FDI in Mexico due to its low labour costs and proximity to the United States (Mexico Country Reports, 2016).

RISKS

The fact that Mexico’s economy is tied to economic prospects in United States means that it is susceptible to the negative effects of a slump in the American economy. Moreover, Mexico produces very little goods and products (Economic Outlook, 2012). It is predicted that Mexico will experience low growth annual rates if reforms in the taxation, labour legislation, energy sector are not introduced (Mexico Country Reports). Security risks also pose as a major threat to economic growth. The drug related violence can hinder foreign investment (Mexico Country Reports)

COSTS

Foreign companies based in Mexico are taxed on the Mexican source income only, at a corporate tax rate of 30%, import duties range from 0-35% (Foreign investment in Japan, 2016). The treaties and trade agreements signed by Mexico are also a means of avoiding double taxation and tax avoidance through tax exemption or reduced withholding tax rates. Certain sectors such as electricity and postal service are restricted for the Mexican government (Foreign investment in Japan, 2016).

COMPARISON

Through the evaluation of both Japan and Mexico’s economic system, it can be noted that Japan’s economy is characterized by a high capita GDP and few formal restrictions making it attractive to FDI (Pestle Insights,2015). Further more Mexico’s thriving, open economy and its proximity to USA has also attracted a significant share of FDI (Country Reports,2016). It is also evident that there re significant risks associated with investing in either one of these countries. Overall Mexico would be a better country to invest in given its free trade agreements with over 40 countries, its stable economy and openness in terms of economic policies.

ECONOMIC SYSTEM

JAPAN

MEXICO

BENEFITS