By Gerald P. Kierce Iturrioz *
By most measures, Mexican economic progress over the past twenty years has been disappointing. According to national statistics, Mexico’s poverty rate, real wage rate, and unemployment rate have largely remained unchanged since NAFTA went into effect in 1994. While Mexico has seen great progress in certain sectors of the economy, such as manufacturing, other segments like agriculture have been negatively impacted. Looking ahead, Mexico has a unique opportunity to drive inclusive growth by becoming an entrepreneurial hub, partnering with US businesses in nearshoring, and engaging global digital nomads.
Technology can mean a lot of things, as it’s generally used as a catch-all term referring to a series of capabilities that can empower all types of sectors. Whether it’s shopping online or facilitating digital transactions, modern technology capabilities like mobile apps, software, cloud storage, artificial intelligence, or crypto can transform societies in many different ways.
Many countries, such as China, South Korea, and Israel, have developed multi-decade strategies to invest in hardware and software technologies that have lifted millions of people out of poverty. Chile, for instance, is focusing its technology strategy on sectors like climate tech and cybersecurity, already attracting hundreds of millions of dollars in venture capital and Foreign Direct Investment (FDI). As has been highlighted before in this editorial, how can Mexico drive growth by positioning itself as a leader in technology?
Invest in a robust startup ecosystem for technology companies
Entrepreneurial vibrancy has the potential to create products and services that transform society. Technology startups, in particular, don’t require extensive physical production facilities and tend to experience higher margins as a result – allowing these same companies to grow revenue and hire employees at a faster rate. The Inter-American Development Bank (IDB) estimates that the value of the tech sector in Latin America grew from US $7 billion in 2010 to US $221 billion in 2020, illustrating the voracity of growth that is possible in this space. For Mexico, concentrating on a few sub-sectors, such as e-commerce and financial technology (fintech), can provide valuable economies of scale. There are already some excellent fintech startups in Mexico, primarily in Mexico City, such as Clip, Belvo, Bitso, and Airtm. These companies are exceptionally well positioned to grow in Mexico and Latin America given the value they provide to customers.
But, in order to build a sustainable and inclusive startup ecosystem, it’s important to not focus exclusively on venture-backed companies and highly-connected founders. Providing opportunities for anyone to become a technology entrepreneur is a critical element of income mobility and disruptive innovation. There are three ways to promote an inclusive startup ecosystem that encourages innovation. First, the private and public sectors must work together to bring capital, mentorship, talent, and customers to startups, especially during their early years. Second, the government must produce a registration and tax structure that simplifies filings and incentivizes businesses to grow in the formal economy. Third, and perhaps most importantly, investment in education must be relentlessly focused on building the critical hard and soft skills necessary to compete in the twenty-first century. This would include formal schooling, as well as specialized and vocational training. All of these efforts combined can result in new business creations, positive labor and wage growth, and a more skilled workforce.
Incentivize both manufacturing and talent nearshoring for US businesses
According to Gartner, 33% of supply chain leaders moved business out of China or plan to by 2023. This broadly represents a US $72 billion a year opportunity in exports for Latin America. As it relates to technology, a Deloitte survey shows that 87% of IT leaders considered nearshoring, representing a US $40 billion opportunity by 2025.
Mexico is currently the third largest exporter of technology products to North America ahead of Japan and South Korea, but still lagging behind China and the EU in terms of sheer output. Given US-China geopolitical and supply chain tensions, Mexico should maximize its opportunity not only in traditional manufacturing but also advanced technology manufacturing. To do this, the country must create the right financial, infrastructure, and talent incentives that will attract investments from US-based firms. Four specific sectors that provide opportunities for nearshoring of advanced technological manufacturing include automotive, aerospace, semiconductors, and medical devices.
Knowledge workers are also an important component of nearshoring. After all, no company can develop, sell, or support products without talent. American firms, such as Amazon, Microsoft, and Intel, have outsourced millions of traditional “desk jobs” – such as customer support, accounting, or software development – to countries such as India, the Philippines, and Poland. Yet, while these countries may provide skilled talent at lower costs, time-zones and culture differences sometimes prove a challenge for effective collaboration.
Mexico is already well-positioned to be the best partner for US firms thanks to its time zones alignment, deep cultural ties, and similar legalities. Moreover, these knowledge workers can be based anywhere in Mexico as their work does not require proximity to the border – expanding economic opportunities to all regions of Mexico.
Take advantage of global digital nomads
An important trend during the Covid-19 pandemic has been the emergence of “digital nomads,” or individuals who can work from anywhere as long as they have access to a computer, wifi, and a phone. Cities like Playa del Carmen, Puerto Vallarta, and Mexico City have experienced a noticeable influx of these visitors. Currently, however, digital nomads are not being engaged and integrated into Mexican society. Mexican cities should seek to develop programs, platforms, and incubators that both attract global digital nomads and provide the right connective tissue to maximize knowledge-sharing to local talent.
Mexico unquestionably faces a myriad of challenges in security, infrastructure, energy, and migration. Those topics should of course remain a top priority for the country. However, given the pandemic’s dynamic impact on labor and supply chain mobility, Mexico has a once-in-a-generation opportunity to invest in technology services that drive inclusive economic growth.
