Amidst a violent war, Mexico tries to remain safe, low-cost, competitive

high-risk parts of the world. “There is some advantage to being a local, to knowing the people and the customs.” Wharton marketing professor David Reibstein suggests another option: to run the business in Latin America from a spot in the United States, such as Miami. Yet that can be what he calls a “compromise position” — not necessarily the optimal way to operate.

Knowledge at Wharton notes that the issue for Mexico is at what point those added headaches and higher costs make a serious dent in the advantages companies see in operating there.

The key advantages include a good, inexpensive workforce and lower transit costs into the United States. With many markets relying on just-in-time inventory systems, the ability to deliver goods quickly to many points in North America is a critical one. Reibstein warns, however, that when it comes to low-cost manufacturing, Mexico faces growing competition. “There are much less expensive places than Mexico,” he notes. “Vietnam, China, Pakistan and India are all viable alternatives without nearly the risk.” That reality is not lost on Mexico’s business leaders: An August 2010 survey of nearly 400 Mexican executives by Deloitte found that 57 percent believed the violence there was the biggest threat to the economy, up from 22 percent at the end of 2009.

Wind argues that Israel provides an interesting contrast to Mexico. “Israel has been in various stages of war for the last 60 years,” Wind says. “Yet the country has high levels of foreign direct investment and venture capital, and major companies like Intel, Motorola, Microsoft and Cisco have [big] manufacturing or R&D centers there. The reason is that the perceived reward of the technology know-how and innovation far outweighs the risk.”

Mexico, he notes, does not have that edge. “If you have longer lead times, then Bangladesh, Vietnam and Indonesia are all attractive. Low-cost manufacturing is a commodity and is not a sustainable long-term advantage.”

Despite all the dire headlines, however, some observers believe that the campaign against the cartels may be working. “The recent deaths and arrests of certain cartel leaders shows there is progress,” David Robillard, managing director in the Mexico City office of risk consulting firm Kroll, points out. “And you can see progress in the fact that the tenure of leadership in cartels is now measured in weeks, not years. But, unfortunately, the path to weakening the cartels is one of violence.”

If the Mexican government can succeed in making inroads against the cartels, observers say it needs to take on several other major challenges as well.

Amiel suggests that among those are energy reform and tax reform. Indeed, the country’s failure to bring outside capital into the energy business in Mexico, which is dominated by PEMEX, is a major drag on the economy. At the same time, he says, tax evasion is rampant in Mexico, resulting in tax receipts that are just 10 percent of GDP — far short of the 50 percent figure in the developed world.

Other countries have faced similar challenges with success. Reibstein points to Colombia, which suffered from decades of violence. “Colombia has made huge strides,” he notes. “But that took a lot of patience and courage.”