Foreign subsidiaries of Spanish multinationals growing since 2010 according to ESADE study
Despite the economic crisis that started in 2008, Spanish companies have continued their international expansion and consolidation. A significant finding in the report is steady annual increases in the number of companies resident in Spain with subsidiaries in other countries (excluding Spanish foreign-securities holding companies) – with numbers growing from 1,476 in 2004, to 2,170 in 2008, and 2,700 at the end of 2012. Some 2,051 of these companies were controlled by Spanish equity (figures from the Foreign Investment Registry).
Moreover, despite a sharp drop in the flow of direct investment abroad after 2009, foreign subsidiaries of Spanish companies as a whole have grown in turnover and levels of profitability since 2010. This is one of the conclusions of the Fourth Report of the Observatory of Spanish Multinationals (OEME), sponsored by ICEX (the Spanish Institute for Foreign Trade) and ESADE, with the support of the PwC Foundation. The report was presented today in Madrid and forecasts a third wave of overseas investment by large IBEX 35 multinationals.
Xavier Mendoza, ESADE lecturer and director of the OEME, commented that the UN Conference on Trade and Development (UNCTAD) expects a recovery in global foreign direct investment (FDI) and forecasts totals of $1.37 trillion in 2015, $1.5 trillion in 2016, and $1.7 trillion in 2017. The UN agency also shows that more than half of global FDI flows towards developing economies, especially in Asia. “This highlights the importance of Spanish multinationals continuing to move towards a geographical diversification of their operations in emerging countries beyond Latin America, Xavier Mendoza remarked.
“Internationalisation is no longer an option for businesses and has become a necessity, says Francisco Javier Garzón, CEO of ICEX. “Only companies that manage to be competitive globally will survive in the medium term. The experience of Spanish multinationals is an asset that ICEX exploits in its strategy to encourage the internationalisation of small and medium-sized Spanish firms. Our main clients share best practices and take advantage of the drag effect generated by large companies, says Garzón.
The growing importance of foreign subsidiaries
The observatory report includes a complete picture of the evolution of Spanish multinationals over the last decade – before and during the crisis. In the words of Xavier Mendoza: “the crisis substantially slowed the pace of investment abroad by Spanish companies compared with the years immediately before the crisis, when investment abroad reached exceptionally high volumes. Net flows of foreign direct investment (FDI) in the period 2009-2013 fell to one- fifth of the volume reached in the previous five years, and as a result, the Spanish economy lost rank as one of the world’s main foreign investors and is now positioned as a mid-sized investor – ranked 15th worldwide in 2013 and in line with its size in the global economy.
This trend contrasts with the results of foreign subsidiaries of Spanish companies – which were clearly positive in aggregate terms. After the collapse of international trade and the slowdown in the world economy in 2009, foreign subsidiaries recovered growth in turnover and profitability and returned to pre-crisis levels. This is in stark contrast with the situation of companies in the Spanish market.
It is also worth noting the importance of international production by foreign subsidiaries as measured by turnover. From 2007 these subsidiaries exceeded the total volume of exports of goods and services of the Spanish economy – an achievement especially remarkable given the positive growth of Spanish exports in recent years. Special mention must be made of the international production of foreign subsidiaries operating in the primary and industrial sectors – which has grown in parallel with Spanish goods exports. Xavier Mendoza explained that: “This data indicates that at the aggregate level the multi-localisation of production, especially in large emerging countries, enabled the local and competitively priced manufacture of goods demanded by middle classes and also enabled Spanish industrial firms to continue exporting high-end goods with high added value.
Changes in strategy after 2008: sectors and destination nations
The observatory report shows that after 2008, as a result of the crisis, a shift in investment by Spanish multinationals occurred in terms of sectors, locations, and modalities.
Regarding the first factor, a drastic contraction of Spanish investment in the period 2009-2013 relative to 2004-2008 was reported in virtually all sector destinations except for professional, scientific, and technical activities (which saw remarkable growth). The report identifies three capital-intensive sectors that experienced a downward trend: manufacturing; hospitality; and public utilities (electricity and gas supply, water supply, and telecommunications).
As regards geographical investment destinations, Xavier Mendoza emphasised: “the loss of the leading role of EU-27 as the main destination (79.1% in 2004-2008 but 32% in 2009-2013) and the increasing importance of North America and Latin America (especially Brazil) which absorbed 23.5% and 23.3% respectively of all net FDI 2009-2013. Finally, investment in the rest of Europe, as well as Turkey, Asia, and Oceania also gained importance – while the enlarged EU and Africa fell from favour and suffered negative net FDI flows.
The third significant change in strategy resulted from the need to mitigate the effects of the strong credit crunch. Accordingly, Spanish multinationals chose greenfield operations as the predominant form of international investment from 2009 onwards, while acquisitions had been the main approach in the previous period.
Short and medium term perspectives
“Some analysts argue that we could be about to see a third wave of overseas investment by large IBEX 35 multinationals, says Mendoza. “Beyond any specific acquisitions, there are several aspects supporting this forecast: the recovery of profitability by overseas subsidiaries of companies in the energy, telecommunications, and financial service sectors; the willingness of many companies to grow through acquisitions; and cheaper access to capital markets by Spanish companies following a fall in the risk premium.
But the outlook is less rosy for smaller multinationals, especially industrials, where the observatory report foresees no significant short-term increases in FDI. The main reasons are a deterioration in the profitability of foreign subsidiaries and increasing competitive pressure from producers in emerging economies.
Large IBEX-35 multinationals may embark on a new phase of acquisitions that will complement existing assets in regions where they are already present (mainly Europe, Latin America, and the United States) rather than increasing presence in new regions.
