SPAIN & THE FDI: From net borrower to net creditor Matilde Madrid Vienna, March 7th 2008

SPAIN & THE FDI: From net borrower to net creditor Spanish position in the World’s FDI Inward FDI –Factors –Effects Outward FDI –Factors –Effects: Employment and production Trade Concluding remarks

1. Spanish position in the World’s FDI Inward FDI: –Attractive host (late 80’s, early 90’s) –More competition in 00’s (emerging countries, EU enlargement) Outward FDI: –FDI inflows => Outward looking orientation of the Spanish economy –2006: Outward FDI stock (41% of Spanish GDP) – : 6% of total world outflows

2. Inward FDI (I): Factors Why did Spain attract FDI in the late 80’s/early 90’s? –EC accession, big market, link to Latin America, lower Unit Labour Cost Why does not Spain attract so much investment today? –Higher competition in world’s FDI (emerging economies) and in the European Union (EU enlargement)

EMPLOYMENT The inward stock of FDI in 2005 generates 1,3 million jobs (direct employment) in Spain, which mean 7% of the total employment. 2. Inward FDI (II): Effects 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.

2. Inward FDI (III): Effects EXPORTS AND OPENNESS –Inward FDI => Exports and internationalisation 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.

3. Outward FDI (I): Factors Why is Spain a big player in world’s FDI since the mid 90’s? –Inward FDI => Outward FDI –Other factors: macroeconomic stability, € Liberalisation/privatisation internal market and abroad M&A’s

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 The second wave of Spanish investments: Europe –The € –M&A’s –EU enlargement –Macroeconomic and institutional instability in Latin America Source: Own calculation based on Bank of Spain data

3. Outward FDI (III): Effects (local economy) Manufacturing sectors which invest abroad don’t worsen their local indicators: –Chemicals, food industries, non metallic minerals, basic metals, machinery… Manufacturing sectors which perform worse aren’t affected by capital outflows: –Textiles, wearing apparel, footwear, communications equipment, computing mach...

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

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

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)

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)

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

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 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 Source: Own calculation based on EUROSTAT data

Services involved in intrafirm trade Main sectors involved in intrafirm trade? –Royalties, business services, R&D… United States: big surplus in intrafirm trade: Specially in royalties, R&D, business services  Deficit in consulting and computer services  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