SPAIN & THE FDI: From net borrower to net creditor

Matilde Madrid (mmadrid@mcx.es) Vienna, March 7th 2008

SPAIN & THE FDI: From net borrower to net creditor

Spanish position in the Worlds FDI Inward FDI

Factors Effects

Outward FDI
Factors Effects:
Employment and production Trade

Concluding remarks
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1. Spanish position in the Worlds FDI

Inward FDI:
Attractive host (late 80s, early 90s) More competition in 00s (emerging countries, EU enlargement)
Spanish Share in World's FDI Stock (in%)
6,0%
5,4%

Inward
4,1%

Outward
4,1% 3,7%

4,0%
2,7%

2,0%

1,4% 0,6% 1,4%

2,7%

0,0% 1986
Source: UNCT AD

Outward FDI:
FDI inflows => Outward looking orientation of the Spanish economy 2006: Outward FDI stock (41% of Spanish GDP) 2001-2006: 6% of total world outflows
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1990

1994

1998

2002

2006

Spanish Share in World's FDI Flows (in%)

8,0% 6,0%
4,0% 7,6%

Inward

Outward
5,1%

6,6%

4,0% 2,0%
0,6% 1,6%

3,0% 1,5%

3,9% 4,6% 2,3%

2,2%

0,0% 86-89
Source: UNCT AD

90-92

93-96

97-00

00-03

04-06

2. Inward FDI (I): Factors

Why did Spain attract FDI in the late 80s/early 90s? EC accession, big market, link to Latin America, lower Unit Labour Cost Why does not Spain attract so much investment today? Higher competition in worlds FDI (emerging economies) and in the European Union (EU enlargement)
30,0% 25,0% 20,0% 15,0% 10,0% 5,0% 0,0% Spain
Source: UNCTAD 14,0% 24,5%

Change in the inward FDI stock

(average annual percent change) 1986-1996 1996-2006 World (96-06): 14,6% World (86-96): 12,7% France BLEU Netherlands Germany United Kingdom Italy Ireland

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2. Inward FDI (II): Effects

EMPLOYMENT The inward stock of FDI in 2005 generates 1,3 million jobs (direct employment) in Spain, which mean 7% of the total employment.

GROSS FIXED CAPITAL FORMATION Inward FDI has traditionally contributed to gross fixed capital formation. In 2000 the FDI inflows meant around 25% of the total Gross fixed capital formation.
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FDI inflows as a percentage of Gross Fixed Capital Formation

30%

25%

20%

15% Geometric Mean: 9,3%

10%

5%

0% 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

Source: UNCTAD

2. Inward FDI (III): Effects

EXPORTS AND OPENNESS
Inward FDI => Exports and internationalisation
Spain's merchandise exports/GDP (in %)
25,0% 20,0% 15,0% 10,0% 5,0% 0,0%

1986

1990

1994

1998

2002

Source: Spanish National Statistics Institute (INE)

BALANCE OF PAYMENTS
Traditionally key to finance Spanish current account (30-40% of total capital inflows) not so much today (around 10%)

To sum up, these inflows had an impact on domestic economy, fostering investment, growth and productivity and creating a more dynamic market, less home-biased. These fundamentals paved the way for a further phase in the internationalisation process: the outward FDI.
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3. Outward FDI (I): Factors

Why is Spain a big player in worlds FDI since the mid 90s?
Inward FDI => Outward FDI Other factors: macroeconomic stability, Liberalisation/privatisation internal market and abroad M&As
30,0% 25,0% 20,0% 15,0% 10,0% 5,0% 0,0% Spain
Source: UNCTAD 27,4% 22,5%

Change in the outward FDI stock

(average annual percent change) 1986-1996 1996-2006 World (96-06): 14,2% World (86-96): 13,6% France BLEU Netherlands Germany United Kingdom Italy Ireland

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Outward FDI (II): by COUNTRY

First wave of Spanish foreign investments: Latin America (97-00)
Privatisation/ liberalisation in utilities, energy, financial and telecommunication services Cultural linkages
SPANISH FDI DESTINATIONS 1997-2000
EU15 (36%)

Africa (0%)

EU Enlargement (2%) Rest of Europe (4%)

Latin America & Caribbean (48%)

North America (10%) Asia & Oceania (1%)

The second wave of Spanish investments: Europe

The M&As EU enlargement Macroeconomic and institutional instability in Latin America

Source: Own calculation based on Bank of Spain data

SPANISH FDI DESTINATIONS 2004-2006

EU15 (68%)

Latin America & Caribbean (12%)

EU Enlargement (8%) Rest of Europe (4%)

Africa (2%)

Asia & Oceania (1%)

North America (6%)

Source: Own calculation based on Bank of Spain data

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3. Outward FDI (III): Effects (local economy)

Manufacturing sectors which invest abroad dont worsen their local indicators:
Chemicals, food industries, non metallic minerals, basic metals, machinery

Manufacturing sectors which perform worse arent affected by capital outflows:

Textiles, wearing apparel, footwear, communications equipment, computing mach...
Chart 1. FDI Outflows in industry
CHEMICALS FOOD, BEVERAGES AND TOBACCO NON-METALLIC MINERAL PRODUCTS MOTOR VEHICLES AND PARTS EXTRACTIVE INDUSTRIES BASIC METALS MACHINERY AND EQUIPMENT PAPER AND PAPER PRODCUTS TEXTILES, TEXTILE PRODUCTS WEARING APPAREL, FUR OFFICE, COMPUTING MACHINERY LEATHER AND FOOTWEAR COMMUNICATIONS EQUIPMENT REST OF INDUSTRIES

CAPITAL OUTFLOWS TOTAL CAPITAL Spanish Disinvestments OUTFLOWS outward FDI ( '000) %over '000 ( '000) total
21.124.572 11.514.970 11.342.887 10.033.480 6.214.533 4.841.852 4.434.248 4.218.319 632.602 692.037 193.757 132.123 21.635 5.453.760 80.850.774 2.205.512 4.107.651 632.279 402.179 178.737 248.497 308.397 415.485 108.377 28.790 7.890 1.648 69.839 3.110.521 11.825.802 23.330.084 15.622.621 11.975.166 10.435.659 6.393.270 5.090.349 4.742.645 4.633.804 740.978 720.827 201.648 133.771 91.473 8.564.281 92.676.576 27,7% 18,6% 14,2% 12,4% 7,6% 6,1% 5,6% 5,5% 0,9% 0,9% 0,2% 0,2% 0,1% 9,2% 100,0%

DOMESTIC INDICATORS (average annual percent change 2000-2006) Gross turnover Employment
4,71 5,62 8,74 1,85 7,98 10,55 6,59 2,81 -2,02 -0,36 -24,12 -3,28 -0,16 0,07 5,30 0,10 0,71 1,60 -0,75 -0,67 0,20 0,89 -0,02 -5,08 -6,71 -8,95 -5,76 -3,37 0,01 -0,04

TOTAL INDUSTRIES
Source: Spanish investments accountant (RIE)

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3. Outward FDI (IV): Effects (local economy)

Domestic indicators do not resent in services, though sizeable capital outflows: Transport and telecommunications, real state and business services FDI in services FDI in manufactures
Chart 2. FDI Outflows in services
TRANSPORT AND COMMUNICATIONS FINANCIAL INTERMEDIATION TRADE AND REPAIRS REAL STATE AND BUSINESS SERVICES ELECTRICITY, GAS AND WATER SUPPLY OTHER SOCIAL AND PERSONAL SERVICES CONSTRUCTION TOURISM, HOTELS AND RESTAURANTS HEALTH AND SOCIAL WORK EDUCATION TOTAL SERV, CONSTRUC. &

CAPITAL OUTFLOWS (2000-2006) TOTAL CAPITAL Spanish Disinvestments OUTFLOWS outward FDI ( '000) %over '000 ( '000) total
69.883.645 50.162.218 27.069.650 21.498.648 8.810.906 4.911.440 4.017.219 3.391.568 1.188.000 911.205 191.844.497 5.880.824 9.586.750 7.373.808 6.781.827 3.547.496 1.919.519 1.661.554 1.107.481 171.908 43.503 38.074.669 75.764.468 59.748.968 34.443.458 28.280.475 12.358.402 6.830.959 5.678.772 4.499.049 1.359.908 954.708 229.919.166 33,0% 26,0% 15,0% 12,3% 5,4% 3,0% 2,5% 2,0% 0,6% 0,4% 100%

DOMESTIC INDICATORS (average annual percent change 2000-2006) Gross value Employment added
5,73 7,70 6,27 9,35 6,50 8,13 14,35 6,71 9,04 6,94 8,49 4,33 1,36 2,85 6,28 3,94 6,64 5,32 5,54 6,17 3,38 4,69

UTILITIES
Source: Spanish investments accountant (RIE)

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3. Outward FDI (V) : Effects (service trade)

Spains share in FDI and service trade (*)

Why does FDI boost service exports? Intrafirm trade Market share: the best indicator for competitiveness Service exports: increasing a lot from mid 90s Spain is strengthening its role in worlds FDI (4%) and trade in services (3%)

6,0% 5,0% 4,0% 3,0% 2,0% 1,0% 0,0% 1986 1990 1994

Share in the w orld imports Share in the World Inw ard FDI Stock Share in the World Exports Share in the World Outw ard FDI Stock

1998

2002

2006

Source: UNCTAD and WTO

*Excluding tourism and transportation

Graph X: Spain's share in FDI and service trade

Share in the service trade*

4,0% 3,0% 2,0% 1,0% 0,0%

Share in the World's FDI Stock**

1986

1990

1994

1998

2002

2006

*Weighted average of exports and imports (excluding tourism and transportation) **Weighted average of outw ard and inw ard Source: UNCTAD and WTO

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3. Outward FDI (VI) : Effects (service trade)

In which countries is Spain bolstering its competitiveness? Especially in UK, the Spanish FDI main host recently. In which sectors is Spain improving its competitiveness? Business services, royalties, computer & information services Spanish is still very far from leaders in FDI and service trade (USA, UK)
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4,0%

Spanish share in partner's imports of services

3,0%
Germany France Luxemburg Netherlands UK US

2,0%

1,0%

0,0% 2002 2003 2004 2005 2006

Source: EUROSTAT Excluding tourism and transportation

30,0%

Spanish growth in services involved in intrafirm trade

(average annual percent change 2006/1997)

(aapc in %)

20,0%

Exports

Imports

10,0%

0,0% Royalties
Source: Bank of Spain

Bussiness services

Financial services

Computer and information services

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4. Concluding remarks
Spain: from net FDI borrower to net FDI creditor Inward FDI effects? Competitiveness, exports, productivity Inward => Outward? Outward FDI effects? Trade in merchandise and services? Positive effects Does outward FDI have costs in employment? CONCLUSIONS FDI inflows can create more outward-oriented economies FDI outflows may contribute to higher exports. FDI outflows do not imply job losses POLICY IMPLICATIONS Policies for companies investing abroad. Pro-active policy for FDI In Spain: INTERES Agency (Invest in Spain)
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ANNEXES

The Spanish outward FDI: by SECTOR

Energy industries lost importance during the second expansion In favour of construction, real-state and business activities. Future: high expectations in the renewable energy sector.
SPANISH FDI OUTFLOWS BY INDUSTRY
Primary Mining, quarrying and petroleum Agriculture, hunting, forestry and fishing Manufacturing Non-metallic mineral products Food, beverages and tobacco Metal and metal products Chemicals and chemical products Electrical, electronic and optical equipment Motor vehicles and other transport equipment Publishing, printing and reproduction of recorded media Other manufacturing Services Transport, storage and communications Real-state and business activities Finance Construction Trade and reparation Electricity, gas and water Other services

1997-2000
14.553 14.325 228 13.410 4.504 3.101 1.524 1.149 194 1.363 475 1.099 85.613 23.155 2.126 28.724 630 16.998 10.118 3.861

Weight
12,8% 12,6% 0,2% 11,8% 4,0% 2,7% 1,3% 1,0% 0,2% 1,2% 0,4% 1,0% 75,4% 20,4% 1,9% 25,3% 0,6% 15,0% 8,9% 3,4%

2004-2006
1.323 1.201 122 20.840 4.632 3.728 1.460 4.709 945 2.214 1.374 1.778 102.598 40.589 10.192 31.621 2.824 8.674 2.100 6.599

Weight
1,1% 1,0% 0,1% 16,7% 3,7% 3,0% 1,2% 3,8% 0,8% 1,8% 1,1% 1,4% 82,2% 32,5% 8,2% 25,3% 2,3% 7,0% 1,7% 5,3%

TOTAL

113.576

100%

124.762

100%

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Source: Own calculation based on RIE data (EUR milions) Net investment including SPE

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The Spanish service exports: by COUNTRY

Are service exports linked to outward FDI? Yes Europe: main service exports destination (~outward FDI) Latin America: sizeable share (close to 10%) From 99-00 to 04-06: Europe increases its weight in service exports to the detriment of Latin America and North America Are service exports linked to outward FDI? Yes but There more factors which hold sway over service exports (growth) Changes in service export patterns are smoother than changes in FDI patterns
SPANISH EXPORTS OF OTHER SERVICES 2004-2006

SPANISH EXPORTS OF OTHER SERVICES 1999-2000

EU15 (58%) EU Enlargement (1%)

EU15 (65%)

Africa (1%) Latin America & Caribbean (9%) Asia & Oceania (2%)

Rest of Europe (12%)

Africa (1%) Latin America & Caribbean (7%)

EU Enlargement (1%)

North America (17%)

North America Asia & Oceania (10%) (3%)

Rest of Europe (12%)

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Source: Own calculation based on EUROSTAT data

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Services involved in intrafirm trade

Main sectors involved in intrafirm trade?
(millions of US dollars)

50.000 40.000

Main services involved in intrafirm trade

Intrafirm exports Intrafirm imports

Royalties, business services, R&D

30.000 20.000 10.000 0 Royalties Bussiness services* Research and development Financial services Management Computer and and consulting information services
Source: Bureau of Economic Analysis

United States: big surplus in intrafirm trade:

Specially in royalties, R&D, business services Deficit in consulting and computer services

*Excluding R&D and management though including intrafirm trade in insurance and communications

(millions of euro)

Spanish competitiveness is very far from USA in services related to intrafirm transactions (Graph X)
Specially in royalties Surplus in computer services High weight in business services

30.000

Spanish trade in services involved in intrafirm trade

Exports Imports

20.000

10.000

0 Royalties Bussiness services* Financial services Computer and information services

Source: Bank of Spain

*Includes R&D and management and consulting (not insurance and communications)

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