SPAIN & THE FDI: From net borrower to net creditor

1. SPAIN & THE FDI:From net borrower to net creditor Matilde Madrid (mmadrid@mcx.es) Vienna, March 7th 2008

2. 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 mmadrid@mcx.es

3. 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) • 2001-2006: 6% of total world outflows mmadrid@mcx.es

4. 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) mmadrid@mcx.es

5. 2. Inward FDI (II): Effects EMPLOYMENT The inward stock of FDI in 2005generates 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. mmadrid@mcx.es

6. 2. Inward FDI (III): Effects 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. mmadrid@mcx.es

7. 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 mmadrid@mcx.es

8. 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 Source: Own calculation based on Bank of Spain data mmadrid@mcx.es

9. 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... mmadrid@mcx.es

10. 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 mmadrid@mcx.es

11. 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%) mmadrid@mcx.es

12. 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) mmadrid@mcx.es

13. 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) mmadrid@mcx.es

14. ANNEXES

15. 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. mmadrid@mcx.es Source: Own calculation based on RIE data (EUR milions) Net investment including SPE

16. 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 mmadrid@mcx.es Source: Own calculation based on EUROSTAT data

17. 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 mmadrid@mcx.es