Report on Star Kabab's Global Expansion into

Mexico

Table of Contents

Executive
Summary.........................................................................................................
...............3
Introduction

PEST
Factors ...........................................................................................................
...................... 4
Government Intervention
.......................................................................................................... 11
Economic Integration and its
Influence.......................................................................................12

FDI

related

issues........

................................................................................................................16
Strategy related reasons for expanding to
Mexico.....................................................................19
Choice of Entry Strategy
..............................................................................................................20
Conclusion.......................................................................................................
.............................22
Bibliography....................................................................................
......................................23

Executive Summary:
Star Kabab is one of the most famous restaurants in Dhaka city. It is situated in the capital city of
Dhaka with a total of 8 branches located in Banani, Dhanmondi, Farmgate, Kawranbazzar, Old
Dhaka, and Wari. The slogan of Star Kabab is to satisfy the customers with quality food.
As a part of the expansion of the Star Kabab to any foreign country, we have selected Mexico as our
potential expansion opportunity. Mexico is an agricultural based country. The food habit of the
2

Mexicans is a bit similar to ours. Spices, fresh food consumption of Mexico is also similar to
Bangladesh. Beside of these factors the business model of Star Kabab, marketing policies, strategic
plans, vision and management are well suited with Mexico.
Mexico is the country with the lowest total manufacturing costs. There is abundant labor force with
longer working hours. Mexico has a network of 12 Free Trade Agreements (FTAs) which grants it
preferential access to 44 countries and over one billion consumers. Mexico is a safe place for
foreign investment. Its macroeconomic financials are sound and has almost 3 times its foreign debt.
Mexicos government runs programs that offer financial support, tax incentives, and technical
assistance to firms. Areas such as education, energy, infrastructure and telecommunication are
improving. Mexico is a vibrant economy, adaptive to changes. Their food preferences match to what
Star Kabab has to offer.
There is restriction to high calorie food advertisement; therefore we plan to promote Star Kabab as a
low calorie food provider.
The Mexican economy contains rapidly developing modern industrial and service sectors, with
increasing private ownership. The most influential FTA is the North American Free Trade
Agreement (NAFTA). One of the major indicators of the economy is Gross Domestic Product
(GDP). In Mexico we can notice the Gross Domestic Product (GDP) in Mexico expanded 2.60
percent in the fourth quarter of 2014 over the same quarter of the previous year. After analyzing the
important aspect we can say that, the overall condition is positive for Star Kabab to go for starting a
business over there. This was possible because of the policies of the Mexico, the consumers
behavior, Mexicos capacity of supplying the raw materials for Star Kabab and the business model
and the strategies taken by Star Kabab. There is a remarkable expansion of FDI over the last three
decades in Mexico. It can be seen that Mexicos FDI inflow has increased steadily over the period
and its outflow grew in a much slower rate than inflow. We are willing to establish Star Kabab as a
full service restaurant in Mexico providing premium quality food at reasonable price. Star Kabab's
core competencies lies on its secret recipes and the experience of the chef staff. If we choose
franchising, we would lose our edge over the competition. After analyzing all the benefits and costs,
we have come to a conclusion that owning a subsidiary in Mexico will be the most effective choice
of entry strategy. We will start with a small scale investment with only one outlet of Star Kabab in
Mexico, and if it acts favorable, Star Kabab can think about expanding more in Mexico and open
more outlets.

Introduction:

In Bangladesh there are many restaurants. If someone is asked to mention few names of good
restaurants, the name of Star Kabab will be said within the top three, thats a sure thing. Star Kabab
is one of the most famous restaurants in Dhaka city. It is situated in Dhaka, but it is famous all over
the country. There are eight brunches of Star Kabab in Dhaka. They are in Banani, Dhanmondi (2
branches), Farmgate, Kawranbazzar, Old Dhaka, and Wari (2 branches). All of these branches have
air conditioned facilities. The branches can accommodate about 300 people at a time. The set menu
offers food starting from TK70 and up to TK300, but any can add more as their wish. Star Kabab
offers breakfast, lunch, snacks and dinner. Beside these birthday celebration, party and also home
delivery is available at Star Kabab. The motto of Star Kabab is to satisfy the customers with quality
food.
As a part of the expansion of the Star Kabab to any foreign country, we have selected Mexico as our
potential expansion opportunity. Mexico is an agricultural based country. The food habit of the
Mexicans is a bit similar to ours. Spices, fresh food consumption of Mexico is also similar to
Bangladesh. Beside of these factors the business model of Star Kabab, marketing policies, strategic
plans, vision and management are well suited with Mexico. We shall be focusing different aspect of
Star Kabab expanding in Mexico in the later part of this report.

PEST Factors:
Political:
Mexico, also known as the United Mexican States, has 31 states and 1 federal district. Mexico is run
by a federal republic under a centralized government.
Mexico has the type of government which can be described as Constitutional, Federal (Federation),
Presidential and Republic. A new president is elected every six years by means of election. The
Government is against re-election so a President can only serve one term.
Villarreal (2012) explains Mexico as the country with the largest number of trade agreements in
Latin America. Mexicos primary motivation for the unilateral trade liberalization efforts of the late
1980s and early 1990s was to improve economic conditions in the country, which policymakers
hoped would lead to greater investor confidence and attract more foreign investment. This
motivation was a major factor in negotiating NAFTA with the United States and Canada. The
permanent lowering of trade and investment barriers and predictable trade rules provided by FTAs
improved investor confidence in a country, which helped attract foreign direct investment (FDI) to
Mexico. Mexico has other motivations for continuing trade liberalization with other countries, such
as expanding market access for its exports and decreasing its reliance on the United States as an
export market. By entering into trade agreements with other countries, Mexico is seeking to achieve
economies of scale in certain sectors of the economy and to expand its export market. In an effort to
diversify and increase trade with other countries, Mexico has a total of 12 trade agreements
4

involving 44 countries. The Mexican economy had experienced many difficulties throughout most
of the 1980s with a significant deepening of poverty. Once the United States and Mexico agreed to
enter into formal negotiations, Canada asked to join the negotiations for the North American Free
Trade Agreement (NAFTA). The agreement entered into force on January 1, 1994. Trade and
investment barriers were eliminated among all three trading partners over a fifteen-year period. By
entering into NAFTA, Mexicos expectation was to diversify its exports and attract foreign
investment, which would subsequently help create jobs, increase wage rates, and reduce poverty.
International Trade Policy, (2013) describes as a WTO Member, Mexico grants MFN treatment to
all its trading partners, including non-WTO Members. Mexico recognizes the importance of the
conclusion of the Doha negotiations and of improving WTO disciplines to ensure the effectiveness
of the multilateral trading system.
Foreign investment is authorized up to 100% in the capital of Mexican companies, except for a list
of activities which are reserved for the State, for Mexican nationals or subject to capital restrictions.
As of 2008, Mexico authorized foreign investment up to 10% of the capital of a credit union. In
order to promote and increase FDI, Mexico has continued to sign agreements for the Promotion and
Reciprocal Protection of Investments. As of June 2012, Mexico had 28 investment agreements in
force. By January 2012, 58.3% of Mexico's tariff lines were duty free and the average MFN tariff
was 6.2%, down from 11.2% in 2007. The average tariff for manufactured goods (WTO definition)
declined from 9.9% in 2007 to 4.6% in 2012, while the average tariff for agricultural products
(WTO definition) fell only from 23% to 20.9%. Following these tariff reductions, the difference
between MFN and preferential duties has also declined. In addition, Mexico simplified its tariff
structure by reducing the number of tariff levels from 88 to 28. Import authorizations are required
for a limited number of products. Mexico has reduced the use of anti-dumping measures during the
review period. Procedures for the adoption of technical regulations are clearly established.
Technical regulations are subject to a sunset review after five years; if the review is not conducted,
the measures automatically expire. In January 2011, Mexico also amended the information required
on labels of food and soft drinks. Mexico strongly promotes its manufacturing export sector through
financial support programs, tax incentives and training programs. Exports are subject to a customs
processing fee (DTA), except when goods are exported under certain trade agreements. This rate is
fixed and applies for each transaction. Some products are subject to export taxes, while others
require registration. In the area of competition policy, Mexico has strengthened the role of the
Federal Competition Commission (CFC) and its system of penalties and fines during the review
period. Mexico continues to apply price controls on several products. During the review period,
Mexico made some changes in its legislation regarding the process of obtaining a patent, as well as
regarding trademark registration and licensing.

Economical:
5

Rennhack (2014) describes that major reforms in the energy, telecommunications, education, and
financial sectors have been designed to unlock potential growth in Mexico. The Mexican economy
is recovering. It had grown by just 1.1 percent last year, and now it's likely to recover further, with
growth forecast at around 2 percent this year. Were expecting that to happen because the United
States is growing much more rapidly than we had thought and Mexico has very close ties to the
U.S. economy. In fact, a lot of Mexicos manufacturing exports go to the United States, so better
growth in the United States translates into better growth for Mexico. The second reason is that the
construction sector in Mexico is beginning to recover. It had collapsed in the last year for a variety
of reasons, and now we're seeing signs of a recovery. Also, monetary and fiscal policy in Mexico is
supporting growth. The economy of Mexico is the 14th largest in the world in nominal terms and
the 10th largest by purchasing power parity, according to the International Monetary Fund. Mexico
has adopted many different structural reforms that are really quite profound and can transform the
economy. Most importantly, they've completely changed the energy sector. A comprehensive
financial sector reform has been adopted that changes many different laws. All of these changes
point in the direction of improving the access of small businesses to the financial system, and trying
to raise credit as a share of GDP. There was also anti-trust reform for markets outside of
telecommunications. So through greater anti-trust enforcement the government can promote
competition that can lower costs and expand investment and growth. Labor market reform is
another area where Mexico has moved forward, creating a number of incentives to move workers
into the formal labor sector, which has higher productivity. The country also embarked on a
comprehensive education reform that creates much more performance-based assessment of teachers
and also introduces a number of other steps to improve the quality of education. The Mexican
authorities are trying to strengthen the credit bureaus, so that the information on crediton
borrowers from the banking systemis better. And they are trying to promote competition in the
banking system. So all these things are designed to strengthen the banking system and promote the
access to credit through non-banks. These will have the effect of improving investor confidence
over time. Mexico has been able to access the Flexible Credit Line (FCL) because it has an
extremely strong policy framework, and has been adopting structural reforms for the past few years.
These are the factors that really drive its economic performance.

GDP growth Rate:

2013- 1.1%. 2014-2.4%. 2015-3.5%.
6

FDI (in Billion):

2013- $35.2 2014- $22.6

2015-$22.56

In spite of the Mexican economy's unprecedented macroeconomic stability, which has reduced
inflation and interest rates and has increased per capita income, enormous gaps remain between the
urban and the rural population, the northern and southern states, and the rich and the poor. Some of
the government's challenges include the upgrade of infrastructure, the modernization of the tax
system and labor laws, and the reduction of income inequality. The tax revenues, all together 19.6
percent of GDP in 2013, are the lowest among the 34 OECD countries. Mexico's labor force is 78
million. The OECD and WTO both rank Mexican workers as the hardest-working in the world in
terms of the amount of hours worked yearly, although profitability per man-hour remains low.
Average Mexican household spend 14% of income bribing government officials. Drug money is
driving nearly 20% of the states economy (UNESCO). Mexican trade is fully integrated with that
of its North American partners: close to 90% of Mexican exports and 50% of its imports are traded
with the United States and Canada.

Social:
Mexico achieved independence from the Spanish Empire; this began the process of forging a
national identity that fused the cultural traits of indigenous pre-Columbian origin with those of
European, particularly Iberian, ancestry. This led to what has been termed "a peculiar form of multiethnic nationalism.
The most spoken language by Mexicans is Mexican Spanish, but some may also speak languages
from 62 different indigenous linguistic groups and other languages brought to Mexico by recent
immigration or learned by Mexican immigrants residing in other nations. Around 75% of the
Mexican people live in Mexico but there is a sizable Diasporas with over 24% living in the United
States.
Of the Mexico population ethnic groups include: Indigenous Mexicans- 14.9%, Mestizo Mexicans,
European Mexicans, Afro-Mexicans, Asian Mexicans and Arab Mexicans
Mexico has no official religion. Christmas is a national holiday and every year during Easter and
Christmas all schools in Mexico, public and private, send their students on vacation.
Population

120,286,655 (July 2014 est.)

Population growth rate

1.21% (2014 est.)

Net migration rate

-1.64 migrant(s)/1,000 populations (2014 est.)

Urbanization

Urban population: 78.1% of total population (2011)

rate of urbanization: 1.49% annual rate of change (2010-15 est.)

Major cities - population

MEXICO CITY (capital) 20.446 million; Guadalajara 4.525 million; Monterrey 4.213 million;
Puebla 2.335 million; Tijuana 1.82 million; Toluca de Lerdo 1.748 million (2011)

Ethnic groups

mestizo (Amerindian-Spanish) 60%, Amerindian or predominantly Amerindian 30%, white 9%,

other 1%

Religions

Roman Catholic 82.7%, Pentecostal 1.6%, Jehovah's Witnesses 1.4%, other Evangelical
Churches 5%, other 1.9%, none 4.7%, unspecified 2.7% (2010 est.)

Languages

Spanish only 92.7%, Spanish and indigenous languages 5.7%, indigenous only 0.8%, unspecified
0.8%
note: indigenous languages include various Mayan, Nahuatl, and other regional languages (2005)

Literacy

Definition: age 15 and over can read and write

total population: 93.5%
male: 94.8%
female: 92.3% (2011 est.)

Obesity - adult prevalence rate

32.1% (2008)

Hofstedes Five Cultural Dimensions:

Goh & Kanna (2013) describes the following:
Power Distance: This dimension deals with the fact that all individuals in societies are not equal as
it expresses the attitude of the culture towards these inequalities among the citizens. At the score of
81, Mexico is hierarchical (arranged in order of rank). This means that people accept the
arrangement in order of rank in according of status and authority.
Uncertainty Avoidance: In Mexico, the score on this dimension is 82 (very high preference for
avoiding uncertainty). The culture of Mexico, there is an emotional need for rules. Even if the rules
never seem to work, time is money & people have the inner urge to be busy and work
hard. Precision and punctuality are the norm. Innovation may be resisted. Security is an important
element in individual motivation. No score for LTO because the society of Mexico has the extent of
conventional historical short-term point of view. Do not have the extent to which a society shows
pragmatic future-orientated perspective.
Masculinity / Femininity: A high score (Masculinity) on this dimension indicates that the society
8

will be driven by (1) Competition (2) Achievements (3) Success.

Mexico scores 69 on this dimension Masculine society.
In masculine countries, Mexico: (1) People live in order to work. (2) Managers are expected to
be decisive. (3) The emphasis is on equity, competition and performance and conflicts are resolved
by fighting them out. A low score (Femininity) on this dimension means that dominant values in
society are caring for others and quality of life.
In Mexico (Collectivism society)
(1) Loyalty is paramount. (2) The society encourages strong relationships where everyone takes
responsibility for fellow members of their group. (3) Offence leads to shame & loss of face.
(4) Employees / employers relationships are perceived in moral terms (a family link)

Technological:
Heng, Heermann, Samaranayake & Sath said that Mexican officials, such as Deputy Finance
Minister Santiago Levy, have taken strong initiatives in expanding educational programs by taking a
strong approach at the base of the educational pyramid. The initiatives provide incentives for
families to keep their children in school through monetary rewards. It has been shown to raise
education levels, which, in turn, has a positive effect on income and technological development in
the country. In regards to higher education, Mexico has established a large number of research
institutions and universities, starting in 1910 with the National Autonomous University of Mexico
and over the past 50 years with institutions such as the Center for Research and Advanced Studies
of the National Polytechnic Institute established in 1961 and the Mexican Academy of Sciences
established in 1959. It had a definite leader in Latin American due to its development of science and
technology programs in the 20th Century. There is significant enthusiasm for technological change
in Mexico. After a major macroeconomic crisis in the mid-nineties, Mexico is currently one of the
fastest growing economies in Latin American and a regional leader in science and technology
programs. Mexico is addressing its poverty concerns through a wide variety of means, however,
with its justifiable focus on more immediate concerns, overall investment in science and technology
programs remains low with its annual investment in research and technology development at 0.31%
of it GDP.
Rennhack (2014) said that the telecommunication sector of Mexico is being completely reformed.
Previously this had been dominated by several large firms that accounted for 80 percent or so of the
market. Now the government has implemented regulation that creates an incentive for the dominant
firms in the sector to shrink, and also opens the door for competition in the sector. This could bring
down the cost of internet services, and a whole array of communication services. By lowering the
cost of information this reform could promote growth.
Fast Food in Mexico (2014) suggests that Mexican consumers are increasingly interested in Asian
and Middle Eastern food. Mexican consumers are increasingly attracted to Middle Eastern and
Asian fast food, particularly as fast food has become too mainstream in the country's culture.
9

Mexican consumers are increasingly attracted to Middle Eastern and Asian fast food, particularly as
fast food has become mainstream in the country's culture. Fast food is expected to continue
growing, offering both established types of successful fast food such as bakery products fast food
and Asian fast food.

Analysis:
Mexico will be a favorable place to start Star Kabab because of the following reasons:

The average growth of the Mexican economy for the 2013-2019 periods is 4% with a controlled
inflation rate of 3.8%.
Mexico is the country with the lowest total manufacturing costs among emerging economies and
approximately 25% lower than the US.
Abundant labor force with longer working hours.
Mexico has a network of 12 Free Trade Agreements (FTAs) and an Economic Partnership
Agreement that grants it preferential access to 44 countries and over one billion consumers,
representing 62.6% of the global GDP.
Mexico is a safe place for foreign investment; it has signed 28 Investment Promotion and
Protection Agreements (IPPA) and Double Taxation Treaties with more than 40 countries.
Its macroeconomic financials are sound: international reserves of US$163 bn, almost 3 times its
foreign debt; low country risk.
Mexicos government runs programs that offer financial support, tax incentives, and technical
assistance to firms. Areas such as education, energy, infrastructure and telecommunication are
improving.
With reinforced CFC Controlled Foreign Corporation, process of competition has been more
protective and there has been free access to markets, through the prevention and elimination of
monopolistic practices, leading to increasing market efficiency.
Recent Anti-Trust Law has prohibited and restricted mergers and acquisitions leading to less
competition, and also prohibits monopoly creation of abuse of such power.
Mexico is a vibrant economy, adaptive to changes. Their food preferences match to what Star
Kabab has to offer.

However, we need to consider circumstances where Average Mexican household spend 14% of
income bribing government officials.

Government intervention of Mexico for restaurant industry:

10

Mexico is currently shifting away from issues that have historically affected the developing world,
such as under-nutrition. The nation is now experiencing obesity and other related health issues that
once only affected wealthy nations. Adjacent to the United States southwestern border, Mexico is
particularly affected by American dietary influences. While technological advances have vastly
improved food availability in Mexico, they have also increased media access and food processing,
which play important roles in the obesity epidemic. Mexican children are now growing up in an
obesogenic environment characterized by physical inactivity and a high-calorie, nutrient-poor diet.
One Mexican study illustrates this, finding that mean purchases of soda have risen by 37% while
fruit and vegetable purchases have dropped by 29% since 1984 (Rivera J.A., Barquera S., Gonzalezde Cossio T., Olaiz G. and Sepulveda J., 2004).
Mexico announced that it was restricting television ad on high calorie food and soda in an effort to
stem the rising tide of obesity. All told 40% of commercials for soft drinks, confectionary products
and chocolates will be pulled from TV in favor of products that meet nutritional standard
according to Mexican health ministry. The ads will be banned on network and cable TV between
2:30 and 7:30 pm on weekdays and between 7:30 am to 7:30 pm on weekends. From a policy stand
point, Mexico is fast becoming a leader in the fight against obesity. Last year, the Mexican
government put a higher tax on high calorie food and drinks and, starting in 2015, will require food
and drink manufacturers to label the health contents of their product (Hennessy, 2014).
Generally, all major equipment of restaurants such as refrigerators, stoves, dish machines, etc., must
be ANSI-Certified (New Mexico environment department, 2015).
Alerts inform consumers of certain problems associated with food and, in some cases, provide
details of specific action to be taken. NMED inspectors keep a watchful eye on nationwide food
safety issues such as: product recalls, trace backs, etc. "Alerts" are updated often so keep this link
under your "Favorites" (New Mexico environment department, 2015).

Analysis
If we look at the data then we can see obesity is an acute problem in Mexico. The Mexican
government is trying to reduce the problem by restricting advertisement of high calorie food. We
will be careful about containing. So it will not be difficult for us to promote Star Kabab in
Television advertisement and TV ad is an effective way to reach target customer. Though Mexican
government put higher tax on high calorie foods, we will try to sell low calorie food to avoid higher
tax rates.. New Mexico environment also raise some regulations like the equipment of restaurants
will be certified of ANSI but in Bangladesh we did not face any regulation like this. But we will
abide by all the regulations in Mexico. There is also regulation for food problem and a food
inspector will always monitor the restaurant. So, we need to always maintain cleanliness and follow
all the regulations.

11

Economic Integration and Influence:

The Mexican economy contains rapidly developing modern industrial and service sectors, with
increasing private ownership. Recent administrations have expanded competition in ports, railroads,
telecommunications, electricity, natural gas distribution and airports, with the aim of upgrading
infrastructure. As an export-oriented economy, more than 90% of Mexican trade is under free trade
agreements (FTAs) with more than 40 countries, including the European Union, Japan, Israel, and
much of Central and South America. The most influential FTA is the North American Free Trade
Agreement (NAFTA), which came into effect in 1994, and was signed in 1992 by the governments
of the United States, Canada and Mexico. In 2006, trade with Mexico's two northern partners
accounted for almost 90% of its exports and 55% of its imports. Mexico had 16 companies in the
Forbes Global 2000 list of the world's largest companies in 2008.

North American Free Trade Agreement (NAFTA):

The North American Free Trade Agreement (NAFTA) is a treaty that was signed on August 12,
1991 by the United States, Canada, and Mexico; it went into effect on January 1, 1994. On that day,
the three countries became the largest free market in the worldthe economies of the three nations
at that time was more than $6 trillion and directly affected more than 365 million people. NAFTA
was created to eliminate tariff barriers to agricultural, manufacturing, and services trade, remove
investment restrictions, and protect intellectual property rights, all while addressing environmental
and labor concerns. Small businesses were among those that were expected to benefit the most from
the lowering of trade barriers since it would make doing business in Mexico and Canada less
expensive and would reduce the red tape needed to import or export goods. Between 1993-2012,
trade between the three members quadrupled, from $297 billion to $1.6 trillion. This boosts
economic growth, profits and jobs for all three countries. It also allows lower prices for consumers.
U.S. exports grew from $142 billion to $597 billion, making Canada and Mexico the top two
purchasers of U.S. exports in 2013. Looked at another way, 33.3% of all U.S. exports went to these
two countries. Exports from Canada and Mexico to the U.S. increased from $151 billion to $646
billion. (Amadeo, K, 2014)

12

Key Terms of NAFTA:

Tariff elimination for qualifying products. Before NAFTA, tariffs of 30 percent or higher on
export goods to Mexico were common, as were long delays caused by paperwork.
Additionally, Mexican tariffs on U.S.-made products were, on average, 250 percent higher
than U.S. duties on Mexican products. NAFTA addressed this imbalance by phasing out
tariffs over 15 years. Approximately 50 percent of the tariffs were abolished immediately
when the agreement took effect, and the remaining tariffs were targeted for gradual
elimination. Among the areas specifically covered by NAFTA are construction, engineering,
accounting, advertising, consulting/management, architecture, health-care management,
commercial education, and tourism.
Elimination of nontariff barriers by 2008. This includes opening the border and interior of
Mexico to U.S. truckers and streamlining border processing and licensing requirements.
Nontariff barriers were the biggest obstacle to conducting business in Mexico that small
exporters faced.
Establishment of standards. The three NAFTA countries agreed to toughen health, safety,
and industrial standards to the highest existing standards among the three countries (which
were always U.S. or Canadian). Also, national standards could no longer be used as a barrier
to free trade. The speed of export-product inspections and certifications was also improved.
Supplemental agreements. To ease concerns that Mexico's low wage scale would cause U.S.
companies to shift production to that country, and to ensure that Mexico's increasing
industrialization would not lead to rampant pollution, special side agreements were included
in NAFTA. Under those agreements, the three countries agreed to establish commissions to
handle labor and environmental issues. The commissions have the power to impose steep
fines against any of the three governments that failed to impose its laws consistently.
Environmental and labor groups from both the United States and Canada, however, have
repeatedly charged that the regulations and guidelines detailed in these supplemental
agreements have not been enforced.
Tariff reduction for motor vehicles and auto parts and automobile rules of origin.
Expanded telecommunications trade.
Reduced textile and apparel barriers.
More free trade in agriculture. Mexican import licenses were immediately abolished, with
most additional tariffs phased out over a 10-year period.
Expanded trade in financial services.
Opening of insurance markets.
Increased investment opportunities.
Liberalized regulation of land transportation.
Increased protection of intellectual property rights. NAFTA stipulated that, for the first time,
Mexico had to provide a very high level of protection for intellectual property rights. This is
especially helpful in fields such as computer software and chemical production. Mexican

13

firms will no longer be able to steal intellectual property from companies and create a
"Mexican" version of a product.
Expanded the rights of American firms to make bids on Mexican and Canadian government
procurement contracts.

Influence of NAFTA on Mexico:

1. Trade and Financial flows: Most studies suggest that NAFTA spurred a dramatic increase in trade
and financial flows. For example, Mexicos exports to the United States and Canada tripled in dollar
terms between 1993 and 2002. While the growth of trade has slowed since 2000, Mexicos trade
(exports plus imports) with NAFTA partners still accounted for around 40 percent of its GDP in
2002. The agreement also appears to have significantly altered the nature of trade flows, with a
substantial increase in intra-industry trade between Mexico and its NAFTA partners. Similarly,
NAFTA helped boost FDI flows to Mexico, which rose from US$12 billion over 199193 to
roughly US$54 billion in the 200002 period.
2. GDP Growth: Increased trade and financial linkages have affected the dynamics of economic
growth in Mexico in several ways. Contributions of exports and investment to GDP growth have
increased substantially following the introduction of the agreement. In particular, the contribution of
investment to GDP growth reached 3 percentage points during the period 1996-2002 as the average
growth rate of investment rose to more than 8.5 percent. Recent studies suggest that NAFTA
induced a sizeable increase in total factor productivity in Mexico, helping double GDP growth from
an annual average of 2 percent in 198093 to 4 percent in 19962002.
3.Export and Investment: The effects of exports and investment on growth in Mexico have changed
after NAFTA. Contributions of exports and investment to GDP growth have increased more than
two-fold following the introduction of the agreement. For example, while the contribution of
investment (exports) was less than 0.5 (1.5) percentage points before NAFTA, it went up to 1.5
(3.0) percentage points during the period 19962002.
4.Business Cycle: NAFTA appears to have also been associated with significant changes in the
Mexican business cycle. Mexicos output volatility decreased by almost 30 percent, and the
volatility of investment fell by more than 40 percent, since 1996. Business cycles in Mexico and the
United States have become significantly more synchronized, with marked increases in the crosscountry correlations of the major macroeconomic aggregates.
5.Policy Formulation: NAFTA also has been instrumental in improving macroeconomic as well as
institutional policies in Mexico. Recent research emphasizes the importance of NAFTA as a
commitment mechanism ensuring the continuation of Mexicos reform process during the 1990s.
This, in turn, improved the risk profile of the Mexican economy and helped attract foreign

14

investment flows. In addition, there have been improvements in institutions in charge of

competition policy and intellectual property protection (Kose, A, Meredith, G & Towe, C, 2004).

FDI Related Issues:

One of the major indicators of the economy is Gross Domestic Product (GDP). In Mexico we can
notice the Gross Domestic Product (GDP) in Mexico expanded 2.60 percent in the fourth quarter of
2014 over the same quarter of the previous year. GDP Annual Growth Rate in Mexico

15

GDP of Mexico

averaged 2.57 percent from 1994 until 2014. Due to this high growth rate of GDP markets are also
expanding and purchasing power is high in Mexico. Star Kabab can take advantage of this and
potentially receive a higher return on their capital and by implication receive higher profit from
their FDI.

FDI inflow and outflow:

There is a remarkable expansion of FDI over the last three decades in Mexico. It can be seen that
Mexicos FDI inflow has increased steadily over the period and its outflow grew in a much slower
rate than inflow.

16

Foreign direct investment - net inflows (% of GDP) in Mexico

Foreign direct investment - net outflows (% of GDP) in Mexico

From the chart we can see a trend in the inflow that, from 2008, the Inflow was getting a negative
response. But in the year of 2013 it got a good positive feedback. This is a good sign for Star
Kabab. For further analysis let us look at the Food Industry data of Mexico.

Year

2003

2004

2005

2006

2007

17

2008

2009

2010

2011

2012

Industry

AGRICULTURE AND
FISHING

14.7

41.337

15.725

21.171

143.514

54.612

35.477

91.506

33.712

71.894

MINING AND
QUARRYING

139.04

306.507

213.429

432.178

1646.468

4758.948

817.036

1319.623

832.62

2689.946

MANUFACTURING

9677.025

13877.32

11046.28

10173.81

13861.14

8258.685

5965.167

12588.41

9784.341

7328.185

Food products

3398.012

3933.415

2443.962

1933.099

1472.553

1461.206

1061.068

7095.706

2857.058

188.981

Table: FDI flows by industry (USD millions)

Here in the data table we can also see that, in the year 2008 the inflow was lower than earlier. This
also includes the Agricultural sector and the Food sector. These two sectors are very important for
Star Kabab. In the subsequent years we see that these sectors have recovered from that setback and
these sectors also has the potential to expand more. Star Kababs investment will be perfectly suited
under these circumstances.
We can also have a look at the data which will give us a brief idea about outflow in different food
categories of Mexico.

A Pie chart can help us in this aspect.

18

We can see that Mexico has a huge demand for Fresh food and Foods contain Protein. Star Kabab
basically will be working these two types of foods. So there is an opportunity of fill up this gap in
the market. If Star Kabab is able to fulfill the Fresh and the Protein demand, the amount of outflows
can be substituted.

Strategy related reasons for expanding to Mexico:

The strategy related reasons for expanding to Mexico are described below1. Familiarity with Product: Mexico already has many restaurants specialized in Kebab and grilled
food like Star Kabab and there is high demand among consumers for the cuisine. So, consumers are
already familiar with the product that we are willing to sell. This reduces our risk of acceptability
among the consumers. And since there is already an established segment for kebab in the restaurant
industry of Mexico, the cost of educating consumers about new product is eliminated.

19

2. Popularity of Asian Flavors: Recent research showed that Asian flavored food is very popular
among Mexican consumers. So being an Asian cuisine based restaurant, it is favorable for Star
Kabab to expand into Mexico.
3. Very low Manufacturing Cost: Mexico is the country with the lowest total manufacturing costs
among emerging economies and approximately 25% lower than the US. So it will be easier for us to
sell at lower prices and be competitive.
4. Foreign Investment Safety: Mexico is a safe place for foreign investment; it has signed 28
Investment Promotion and Protection Agreements (IPPA) and Double Taxation Treaties with more
than 40 countries. Due to this reduced risk for foreign investments, Mexico is an ideal place for Star
Kabab's expansion.
5. Positive Economic Conditions: The average growth of the Mexican economy for the 2013-2019
periods is 4% with a controlled inflation rate of 3.8%. Mexico also has abundant labor force with
longer working hours. Its macroeconomic financials are sound: international reserves of US$163
bn, almost 3 times its foreign debt; low country risk. All these factors add up to a stable Mexican
economy which is predicted to grow in the coming years. The positive economic condition in
Mexico is one of the primary reasons for selecting Mexico for Star Kabab's expansion. It reduces
the risk to incur losses due to poor economic conditions.
6. Positive Government Interventions: government runs programs that offer financial support, tax
incentives, and technical assistance to firms. Areas such as education, energy, infrastructure and
telecommunication are improving. Recent Anti-Trust Law has prohibited and restricted mergers and
acquisitions leading to less competition, and also prohibits monopoly creation of abuse of such
power. Mexico also has regulations specific for food and restaurant industry. It has higher tax rate
for food with high calories. It has regulations for using standard equipment in the restaurants. All
these interventions offer a fair playground for the firms to compete in. We are positive that we can
abide by all the regulations and also be competitive because other firms face the same regulations
too.

Choice of Entry Strategy:

Mexico has more than 175,000 full service restaurants which accounts for 29.3% of the whole
restaurant industry. 95% of the full service restaurants are independent and the rest 5% are chain.
We are willing to establish Star Kabab as a full service restaurant in Mexico providing premium
quality food at reasonable price. Mexican restaurants are either franchises or wholly owned
subsidiaries. So, the choice of entry strategy for Star Kabab should be either one of the two.
20

After much deliberation, we decided not to use franchising as our choice of entry strategy due to the
following reasons

It limits our control over the business activities in Mexico. Franchising allows the franchisee
to conduct all the marketing and other business activities.
Star Kabab's core competencies lies on its secret recipes and the experience of the chef staff.
If we choose franchising, we would lose our edge over the competition.
It limits our profit to royalty fees only.

So, the only other option we have is wholly owned subsidiary. After analyzing all the benefits and
costs, we have come to a conclusion that owning a subsidiary in Mexico will be the most effective
choice of entry strategy. The reasons for choosing wholly owned subsidiary are as follows

It gives us the total control over the business activities in Mexico. We can implement our
own marketing strategy, supply chain management and other business activities in Mexico.
This allows us to establish our brand in the market exactly like we want it to be.
Our core competencies, which are the secret recipes and the experience of the workforce,
remain protected if we choose wholly owned subsidiary. This gives us the edge over our
competition in Mexico.
Wholly owned subsidiary gives us the scope to earn the most money since there is no
franchisee or other middlemen.
The disadvantages of owning a subsidiary includes the huge capital investment required and the
cost incurred during the learning phase in a new market also known as pioneering cost. The huge
investment outweighs the benefits we will receive for having our own subsidiary. Pioneering cost is
an extra cost but it helps us to understand the new market conditions, teaches us the ways to go
about doing business in a new country and all the things that we need to know and have in order to
conduct business activities properly. So, in a way, pioneering cost is more help to us than we realize
as it is helping us to adapt to the market conditions and working process in the new country.
We will start with a small scale investment with only one outlet of Star Kabab in Mexico to "test the
water". If all things remain favorable, Star Kabab can think about expanding more in Mexico and
open more outlets. This helps us from facing a big loss due to huge investment at a particular time.
Taking things slow means Star Kabab can get more time to the Mexican conditions and expand only
when Star Kabab is completely adaptive to the new conditions.

Conclusion:
21

Star Kabab is one of the leading restaurants of our country. In our report we tried to focus the
probable outcome of Star Kabab starting business in Mexico. After analyzing the important aspect
we can say that, the overall condition is positive for Star Kabab to expand into Mexico. This was
possible because of the policies of the Mexico, the consumers behavior, Mexicos capacity of
supplying the raw materials for Star Kabab and the business model and the strategies taken by Star
Kabab. While doing this project we came to understand that globalization is an opportunity for the
businesses to expand. Hopefully Star Kabab will be seen soon in Mexico.

Bibliography:

22

1. Amadeo, K (2014), Advantages of NAFTA, About News, viewed at 2nd April, 2015.
<http://useconomy.about.com/od/tradepolicy/p/NAFTA_Advantage.htm>
2. Comprehensive and Accurate Foodservice Database, Excellence in Foodservice Information,
viewed on 5th April, 2015. <http://www.chd-expert.com/>
3. FDI flows by industry, OECD StatExtracts, Viewed on 6th April, 2015.
<http://stats.oecd.org/Index.aspx?DatasetCode=FDI_FLOW_INDUSTRY#>
4. Foreign direct investment, net inflows (BoP, current US$), Catalog Sources World
Development Indicators, The World Bank for a World free of Poverty, viewed on March 31st,
2015. <http://data.worldbank.org/indicator/BX.KLT.DINV.CD.WD>
5. Goh, S. & Kanna, September 8, 2013, Mexico: Cultures Influence on Work place and Value,
Prezi, viewed on April 4, 2015.
<https://prezi.com/i75zuvhwm4ch/hofstedes-five-cultural-dimensions-for-mexico/>
6. Heng,A., Heermann, J. , Samaranayake, C. & Sath, L. Technology trends in Latin America
and their social and economic impact, viewed on April 5,2015.
<http://cs.stanford.edu/people/eroberts/cs181/projects/201011/TechnologyTrendsLatinAmerica/mexico.html
7. Hennessy, M., (July, 2014), Mexico restricts junk food ads; time for rethink of advertising?
Viewed on April1, 2015. <http://www.foodnavigator-usa.com/Regulation/Mexico-restrictsjunk-food-ads-time-for-rethink-on-advertising?
utm_source=copyright&utm_medium=OnSite&utm_campaign=copyright
8. Kose, M. A., Meredith, G. M. & Towe, C. M. 2004, How Has NAFTA Affected the Mexican
Economy? Review and Evidence. Viewed at 2nd April, 2015.
<https://www.imf.org/external/pubs/ft/wp/2004/wp0459.pdf
9. May 1, 2013, WTO Trade Policy Review: Mexico, International Trade Policy, viewed on 4th
April, 2015. <http://www.intracen.org/BB-2013-05-01-WTO-Trade-Policy-ReviewMexico/>
10. May, 2009, Swine Flu Aftermath - Mexico Restaurant Regulations, Examinar.com, viewed on
April 1, 2015. http://www.examiner.com/article/swine-flu-aftermath-mexico-restaurantregulations
11. Rennhack, R. November 17, 2014, Mexicos Economy Shows Steady Growth Fueled by Key
Reforms, Economic Health Check, IMF Survey, viewed April 3, 2015.
<http://www.imf.org/external/pubs/ft/survey/so/2014/car111714a.htm>
23

12. September, 2014, Fast Food in Mexico, Euromonitor International, section-Trend, viewed on
April 5, 2015. <http://www.euromonitor.com/fast-food-in-mexico/report>
13. Star Hotel and Kabab, bdfoodnavi.com Bangladesh Food Guide, BJIT, viewed on 5th April,
2015. <http://www.bdfoodnavi.com/detail/97>
14. Trading Economics, Forex Forum, viewed on April 1, 2015.
<http://www.tradingeconomics.com/mexico/foreign-direct-investment
15. Villarreal, M. A. July 3, 2012, Mexicos Free Trade Agreements, Congressional Research
Service, CRS Report for Congress Prepared for Members and Committees of Congress,
viewed on 4th April, 2015. <https://www.fas.org/sgp/crs/row/R40784.pdf>
16. 2015, New Mexico Environment program: Food Program, New Mexico environment
department, viewed on April 1, 2015.
<http://www.nmenv.state.nm.us/fod/Food_Program/faqs.html>

24