Underlying local workforce rules and regulations

Every business in Mexico must be included in the Mexican Information System (Sistema de Información Empresarial Mexicano [SIEM]), and the database is updated every year with main data of the businesses (MS, 2017). Throughout the following section local requirements regarding salary, welfare, retirement, legal work day, holidays, vacation, indemnity and severance, as well as sonority will be discussed. These are important factors to consider when assessing the feasibility and prospects of doing business to Mexico.

It is a requirement that all employees are to be paid the minimum daily salary as determined by the Minimum Salary Commission (Comisión de Salario Mínimo [CSM]) (MS, 2017). Additionally, it is important to take into consideration benefits of employees. The Mexican Institute of Social Security [IMSS]) receives quotas from companies and institutions

that are paid by employees, employers and the government (MS, 2017). This social security system accounts for medical care, retirement and insurance and caters to the welfare of workers.

It is required by law that all employers have to register their employees in this social security system (MS, 2017).

Founded in 1992, the Retirement Savings System (Sistema de Ahorro para el Retiro [SAR]) provides an employee a retirement fund (MS, 2017). An employer is required to contribute two percent of the monthly salary to the employee’s individual bank account (MS, 2017). The employee is allowed to choose the bank account will manage these funds and this system is known as the Administration of Retirement Funds (Administradoras de Fondos de Ahorro para el Retiro [AFORES]) (MS, 2017). Mexican Labor Law also requires that ten percent of the net taxable income is to be shared with their employees (MS, 2017). It is important to note that in the first year of operation, a company is exempt from this rule (MS, 2017).

In terms of work hours per day, an employee in Mexico is required to work eight hours or less, six days a week, as eight hours is the maximum an employee is allowed to work per day (MS< 2017). It is possible for an employee to work a maximum of nine hours in any week, with an allotted three hours of overtime per day (MS, 2017). Overtime is worth twice the rate of the employee’s normal salary and if an employee works six consecutive days, an employee is required to have one fully paid day off (MS, 2017). A common agreement in the workplace is a 40-hour week, Monday thru Friday (MS, 2017).

There are eight celebrated holidays in Mexico, which employees are granted a holiday day-off (MS, 2017). The holidays are as follows: January first New Year’s Day is celebrated;

February’s first Monday for Constitution day; March’s third Monday for the birthday of former

President Benito Juárez; May first is Labor Day, September 16^th is Independence Day;

November’s third Monday is Revolution Day; December first every six years when the new President takes office; and December 25^th as Christmas Day (MS, 2017).

Next, vacation pay will be discussed and paid vacation in Mexico is granted according to seniority (MS, 2017). A common granted vacation period for an employee is two weeks’ paid vacation after a full year of service (MS, 2017). It is also important to take into consideration indemnity and severance payments which means that if an employee is discharged, they are entitled to three months’ salary plus an additional 20 days’ salary for each year of service with the company (MS, 2017). Also granted is a seniority premium, where an employee receives 12 days’ salary for each year of service after 15 years of total service with the company (MS, 2017).

A Christmas bonus is required each year and an employer is accountable for paying 15 days’

salary to each individual employee prior to December 20^th of each year (MS, 2017).

It is important to note that Mexican immigration legislation allows a foreigner to work in Mexico as an immigrant or non-immigrant (MS, 2017). A non-immigrant may enter if he or she has a permit issued by the Ministry of the Interior (MS, 2017). A foreigner must maintain an immigration permit and can enter the country as an immigrant to fill a management position in a Mexican company or institution (MS, 2017). This company must be in operation for a minimum of two years and have a minimum capital stock or a certain net worth (MS, 2017). A foreigner can also enter Mexico as a technician or scientist, researcher in production, technical or with a specialized job in a Mexican company (MS, 2017).

Furthermore, tax structures should be considered when doing business in Mexico. In Mexico, there are both federal, state and municipal taxes, with the main federal taxes being

Income Tax and Value Added Tax (VAT) (IVA is the Spanish acronym) (MS, 2017). The Ministry of Public Finance and Credit (SHCP), levies these taxes and deals with interpretation of the law, authorizations, responses to consultations, and tax audits (MS, 2017). Each year the tax laws are updated and are in the form of main taxes (direct and indirect), miscellaneous taxes, and corporate and income tax structure (MS, 2017). Direct taxes are income tax, taxes on companies that exploit natural resources, and taxes on salaries (MS, 2017). Indirect taxes are value added tax, tax on the production and sale of a specific good or services, duties and customs duties (MS, 2017). Miscellaneous taxes are classified as payroll taxes, real estate acquisition tax and land tax (MS, 2017). A very important tax bracket to consider if moving forward as a corporation would be corporate and income tax structure, which would be classified according to the source. There are different rules that computes these taxes and it would follow the Income Tax Law including general provisions, corporations, non-for-profit organizations, individual, and income obtained by non-resident aliens with a source of income in Mexican territory (MS, 2017).

In the foreign market in Mexico, trade liberalization agreements and free trade

agreements have been signed with more than 40 countries (MS, 2017). This enables business relationships with such countries and access to a potential export market of one billion

consumers which in turn represents 75% of the global GDP (MS, 2017). Mexico has become one of the most privileged and competitive economies and provides advantages for investors who wish to establish a business in Mexico because 90% of negotiated tariffs are tax deductible (MS, 2017). There is also room for non-payment of customs duties and to obtain these benefits it is important to follow the rules and regulations in the Mexican government stated above (MS, 2017). This chapter has reflected on entry points of Bigmond to the Mexican market and opportunities and weaknesses in each.

Table 30

Entry Mode Assessment Overview

RO JV Branch JS LLC

Control Low Moderate Moderate High High

Cost Low Moderate Moderate High High

Risk Low Moderate Moderate High High

Return Low Moderate Moderate High High

Note. RO: Representative Office, JV: Joint Venture, JS: Joint Stock Company, LLC: Limited Liability Company

Table 30 presents an overview of the different entry mode alternatives. The criteria have been pre-defined based on an interview with Bigmond. The table indicates, that while a Joint- Stock Company and Limited Liability Company offer the highest degree of control, their requirement to become a publicly listed firm in the stock market and the associated amount of resources and risk exceeds Bigmond’s current means. The same accounts for a Joint Venture.

Offering a moderate degree of control, the joint venture puts Bigmond into the position to find a fitting partner. This is a complicated and time-consuming process as Bigmond applies its high responsibility and zero corruption policy to all its partners. Moreover, having a partner increases dependency and decreases the degree of control. Hence, a Branch offers the company

independency while solely requiring a moderate amount of resources, risk and allows for the establishment of a commercial activity without a previous capital requirement.

6.3 Conclusion

In conclusion, it would be most customary for Bigmond to enter the market as a Branch because it would allow for the execution of commercial transactions. Bigmond will be able to operate in Mexico as a Branch but will not be able to own the real estate. This will be most beneficial because it will keep costs low and prevents the need for the company to go public, which it would have to do if taking the route of a Limited Liability Company or a Joint-Stock

Company. Also, the means to enter the Mexican market as a branch is moderate in all playing fields and does not prevail a high risk. To enter as a Branch, Bigmond will have to receive permission from the National Foreign Investment Commission of the Ministry of the Economy and provide an address in 30 working days. A second option that would be a consideration when entering Mexico would be to enter as a Representative Office. This option has already been established in several of Bigmond’s markets such as Europe, Asia and South American

countries. The disadvantage to this option would be that it is not considered commercial activity and there is a low level of control and guidance. Overall, Bigmond’s existing capabilities,

resources, as well as its ability to engage in risks have all been assessed in the previous section to lead the recommendation and proposal of entering the Mexican market as a Branch to be the most successful option thus far.