With the aim of increasing our understanding of how foreign direct investment (FDI) impacts developing countries and economies, COFIDES and ESADE recently carried out a study entitled 'Foreign Direct Investment by Spanish Companies. Effects on the Destination and Origin: Five Case Studies in Developing Countries and Economies.' The study received support from the Spanish General Council of Economists and was conducted under the academic supervision of Xavier Mendoza, Associate Professor at ESADE. 

This study was one of the first in Spain to use the Sustainable Development Goals (SDGs) as a benchmark to assess companies’ contributions to development. Another novel aspect of the study is that it investigated the organisational mechanisms and context-related factors that brought about a greater positive impact on the recipient country as well as the investor’s country of origin. In addition to its theoretical and conceptual contributions, the study examined a sample of specific investment projects financed by COFIDES and carried out by Spanish companies in various sectors of activity.

The presentation featured the participation of Marisa Poncela, Spanish Secretary of State for Commerce. Ms. Poncela noted that the study goes beyond merely analysing the direct and indirect effects of investment in recipient countries by taking into account the effects on the competitiveness of the companies that make these investments and on the economy of the investor’s country of origin. She added that the study represents a very satisfying form of collaboration between the public and private sectors, in particular between ESADE, COFIDES and the Spanish General Council of Economists. Also in attendance were Salvador Marín, President of COFIDES; Valentín Pich, President of the Spanish General Council of Economists; Enrique Verdeguer, Director of ESADE Madrid; and Xavier Mendoza, Associate Professor at ESADE.

Sustainable Development Goals as a benchmark

The international community has recognised that official development assistance (ODA) is clearly insufficient to finance the SDGs. If these goals are to be achieved, the private sector must therefore take on a central role. In the year 2015, FDI flows to developing economies were six times larger than the total amount of ODA worldwide.

The challenge, then, is to ensure that FDI flows to developing countries and economies – or at least a significant portion thereof – integrate contribution to the SDGs as an integral part of the business projects that give rise to these investments. At the same time, new forms of development funding are emerging through cooperation between public and private actors, with institutions that finance development project – such as COFIDES in Spain – playing a major role in catalysing business investment projects capable of generating positive effects in the recipient economies as well as in the economies of origin.

From the perspective of the recipient country, the quality of the foreign investment received is as important than the quantity, if not more so. As noted in the study, the quality of FDI in terms of sustainable development is linked to the investing company’s long-term interest in the destination country; its interest in establishing productive relationships or linkages with the local economy, promoting the transfer and dissemination of technological capabilities and good management practices; and its ability to carry out its activity in accordance with the criteria of economic, social and environmental sustainability. Hence, the importance of encouraging Spain’s international companies to adopt responsible investment approaches across the board. The SDGs can thus become a true compass to guide business executives in the creation of shared value that benefits both the company and society as a whole.

Prof. Mendoza commented: “As we have seen in the case studies, the management of the risks and the opportunities associated with the integration of the SDGs into subsidiaries’ strategic approaches involves a large component of specificity and is heavily influenced by the company’s sector of activity and business model.” He added: “It is essential to integrate responsibilities in terms of the SDGs that the company wishes to pursue in its governance and business processes, and to translate them into concrete objectives for all functions.”

Impact on the country of origin: Spain

The FDI projects studied had various positive effects on the country of origin (Spain). One such effect was an impact on the balance of payments through the repatriation of dividends and the payment of royalties. Another effect occurred when the foreign subsidiary created a demand for capital goods, intermediates or complementary products that could then be exported from the country of origin. FDI also has a positive effect on employment as a consequence of the bandwagon effect on exports and the increase of skilled employment in the parent company as a result of its growing size and need for coordination and control. Likewise, in some of the cases analysed, there was an “inverse technology transfer”, as it is increasingly common for recipients of FDI to provide the investor company with new knowledge. Finally, another advantage of Spain’s international companies adopting responsible investment approaches is the fact that this fosters a positive image of Spain as a country that makes investments overseas.

Relationship between FDI and sustainable development: a conceptual synthesis model

This synthesis model emphasises the fact that the effects on development in the recipient country are generated during the implementation of the FDI project by the investing company’s subsidiary in that country. What’s more, these effects are largely produced as a result of the subsidiary’s organisational configuration and the role assigned to it by the multinational parent company. Moreover, the subsidiary’s impact on the country’s sustainable development is amplified or reduced depending on the corporate social responsibility policies applied and the intensity and quality of the subsidiary’s interactions with various stakeholders, particularly local businesses and government bodies. Finally, the report highlights the importance of the temporal dimension: many indirect effects related to knowledge spillovers require time to materialise, and this, in turn, presupposes that the investor will remain involved, at least in the medium term.

Salvador Marín, President of COFIDES, commented: “This study confirms the notion that companies engaged in foreign direct investment generate many positive effects in both the destination country and the country of origin: job creation in both directions, image-building, bandwagon effect, etc. In other words, growing internationally is a good idea and a policy that should receive support from various spheres. If, in addition to growing abroad – with all the innovation and transfer of technology and knowledge that this entails – companies also manage to contribute to achieving the SDGs, we can be satisfied with our participation as responsible investors. This is the path currently taken by financial development institutions like COFIDES: associating internationalisation and development with the support of the private sector. Indeed, COFIDES has been leading such efforts for 30 years, and this study confirms that we must continue along these lines.”

International companies: key players for development

Although there is a broad academic consensus that international companies can, through FDI, bring about important direct benefits, these organisations’ most significant contributions to a country’s development involve the transfer and dissemination of technological capabilities to local industry. FDI is currently the number-one source of technology transfer for most developing countries and economies. In these places, FDI helps to increase the added value associated with local production and favours the training of local human capital.

These technology-transfer processes can take place along two different channels. On the one hand, there is direct investment and the transfer of technology and capabilities from the parent company to the subsidiary. This includes the implementation of the business model and corporate management practices, with whatever adaptations are necessary for the local context. On the other hand, local industry receives knowledge spillovers as a consequence of decisions and actions taken by the company. For example, the company might share the subsidiary’s property with a local partner, support local suppliers to help them comply with international quality standards, supply the local market with products that are more technologically advanced or developed in tandem with local clients, carry out research and development activities in the destination country, or collaborate with universities and local research centres.

Finally, the adoption of responsible investment approaches also provides tangible benefits for companies. These approaches facilitate the adaptation of the subsidiary to the destination country and make the return on investment more sustainable. At the same time, the investing company is able to differentiate itself from its competitors and develop new organisational capabilities that it can then replicate in similar countries, thus enhancing the company’s international growth.