«/T. LJBRARIE8
-
DEWEY
Dewey
HD28
.M414
no.
SPAIN IN THE INVESTMENT
DEVELOPMENT PATH
Working Paper No. 3740-BPS/94
Jose M. Campa
New York University
and
Mauro
F. Guillen
MIT Sloan School of Management
Jose M. Campa
Stern School of Business
New York University
44 West 4th St.
New York, NY 10012-1126
Ph: (212) 998-0429
e-mail: jcampa@stern.nyu.edu
Mauro
F. Guillen
MIT
Sloan School of Management
50 Memorial Drive E52-554
Cambridge,
02139
Ph: (617) 253-4417
MA
e-mail: guillen@mit.edu
November 1994
Research funding from the Carnegie Bosch Institute for Applied Studies in
International Management is gratefully acknowledged. We also thank Carlos
Pereira and Montserrat Luengo for research assistance.
SETTS INSTITUTE
OF TECHNOLOGY
DEC 01
1994
LIBRARIES
Abstract
This chapter explores the ownership, locational and internalization advantages of outward and inward
Spanish foreign direct investment (FDI)
development path (TDP)
in
in
order to test the predictions of the theory of the investment
the case of a middle-income country.
We first
present the historical evolution
of FDI since the mid-19th century, discussing the interplay between economic and political factors.
Focusing on the 1986-1992 period,
outward FDI
first
of income levels,
assets,
R&D
effort, trade intensity,
and revealed comparative advantage
going
analyses of the determinants of inward and
by home/host country and then by industry. By country, we find the expected
confirms the IDP theory
activity
we conduct econometric
all
in its different aspects.
to countries with higher
and prior FDI history. Industry profitability, intangible
predict higher
Outward FDI
FDI
activity in
an industry. Inward FDI
also behaves as predicted, with
incomes. FDI to lower-income countries
is
terms, however, most Spanish created assets are exploited
government incentives
to
R&D
in
most FDI
mainly market-seeking
while higher-income countries receive both asset-seeking and market-seeking Spanish FDI.
internalization advantages or
effects
In absolute
countries with a higher income, and
advantages play a very limited role.
1.
Introduction
The case of Spain may be taken
spite of
moved
as representing a
group of middle-income countries
that, in
being early industrial izers and having achieved relatively high standards of living, have not
far in
what has been termed the "investment development path" (Dunning and Narula 1994;
Tolentino 1993:92-119). Dunning and Narula (1994) posit that the relationship between FDI. on the
one hand, and the ownership, locationaJ and internalization (OLI) advantages of countries and firms,
on the other, changes according
relative weights
to the country's stage of
economic development.
and roles of the three elements of the OLI or eclectic approach
In other
words, the
to international
production vary as countries (and their firms) become richer, shift from natural to created assets, and
become more embedded
to the rest
in
the world
economy (Dunning 1979, 1981, 1988; Agarwal
of Europe's Western and Southern fringes (Ireland, Portugal,
Italy,
and Greece), inward
FDI by
foreign direct investment (FDI) in Spain has historically exceeded outward
1980). Similarly
a
wide margin.
Presently, there are only timid (and sometimes contradictory) indications that the growth rate of
outward FDI
is
accelerating, and that inflows and outflows are
becoming more balanced
as
more
Spanish firms try to exploit their ownership advantages abroad.
Studying the case of Spain
most dynamic countries
attractive host country
in
is
important because during the 1980s she has been one of the
terms of economic growth and FDI activity, consolidating
and as an emerging source of FDI. In 1990 the
ratio
its
position as an
of outward-to-inward
FDI
stocks stood at 0.23, only slightly higher than in 1980 because net inward and outward flows
increased
compared
at
similar rates. In 1990 stocks of
to the other large
EU
FDI were
countries, Spain
seems
13 times greater than ten years earlier.
to
be approaching
Italy in
terms of the relative
importance and growth of outward FDI, and the United Kingdom as far as inward FDI
As
When
is
concerned.
the country has developed economically over the last thirty years, Spain has attracted considerably
1
2
more inward FDI
as a percentage of
investing abroad less (Table
It is
useful to
GDP
than countries such as
Germany, France or
to those
of the emerging economies of Europe,
East Asia and Latin America that are playing increasingly important roles
Taiwan, and Brazil, equal
outward stocks
in
ratio
of inward stock to
GDP
faster,
have been
to Mexico's, and higher than for Ireland, Chile,
The only
Spain's 0.23 in 1990
fast),
large emerging
was Korea's 0.40.
similarly to Italy, Spain features a
1),
which
while most of Korea's
In this chapter
Korea or China. Spain's
economy whose
its
in
we
manufacturing or
first
as well as to the
in
inward FDI (only China's has
outward FDI (though Korea's and again China's
ratio of
GDP, however,
outward-to-inward FDI surpassed
Spain's outward stock was
inward stock six times larger.
much higher number of
in
industry and country level data,
we
Unlike Korea, but
most Spanish outward investment
in
in services
Spain since the dawn
Attention will be devoted to the role of the
political cycle,
both domestic and international. Using
analyze the locationaJ and ownership factors behind the evolution
of inward and outward FDI since the country's entry into the European Union.
the issues of the creation of assets through
the future prospects for FDI.
is
trading of Korean manufactured goods.
last thirty years.
economic and
in
large service firms than large industrial
provide a historical summary of FDI patterns
of industrialization but focusing on the
government
in
reflected in the fact that
is
is
and
Relative to
1990 three times larger than Korea's, and
firms (Table
FDI. Spain entered the
1980 were much higher than for any of these countries. The Spanish trajectory
with Portugal's almost as
faster).
in
lower than those for Portugal, Greece,
during the 1980s stands out for the relatively rapid increase both
been
while
1).
compare the Spanish experience
decade of the 1980s with a
Italy,
R&D,
Finally,
we
deal with
the internalization advantages of Spanish firms, and
3
2.
Historical
As
domestic
is
Overview
many
true of
political events
situations.
other countries, the
FDI
cycle in Spain has historically been affected by
and upheavals as well as by the domestic and international economic
Liberal trade policies in the mid-19th century set the stage for the arrival of French.
Belgian, and (after 1870) British investments in railways, mining, wineries, banking, insurance and
public
utilities.
The
return of protectionism and legal hindrances to foreign investment after 1891
slowed down the inflows. Meanwhile, Spanish investments abroad paled by comparison, with Cuba
and Argentina as the major destinations (Tortella 1994:128-134; Nadal 1975:25-53, 87-121).
The 1920s witnessed
German and French investment
the rise of American,
in electrical
machinery, chemicals, autos, and telecommunications despite growing restrictions to foreign
investment and trade (Campillo 1963). Over this early period of industrialization, Spain attracted
foreign investment
at
or economic crises.
increasing rates albeit with
Most of
these early flows of
assets such as mineral deposits
many ups and downs
FDI had
to
dictated by political, financial
do with the exploitation of either natural
and unique agricultural products (wines
in particular)
or the
underdeveloped market for transportation, communication, banking, insurance, and basic industrial
goods. During the
first
two decades of the century, Spanish investment abroad was negligible except
for the mostly speculative flows during
World War
The Great Depression was shallower
nonetheless devastating for FDI.
The
Civil
in
War
I.
Spain than elsewhere
in
Europe or America, but
of 1936-39 represented a further setback to foreign
investment and trade. After the war, the authoritarian government became dominated by
populist and staunchly nationalist
economic policy-makers
that
..
group of
implemented a series of foreign
exchange controls and protectionist measures, and encouraged import-substitution investments
industry, while the Allied
powers imposed
1940s. Foreign ownership restriction to a
a trade
embargo
maximum
that
remained fully
in
in
place until the late
of 25 percent, the overvaluation of the currency,
-
the intricate system of multiple exchange rates, mounting inflation, and economic stagnation provoked
and close to zero inward FDI.
capital flight
It
was with the
liberalization and stabilization
measures of
1959 that the pattern of increasingly high inward FDI and a trickle of outward FDI returned.
From
Liberalization to
The
liberal
EU
Membership. 1959-1986
economic reforms of 1959 assigned foreign
supplement the meager
level of
capital several roles to play:
domestic savings, generate much-needed hard currency, and
technology transfers (Varela Parache
1974; Mufioz
et al.
et al.
facilitate
1978:45-60). The reformers also
introduced changes in the protectionist regime: very steep tariff barriers were substituted for non-tariff
barriers to trade.
The
punitive taxation of imports of industrial and consumer goods in a domestic
market of considerable growth potential attracted inward FDI during the 1959-73 period. During the
1960s and early 1970s, inward FDI ranged between 0.15 and 0.59 percent of
FDI
in
stayed under 0.1 percent of
Spain, inward investment was
GDP. By
still
GDP.
while outward
the mid-1970s and despite the reduction in foreign activity
about 4 times higher than outward investment (Figure
top
1.
panel).
Spanish investments abroad
in the
1960s had to do with (1) the access to raw materials
(uranium, paper pulp, petroleum, various metals, fisheries), (2) the creation of distribution channels
for Spanish fish, beverage, and food products, (3) construction and engineering projects, and (4)
banking. Manufacturing FDI based on ownership advantages was not significant until the early 1970s.
While manufacturing FDI was
initially
represented nearly 40 percent. Firms
textiles,
Munoz
worth 20 percent of
in the
and beverages industries invested
et al.
FDI during
outward FDI, by the mid-1970s
it
chemicals, paper, mechanical, electro-mechanical,
in
manufacturing activities abroad
1978:352-353). Most analysts agree
this period.
total
in that the
Exchange controls were too
tight
government did
and state subsidies
(COCINB
little
1973:25;
to facilitate
outward
to help create distribution
5
channels abroad not very effective (Varela Parache
destination of intense Spanish outward
FDI
et aJ.
in the early
1972;
Moreno More" 1975:106-107). One
and mid-1970s was the relatively depressed
French department of the Eastern Pyrenees (the historic Roussillon), to the north of one of Spain's
most developed
industrial regions, Catalonia (Castellvi 1973;
Raurich
et al.
1973). Catalan firms in
the textile, clothing, appliances, chemicals, beverages, and food-processing industries invested there
to secure access to the
European
Common
Spain failed to significantly reduce
location
was selected
for
its
Market given
that the
tariffs for labor-intensive
1970 Preferential Agreement with
manufactured goods. This specific
geographical proximity and relatively lower labor costs than
in
other
European areas.
The world economic
FDI
in
crisis
Spain. But by the late 1970s both outward and inward flows resumed their
with significant annual ups and
second
of 1973 and the transition to democracy after 1975 slowed
oil
downs
until the
mid-1980s (see top panel
shock, the 1981 world recession, and the
initial
in
Figure
upward trend
1)
due
more than
mid-1970s was
three times the rates for the early 1970s. This
in part facilitated
by changes
in
albeit
to the
uncertainty over the socialist electoral
victory in 1982. In 1985 outward and inward flows represented 0.16 and 1.00 percent of
respectively,
down
GDP.
upward trend since
the
governmental regulations. The agencies that had
tightly controlled foreign transactions since the 1940s
were dismantled
as the Ministry
of
Commerce
assumed the authority over foreign investment authorization and control (De Erice 1975).'
EU Membership
and the FDI
The 1986-92 period
Boom
featured economic liberalization in the context of
membership
in the
in 1973-74 and 1976-77 procedures for inward FDI were clarified and simplified (Munoz et al.
while similar changes were introduced for outward FDI beginning with the first
comprehensive legislation of 1973 and several liberalizing decrees in 1978 (De Erice 1975; Marfn 1982;
1978:45-60),
Aguilar Fernandez-Hontoria 1985; Nueno Iniesta
et al.
1981).
6
European Union (EU), rapid economic growth
("by
1992 Spain's per capita income was 80 percent of
huge inflows of FDI
the UK's), expansion of private enterprises in both manufacturing and services,
peaking
1991
at
GDP
4.2 percent of
at 1.2
percent of
origin of inward
GDP
FDI and
in
1991, and the coming of age of outward FDI, towering also
(Figure
1,
top panel).
Membership
the destination of outward
almost doubled to roughly two thirds of the
total
in the
FDI accounted
compared
to
EU
for
in
has meant that both the
by other
EU
countries has
between 30 and 50 percent prior
1986 (Secretarfa de Estado de Comercio 1993:228-233). Flows from the United States or
America have
fallen in relative terms, while destinations such as France, the Netherlands,
Portugal have
become increasingly popular with Spanish
firms. Outside of Europe,
to
to Latin
and
Morocco has
recendy attracted manufacturing investment. Japan remains a minor source or destination of FDI
(Portillo 1994).
Most of the momentous surge
in
outward FDI has been
non-financial (utilities, air transportation, telecommunications).
percentage of
1,
GDP
in
1977
both financial and
Outward manufacturing FDI
trebled since the mid-1970s but has yet to reach the 0.3 per cent
lower panel), and the
46 percent
in services,
total share
mark
of outward manufacturing FDI has fallen from an
to 11 percent in 1993. Acquisitions
have been more
common
all
as a
(see Figure
time high of
than greenfield
operations (Figure 2, top panel). Since 1988 Spanish acquisitions abroad have mostly taken place in
Latin America and the
EU,
targeting firms in utilities, banking, plastics, and oil and gas (Duran
Herrera 1992:227-228). The goals sought by outward investments are.
in
decreasing order of
importance, market access, technological assets, cheap factors, and, lastly, investments
procurement (Figure
materials seeking
2,
nw
materials
lower panel). By comparison, between 1975 and 1978 outward factor or raw
FDI was
four times higher than market-seeking
FDI (Nueno
Iniesta 1981:152-153).
Despite the unprecedented volume of outward FDI since 1986, inward investment stole the
show, with much of
its
fast
growth taking place through acquisitions of Spanish firms (Figure
3).
The
7
most active acquirors were firms based
in the
UK
and France, while the most targeted industries were
food, beverages, chemicals and pharmaceuticals (Duran Herrera 1992:227).
with outward
FDI
(see Figure
1,
lower panel), and
per cent. Given that the Spanish
to
that
we
3.
less rapidly than total
inward
share of the total has fluctuated annually between 35 and 65
its
economy was becoming
do with other kinds of barriers of entry defined
had
important difference
referred to the relative importance and growth of manufacturing investment.
Inward manufacturing FDI has increased since the mid-1980s although
FDI
One
less protected,
at
many of
these acquisitions
the industry level of analysis, an explanation
explore further in the following sections.
Outward Foreign
Direct Investment
This section presents a more detailed analysis of the type of FDI transactions that have taken
breakdown by major country of origin and/or
place; their
better understanding of
increase in
FDI
where the Spanish economy
for
outward FDI and
level and, as a result, the
The
in the
investment-development path.
activity in the last five years occurred both in
Although the annual rate of increase
(24%
is
destination; and their implications for a
first task
23%
both types of
in
for inward FDI),
outward and inward direct investment.
FDI between 1988 and 1992 has been
inward direct investment started
of this section
is
to empirically analyze the relationship
its
is
most
between the types of
FDI
likely to take place.
We
will use detailed data
period 1988 to 1992 to contrast those implications empirically.
mode
on Spanish FDI
We
will first
The
activity a country
process of economic development, but also on the pattern of
terms of the host countries, the economic purpose of the investment and the
investment
much higher
the economic conditions in the respective host countries.
investment development path has clear predictions not only on the pattern of
through
at a
similar
Spanish capital account has worsened during this period.
FDI pursued by Spanish companies and
will follow
The
its
in
FDI flows
in
which the
activity during the
analyze Spanish outward
s
FDI
activity in each country according to
across industries in the
The
A
investment.
advantage
less
As
we
Later
will analyze the differences
activity takes place.
of development of the host country
is
a
major predictor of the type of inward
developed country does not have a high level of created assets and
lies in its
production).
The
level
mode FDI
economic purpose.
its
endowment of
natural assets (such as
a country develops, both
its
raw materials, or cheap
stock of created assets and
its
its
comparative
factors of
stock of capital increase.
increase in the stock of capital raises the marginal productivity of natural assets and the relative
price of these assets.
This process causes a
We
pursuing created assets.
shift in
inward FDI from seeking natural assets towards
therefore expect a country's per capita income to be negatively related to
the percentage of factor seeking
FDI
into the country
and positively related
to the
percentage of asset-
seeking investment.
The
existence in the host country of created assets not currently available in the
induces asset-seeking FDI.
The amount of
country's level of development and
its
created assets in a country
level of scientific activity.
We
is
expect countries with higher
country's
FDI.
We
use two
scientific activity as proxies for the existing level of created assets in the host country.
The number of
devotes to
country
positively correlated with the
levels of scientific activity to have a relatively higher level of asset-seeking inward
measures of
home
scientists
R&D
R&D
and engineers
activity while the
output.
in the
country measures the amount of inputs a country
number of patents
in
force in each country
is
a
measure of the
2
Existing trade flows will also determine the purpose of
likely to invest in foreign marketing
FDI
activity.
and distribution for their products
Companies are more
in countries that represent
an
^Clear problems exist with both of these measures: (1) certain created assets (such as brand names,
know-how from traditional industries) are not likely to be highly correlated
organizational advantages, or
with these two measures
;
(2) regulation
on
industrial property rights differs widely across countries
reducing the incentive to register patents; and (3) definitional problems exist across countries for each
measure.
9
important present and/or potential market for them.
Therefore,
we
expect the current level of trade
flows be'ween the host country and Spain to be a positive predictor of the percentage of inward
that
is
market seeking
for
activities.
1
being served without market seeking
We
activities.
to their
data compiled by the Spanish
economic purpose.
following categories:
a higher probability
of
Factors to favor this effect will be geographical
proximity to Spain and high levels of international trade.
The
have
also expect certain countries to
FDI
4
Economic Ministry distinguishes FDI transactions according
Investors are required to classify their investment within one of the
marketing and distribution, production using Spanish technology, production
without using Spanish technology, sourcing of raw materials, joint ventures, holdings, and others.
We
grouped these investments according
to the
IDP framework
as follows: marketing and distribution
are defined as market-seeking investments; those investments with the purpose of sourcing
raw
materials and of manufacturing overseas using Spanish technology are factor-seeking investments; and
an investment
is
defined as asset seeking
when
its
purpose
is
the production without using Spanish
technology or the establishment of an overseas joint venture. 3
The lower panel of Figure
different
economic purposes.
2 describes the breakdown of outward
FDI according
Market seeking investments have grown throughout
signalling the increase in export orientation of Spanish companies.
The
this
to these
period
other two types of foreign
High protection by a host government can also increase market-seeking FDI activity in production
facilities as a way around protection. As explained below, we cannot distinguish this type of investment
'
in
our data.
'Notice that trade to
example
is
This
the
US
GDP
that has
low
ratios are not necessarily related to
rates of protection
degree of protection.
and a low ratio of international trade
to
An obvious
GDP.
economic phenomena intended to capture do have some
For instance, the market seeking investment category does not include the possibility of
investments in manufacturing production in a country due to the country's high level of protectionism.
This case would likely be an investment in production using Spanish technology which we are classifying
classification although close to the
problems.
as a factor seeking investment instead of market seeking.
It)
investment present a
much
FDI
smaller amount of overall
practically constant. Financial investments in the
accounted for approximately
40%
of the
total
activity
and their levels have remained
form of holdings and other financial transactions
outward investment flow during
this period (see
Figure
Financial investments are very sensitive to short run fluctuations in returns and to regulatory
2).
differences across countries.
development framework.
As such, they
Therefore,
we
are hard to analyze in the context of the investment
will restrict
our analysis to the other four types of
investment.
Table 2 shows the results of correlating the percentage of
each host country that
is
variables defined above.
dependent variable
is
total
Spanish outward FDI flows to
asset-seeking, market-seeking or factor-seeking with the independent
6
The
first
three columns report the results of regressions for which the
the annual outward
FDI flow by purpose
to
each host country as a percentage of
total
Spanish FDI to that country.
ratio
of the annual value of each type of Spanish FDI into the host country divided by that country's
GDP. The
goal
is
In the last three
columns the dependent variable was defined
not to understand the country variables that determine the
amount of FDI
country receives for each purpose but to determine what country characteristics
be a destination of a certain type of FDI
.
i.e.
the percentage of Spanish
FDI
in
make
it
more
as the
the
likely to
the country that has a
given economic purpose.
The
first
column of Table 2 confirms the hypothesis
of created assets will be more likely
The
results
show both per
capita
in
outward investment
that Spain's
We
search
those countries with a comparative advantage in those assets.
income (GDPCAP) and the number of
scientists (SCI) in the host
country to be a positive and significant influence on the percentage of Spanish FDI that
seeking.
in
also ran this specification substituting the input
output measure (the number of granted patents
in
measure of
scientific activity
the host country) and the results
'The specific definitions of the variables used and
is
were
asset
by an
similar.
Both
their sources are included in the data appendix.
1
1
the level of development and the level of scientific activity are positive predictors
on the
relative
importance of asset seeking investments.
The
results for
market seeking investments and factor seeking investments are also partly
consistent with the theory.
which Spain has a higher
Spanish FDI
in
relatively bigger for those countries with
Market seeking investments are
level
those countries
of international trade
(SFDIGDP)
to
(SPTRADE).
We
also find the existing stock of
be negatively correlated with the importance of market
Factor seeking investments are likely to occur in countries with which Spain does
seeking activities.
not have a high level of international trade and countries with a low level of created assets.
that factor seeking
include investments in raw material production and in cheap factors of
Therefore, these investments should take place in those countries with a relative
production.
advantage
FDI
in natural rather
(WFDIGDP)
The
is
than created assets.
last
three columns
country
GDP.
This specification avoids the implicit correlation
the dependent variables in the first three columns due to the restriction that the three
way
in
We
reasons.
also believe this normalization to be
which the exogenous variables have been defined.
Spanish FDI activity to be higher
OECD
in the host
of Table 2 redefine the dependent variable as the ratio of each type of
dependent variables must sum to 100.
the
The worldwide stock of FDI
only significant for factor seeking investment.
investment relative to the host country's
among
Recall
Therefore,
countries
we
in certain countries for
also include as
(OECD) and
for Latin
and their coefficients are not reported
The
results
more
consistent with
However, we expect the
level of
geographical, regulatory and historical
exogenous variables two
America (LATIN).
7
dummy
variables to control for
Both dummies are positive as expected
in the table.
from these regressions confirm the evidence presented above. Asset seeking
'A third group of countries, the tax heavens, was dropped from the analysis due to the distortions
caused by their tax regimes.
12
investments are more likely to occur
in trade related countries
while market seeking activities occur
Only the
level
We
of Spanish FDI stock
The
We
new company by
the country
(SFDIGDP)
and with
weak.
mode
in
significant with a positive sign.
is
which investment takes place
in
8
27
the foreign investor or the acquisition or the establishment of a long run
10
Asset seeking investments have the goal of
acquiring intangible created assets (such as know-how, brand names, or
more
transactions for these assets are often
one of the main reasons for
more
likely
when
the intangible asset
is
Table 3 reports the
Therefore,
we would
is
more
likely to
company,
column
is
i.e.
Market
This
is
expect this investment to be
FDI
is
On
the other hand,
of the factor or market
be a greenfield investment.
results of these industry regressions
in the first
recognition).
acquisition of an existing firm in the host country.
the property of the investing
seeking type, such investment
name
costly than intrafirm transactions (Caves 1982).
internationalization.
done through the
"We decided
GDP
can distinguish whether the investment involved the establishment of
relationship with an existing firm in the country.
dependent variable
to
results for factor seeking investment are
also decided to split the sample by the
9
manufacturing industries.
a
in
FDI
with a low stock of inward
in countries
high levels of international trade with Spain.
with a high level of scientific activity,
by mode of investment.
The
the total value of investment in an industry and year while in
to split the factor seeking
group between investments
investments to produce with Spanish technology.
We
in
search for raw materials and
also included as a regressor the percentage of
exports of each country that are minerals and raw materials.
As expected,
this variable
was
a significant
positive predictor of the level of FDI seeking raw materials.
Ideally one would look
country.
l0
However, data
The raw data
at
the importance of each form of
restrictions
classified
FDI
do not allow us
transactions as: creation of a
existing investment, acquisition of an existing domestic
of establishing a management relationship.
as greenfield investments;
domestic firms.
as in
Although
we
We
transaction to each destination
company,
new company,
such manner.
capital increase in
an
and a long term loan with the intention
first two groups and define the aggregate
two and define the new measure as acquisitions of
aggregate the
also aggregate the last
a capital increase can be in a
an already foreign owned company (greenfield)
to include all capital increases as greenfields.
FDI
to identify the transactions in
domestic company
we cannot
(i.e.
an acquisition) as well
distinguish between the two.
We decided
13
the second
column the dependent variable
Finally, the last
in that industry.
is
the percentage of investment for that year that took place
two columns use the percentage of investment
in
each industry and
year that were greenfield investments and the percentage that were acquisitions as the dependent
variables.
The
first
The
overseas investment.
(PRFRAT) and
production
on FDI has consistently found
two standard measures
(PUBRAT), and
report the results using
PUBRAT
literature
which type of industries are more active
the ratio of
PUBRAT
due
(see
R&D
to data
Caves 1982): the
We
measure
of advertising expenditures
(RDRAT).
R&D
problems when using the
ratio."
A
We
only
higher
implies a higher level of created intangible assets and a larger potential benefit from
The
results in the
higher percentage of
FDI
activity are industries with high levels
intangible assets.
second column are practically identical: industries with a
In this specification, also the
(REVADV) comes
FDI
ratio
activity.
expenditures to production
internationalization.
large
in
that highly profitable industries
more FDI
those with a high level of intangible assets have
intangible assets using
to
will help us determine
two specifications
of profitability and with large
measure of revealed comparative advantage
positive and significant suggesting that export oriented industries also tend to have
activity.
The
information.
distinction
In
between greenfield or acquisitions does not provide, however, much
both specifications none of the exogenous variables are ever significant (except for
the 10-firm concentration ratio,
CIO
The
for greenfield investments).
coefficients of the independent variables (except those of the industry
null hypothesis that all the
dummies) are equal
to zero
and
the null hypothesis could not be rejected with an F-test.
"Missing observations
sample.
set.
Also, the
R&D
in the
this,
number of observations in the
industry classification in the FDI data
data significantly reduces the
data are not directly comparable to the
However, when we include
always significant.
R&D
variable in the regression
its
coefficient
is
always positive but not
14
4.
Inward Foreign Direct Investment
The
FDI,
1).
i.e.
rapid increase in inward
FDI flows
into
Spain has been mainly due to non-manufacturing
finance and service oriented industries, especially towards the end of the period (see Figure
Although manufacturing FDI consistently increased
than overall FDI.
after 1986,
Inward manufacturing FDI has increased
at a
did so at a
it
much
much lower
faster rate than
rate
outward
manufacturing FDI and by 1993 inward manufacturing flows were nine times larger than outward
flows.
Given the importance of inward manufacturing FDI
understanding of the country of origin of FDI,
Therefore,
takes place.
we
section for outward FDI.
will
its
activity
it
will
be useful to have a better
industry composition and the form in which
perform below an analysis similar
FDI
to that presented in the previous
12
Table 4 reports the results of regressing Spanish inward FDI flows from each home country,
broken down by the mode of investment as
As
we
in table 3
percent of each
(PANINV), and percentage of
The
or acquisitions
the
home
home
country's investment
country's outward
FDI flow
FDI
in
results for total investment
Spain.
countries or
12
country.
13
These countries
when seeking
in total
to
Spain that was greenfield
show
that countries with a high
will incur
FDI when searching
created assets from equally or
income per capita (GDPCAP)
less likely to
The home country
is
more developed
countries.
FDI by
its
To
the extent
economic purpose.
the country of residence of the ultimate beneficiary of the investment.
perform similar regressions by country of immediate origin.
certain countries (such as tax heavens, the Netherlands,
government regulations.
perform high levels
for factors in factor-endowed
Unfortunately, data limitations do not allow us to distinguish inward
13
annual investment
(PACQU).
and countries relatively well endowed with created assets (SCI) are
of
home
report the results using the following dependent variables: total annual investment by
home country (TOTAL),
(PGREEN)
a function of the characteristics of the
Due
to report those results here.
In those regressions
we
We also
decided to exclude
etc..) due to differences in taxation and
to the possible noise introduced
by
this selection criteria
we
decided not
[5
that
Spain
is
an intermediate country
most developed countries while,
to less
both
developed countries
OECD
dummies
destination of
the
the IDP,
its
level of created assets
same time, Spain has
lost
are positive and significant.
becomes positive and
FDI from developed
is still
too low to appeal to
comparative advantage with respect
terms of cheap factors of production.
LATIN
and
GDPCAP
regression then
in
at
in
If
Notice that
OECD
in this
regression
dropped from the
is
significant indicating the attractiveness of Spain as a
countries for locational reasons, although not necessarily from the
developed countries with the highest
GDP
per capita,
GDPCAP. We
also find the intensity of trade
between the home country and Spain (SPTRADE) and the worldwide FDI stock of the home country
(OUTFDI)
to
The
be positive predictors of the amount of inward FDI originating from those countries.
last
two columns of Table 4 report the
results of splitting the
whether the investment was a greenfield or an acquisition.
Since the variables here are expressed as
home country investment
percentages of each form of investment over
total
dummy
the specification.
results
variables
(OECD
and
LATIN) from
amount of investment by
As was
in
Spain,
the case for outward
from these specifications are not very revealing. The only significant variable
the country's per capita
income which has a positive
greenfield investments.
These
effect for acquisitions
results suggest that rich countries are
we drop
more
is
the
FDI
two
the
the level of
and a negative effect for
likely to enter
FDI through
the purchase of existing assets in Spain. 14
Table 5 reports the results of regressing inward FDI by destination industry.
As was
the case
with outward FDI, inward FDI tends to be most intense in manufacturing industries with high levels
of profitability
orientation
(PRFRAT), high
(REVADV).
levels of intangible assets
Also, as before,
(PUBRAT), and
relatively high export
the results are incapable of providing information on the
type of industries that are more likely to receive
FDI through
greenfield investments rather than
''Recall the high level of acquisition activity that has taken place in this period (see Figure 3, above).
Most of these
acquisitions
were done by companies from
OECD
countries.
16
through acquisition of existing firms.
5.
R&D
and Asset Creation
Countries and firms can upgrade assets and increase the marginal productivities of production
factors
by investing
support industries, labor
in infrastructure,
1980s private firms have increased investments
government has invested heavily
have not been enough to allow Spain
particular, the role of the
education.
As
Spain
and
fees.
to
government
in
R&D
efforts,
however,
has not been as forceful as
in infrastructure
minor role
in
In
and
FDI.
(Figure
4).
payments for patents, royalties and
Domestic
fees.
Spain spent domestically two pesetas on
more advanced
countries
countries (60 per cent to the
come from
receipts
have oscillated between 0.02 and 0.1
1
per cent of
escalated from 0.17 per cent in 1960 to 0.51 in 1992, roughly one-sixth of
inflows during that year
receipts
R&D
the
suffering from a yawning gap between payments and receipts for patents, royalties
GDP, payments have
OECD
and professional training.
a result, technology-created assets in Spain play only a
is
R&D. During
narrow the gap with the more advanced countries.
While since 1960 technological
levels of the
formation, and
labor skills and product differentiation, while the
in
in infrastructure
skill
the
OECD
R&D
expenditures have been growing faster than net
For every peseta of net payments
R&D. By
to other countries in
1991 the ratio was one to three,
still
far
(1NE 1994:30). The vast majority of the payments go
EU
FDI
1980
from the
to other
and 20 per cent to the United States) while 80 per cent of the
(50 per cent from the
remainder mainly from Latin America, and
EU
and 25 per cent from the United States), the
to a lesser extent.
South East Asia and the Magreb (Duran
Herrera 1992:242). The fact that 80 percent of receipts come from countries with a per capita income
equal to or higher than Spain's
R&D
expenditure
of the government to
total
in
is
at
odds with the IDP framework.
Spain has more than quadrupled during the 1980s. But the contribution
R&D
expenditure has fallen from 52 per cent
in
1980 to 46 per cent
in
17
grown from
1991, while foreign funds have
1
to
6 per cent, and the share of private firms has
remained constant. Despite the overall upward trend,
cent of
34).
its
GDP,
the lowest rate in the
OECD
That same year, Spain ranked nineteenth
States (U.S. Patent and
Africa,
New
in
1991 Spain spent on
R&D
a
mere 0.87 per
except for Greece, Portugal and Turkey (INE 1994:30,
in
terms of cumulative patents granted
Trademark Office 1992:A2),
in the
United
closely followed by countries such as South
Hungary and the former Czechoslovakia, and not much ahead of South Korea, Mexico, and
Zealand.
Unlike Portugal, Greece, and Ireland, however, Spain has managed to develop three areas of
technological strength, as identified in a recent
OECD
study (Archibugi and Pianta 1992:76-77),
namely, fabricated metals, industrial machinery, and motor vehicles, primarily auto parts. Neither
funding from the government nor from abroad have contributed significantly to developing distinctive
technological capabilities in machinery and motor vehicles: the firms in these industries account for
90 and 98 percent, respectively, of
R&D
all
R&D
expenditure.
By
contrast, as
much
as 18 per cent of
expenditures in fabricated metals comes from the government (INE 1994:64). Finally,
multinational firms operating in Spain or Spanish firms controlled by foreign investors in a proportion
higher than 50 per cent invest
in
R&D
to a greater extent than the rest,
exclusively through internally generated resources with
little
and they do so almost
or no governmental funding (INE
1994:95-96).
6. Internalization
Advantages
The theory of
the investment development path argues that the higher the economic
development of a country and the more advanced
it
is
along the investment path, the more firms are
able to exploit whatever ownership advantages they have internally rather than through licensing or
joint
ownership arrangements. Unfortunately, data limitations
to test this aspect
of the theory
in the
IS
case of Spain are tremendous. Official statistics on receipts for patents, royalties and fees from abroad
do not specify whether the payer
is
limited and outdated information
on ownership of the foreign subsidiaries of Spanish companies.
Authorizations for
affiliated with a
Spanish parent company or not. There
new outward FDI between 1975 and 1978 show
that
stocks.
It
rise in majority
mid-1970s and the mid-1980s has been most remarkable
US
(from about 20
America have
actually
to
become
in the
1986
seems, therefore, that Spanish firms have been increasing their
ownership share of foreign subsidiaries over time. The
and the
some
45 percent of the subsidiaries
were majority owned. This compares with overall 65 percent majority ownership
benchmark survey on FDI
is
over 70 percent of
less majority
case of subsidiaries located
in the
EU
in the
subsidiaries), while those located in Latin
all
owned
ownership between the
(see panel
A
of Table 6). These levels of majority
ownership are not much lower than the ones reported by Encarnation (1994:210) for the subsidiaries
of US,
EU
and Japanese multinationals.
Another way of measuring internalization
is
markets through proprietary distribution channels or
firms with no
more than 75 percent of
to
examine whether exports flow
not.
Taking
US
distant the foreign market (e.g.
EU
in
1986 to 14.8 percent
in
1992.
The
and Latin America compared to Europe), the higher the
degree of internalization (panel B of Table
lower than for US,
account Spanish-based parent
foreign capital, the ratio of exports through proprietary
channels to total Spanish exports has doubled from 7.3 percent
more
into
into foreign
6). In general, levels
of internalization of exports are much
and Japanese multinationals (Encarnation 1994:217). Of
all
Spanish exports
originating from firms with no or less than 75 percent foreign ownership, 23 percent are sold through
proprietary distribution channels. Firms that do have proprietary distribution channels
of their exports through them (panel
C
Finally, no information exists
sell
61 percent
of Table 6).
on
intra
company shipments of goods other than those
for sale
through foreign distribution subsidiaries. The fact that outward factor and raw material seeking FDI
19
has remained
flat
while most of the recent increase has been accounted for by investments
in
holdings
or market access (see, again, lower panel of Figure 2) indicates that Spanish firms with investments
abroad have not generated the complex patterns of transfers of intermediary and
subsidiaries and parent
company or between
final
goods between
subsidiaries located in different countries so characteristic
of the largest multinational corporations (Encarnation 1994:221-226).
7.
Explanations for FDI Growth: Economics and Government Policies
What has made Spain such an
from
attractive destination for
a variety of perspectives. First, time-series analyses
FDI? This question may be answered
provide solid macroeconomic evidence
wage and
favor of the market-seeking hypothesis while finding no support for the impact of relative
exchange rate levels (Bajo 1991; Bajo and Sosvilla 1992; Garcia de
size
and growth of the market, foreign investors have flocked
Cruz 1993). Attracted by the
Spain during periods of relative
to
and economic and trade liberalization. Second, there
political tranquillity, price stability,
evidence from the case of the European
sales per
la
affiliates
employee, they obtain higher returns
in
of
US
in
is
some
multinationals that, despite the similar level of
Spain than elsewhere
in
Europe (Garcia de
la
Cruz
1993).
Third, upgraded assets such as skilled labor, support industries and infrastructures must be
playing an increasingly important role given that, simultaneously, Spain has engaged in trade
liberalization, reached industrial productivity levels
comparable
to other
EU
countries with high
FDI
inflows (e.g. the UK), and allowed labor costs to rise (United Nations 1992, table 2.7). Yet inward
FDI
in non-financial services
Fourth, inward
(Figure
3).
Why
FDI
and
is
in
now
manufacturing has continued to pour into the country.
tilted
more towards
have the most active foreign investors
into an increasingly
open economy
to
acquisitions than greenfield investment
(i.e.
EU
firms making acquisitions)
moved
manufacture or to render non-financial services? In the case of
20
non-financial services, foreign investors have acquired assets in order to
barriers to entry and to gain market share quickly.
foreign firms have
fairly
open
come
to
to competition
value-added activities
Spain not only to
from abroad) or
in the context
As regards manufacturing investments, most
sell in
an expanding domestic market (which
overcome
to
overcome industry-level
is
by now
industrial barriers to entry but also to locate
of a world economy tending towards globalization. Furthermore,
foreign firms are finding in Spain upgraded assets such as a skilled
industries stimulated in part by prior inward FDI, and an
use a Spanish location as an export base (e.g.
work
force, clusters of support
improved infrastructure
in autos, electronics, electrical
that allows
them
to
appliances, and
chemicals). Meanwhile, successful Spanish firms have barely shifted production abroad in response to
domestic cost increases for the same reason: the continued, yet changing, locational advantages of
Spain. Finally, multinational firms in mature industries (e.g. food processing, beverages, auto parts)
have been acquiring Spanish firms with an international presence not only to gain market share
Spain but also
in
other
EU
countries in which the Spanish firms had a sizeable presence.
Given the tone of our discussion thus
in
far, the political
economy of inward
in
15
foreign investment
Spain can only offer a straightforward explanation of the role of the government. In the short run,
policies tending towards political and
economic
stabilization, liberalization
regimes, and market opening have been the direct contributors to the
1960s and of the 1980s are testimony to
democracy
in the late
1986 have been
this.
1970s, the containment of inflation during the 1980s, and
critical to
group, Exide Corp. of the
Ferruzzi.
stories of the
EU
membership
in
continued foreign inward investment. Beyond the short run, policies such
"Recently, Allied-Lyons of the
level,
FDI boom. The
Arguably, the comparatively smooth transition to
as the impressive investments in infrastructure, education,
European
of foreign investment legal
US
UK has acquired
and worker training since 1983 are steadily
Pedro Domecq, the world's eighth-largest beverages
has taken over Tudor, the third largest battery manufacturer
and the Koipe-Elosiia olive
oil
at
the
and foods group has come under the control of Italy's
~;:-.--
—
•
lt..:-
ire
::—.-.•
atioci.
^ici.-
c
t\
waf oatward
-.--
=
.;-
:
'..
Srair.
n2
-
e:r
di
~
-'-.:
-
ownership and
--.
lavemment
poJ;:
a
-
-tcted tov~
a of the Spanish economy and upgrading the
asing flow of FDI.
.-
•
„'..-?
•---;^
/
-
i.-,:
'
:
;
-i.--
S'aru
i
.
•
/-
?94
.-~
,.-:-
'.
v.c .i-'.r.: ivigc
.aaracterize this itage .
certain support industries clustered
one
in
:
which
around primary
.
.
These phenomena
industries.
Tt
-
r
olution
.
E 1 2 ~ t - - 1r
percentage of
~---
".:
.
:-
_r- ard direct invesmec:
:
.
e
.
•
r
•
most of the
stage
-
:
s;e
par ac.gr:
--.e
appear
returr.
-.a.e
:
rect
i
The experience
r-caticr.a, ad',
artages
:
-arse: par_> e\p:a.rs
.
-rallies with estar
f
iirect s
-
gr:-rr
-
domesticaiiy-owned firms.
to in;:^.
.
'
;
-
r
•
:
\>
G
-
;.
-
reach the
~-^ rrom at.":;-
r?
sirua:
middle
or
stages
oped and
ir:.
_.;
.
come countries
-. :
-
_
~
.
.
FDI even
_
_
rtarc:
-
:
.
~
been
me
_:
-
2
~=j:
;
accuisrDcns
:
ra. pv>::::r.s .- r.e:r indu
^:
r7
:_rta
ed
;
r'r.pse as&ee
:r.
:
as
:
.- 1
-
-_-.
e case
r.:e-ra:
:
r_a
f
;•
as part
-? wr.ee
_s
t
sucr. as
.--
support
:^j
:
:
_r-ar:
furcr:
n
...
rrr er:
".
•
aaportant has
re
:
of inv.^:.
in:.
Er
.
.
'.e\e.s
~~ "
_-
-errs
jcrease in inward
-
-
R&L
scentiv:
>rtk>n activirs
forei£~ :a:;"'. :.;-?a
.
-
rap
.--
-a:: r E'.
r
em
:
-:'
_-
-
r
estment
-
-
-
inducee
—
~
s ft
i
shec c;rres;:; arc rrerr.a:
Tr.ese rr.ass.'.e rVreigr
parts
t
-
-
.
;e
rrerra: :ra.:ra:
;
ace the mid-
Spair
rar_ra. assets
•_-.:?
eve
the
s
-
-
.
a
created a
-
-:..:
ped domestical^
:
a
.
™ Spa
-
:
mat
re:
signer for countries
race
-
.
•_--.
- r
setini
-
e
_
r.a.
...
_-r»ard investments are
-
r. e
:'
-.-.c— a:
:
an
jggest
'
rr-artex
.s
:
take place in countries *ith higher
find that
—;
e
-_-.
--
z:
-__-:-
a.
par.
FZ' "a:
-
:_rr=r.:
'-
=-:
-
:
Spar
tota.
izz -
•_*
r.
a case
par
IDr :__.. i
the predictions of the
I
: :
ccurred
:
. .
'
of tin
ccrr p acres -
":
:? 7 :.
reca_se tre>
>p a.:
-
e
-
~
:.
re
.
"
that
"
.
-_--..;.--.-.-
•
23
private and state-owned sectors, tend to keep the flows of inward
higher than those for outward FDI.
FDI
at levels
and rates of growth
24
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.
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la
.
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Econdmico de ICE 241
1
(May
2-8, 1994):
1
el
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Censo de inversiones directas de Espana en
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el
exterior a
26
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.
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.
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27
DATA APPENDIX
The data of outward and inward FDI
at least
20%
reflect transactions in
equity interest in the participated
control over the
management of
company (10%
which the foreign investor controls
starting in 1993) or has effective
company. The data
the participated foreign
FDI
also include as
long-
term loans to or from foreign companies with maturity longer than five years and with the goal of
establishing lasting
economic
actual investment.
The company
to
do
so.
The
data reflect notification of the intent to invest not of the
has after
its
notification of the intention to invest
up
months
to six
Therefore, an investment might be classified in a calendar year prior to the year in which
the investment took place.
flows
links.
may appear
in
actual investments
is
Also, to the extent that a notification does not end in a transaction,
the data that never took place.
very high
(cite???).
Finally,
The
FDI
FDI
overall correlation between notification and
transactions appear in the data (such as
reinvested earnings, or contributions in physical assets) that did not result in international capital
flows.
Therefore, differences exist between our measure of
FDI and
the values that appear in the
capital accounts.
Variable Definitions:
PASSTSK, = percentage of
the annual value of Spanish
purpose of either producing
in
a foreign
country
i
outward FDI
in
host country
that
i
had the
using non-Spanish technology or starting a joint-venture with
company.
PMRKTSK^ =
percentage of the annual value of Spanish outward FDI
in host
country
i
that
was
in
marketing and distribution.
PFCTRSK; =
percentage of the annual value of Spanish outward FDI
sourcing of raw materials or
PASSTGDP; =
in
in
host country
i
that
was
in
manufacturing production using Spanish technology.
the ratio of the annual value of Spanish outward
FDI
a joint-venture or an investment in production facilities that will use
in
host country
i
that
was
non-Spanish technology to
either
28
country
i's
GDP.
PMRKTGDP; =
the ratio of the annual value of Spanish outward
marketing and distribution to country
PFCTRGDPi =
in
country
host country
i
production
FDI
in
host country
that
that
i
using Spanish technology to country
facilities
percentage of the annual value of outward (inward) FDI that took place
was
in
was
i's
either
GDP.
in
(from)
in
(from)
(or in industry k].
i
PGREEN W =
country
in
in
GDP.
the ratio of the annual value of Spanish outward
sourcing of raw material or
PANINV W =
i's
FDI
i
percentage of the annual value of outward (inward) FDI that took place
(or in industry k] that took the
form of
a
new company
or equity increase in an existing
foreign company.
PACQU, >M =
country
i
percentage of the annual value of outward (inward) FDI that took place
(or in industry k] that took the
in
(from)
form of purchase of an existing national company or a long
term loan.
GDP =
Gross Domestic Product,
US$
in million
for 1990.
GDPCAP = GDP/population.
SCI
= number
of scientists and engineers
the country, latest year.
in
SCIGDP = SCI/GDP.
SPTRADE = (EXPORTS^ + IMPORTSs^/tEXPORTS. + IMPORTSJ,
subscript
i
indicates the
SFDIGDP; =
ratio
WFDIGDPi =
OUTFDI; =
The source
FDI
home
for the variables
stocks that
in
host country
of worldwide FDI stock
of
where the
or host country.
of Spanish FDI stock
ratio
ratio
home
for 1990,
country
above
come from United
i's
is
in host
i
to country i's
country
stock of outward
United Nations,
FDI
i
GDP
to country i's
to
Statistical
country
i's
in
GDP
GDP
1986.
in
in
1990.
1990.
Yearbook, except for the valaes of
Nations, World Investment Report. 1993 and from Direccibn de
29
Transacciones Exteriores Censo de Inversiones Directas de Espafia en
source for Spanish FDI inflow and outflows
is
the Spanish
el
extranjero. 1989.
Economic Ministry,
The
DireccifJn de
Transacciones Exteriores.
PRFRAT =
the ratio of industry k real profits to
PUBRAT =
the ratio of industry k nominal expenditures in advertising to
k
k
production
ClOy
=
its
real
production
in
1990.
its
nominal industry
in 1989.
ten firm concentration ratio in 1990, measured in terms of each firm's value of production.
REVADV =
k
revealed comparative advantage measured as the difference between industry k exports
and imports as a ratio of the industry production
The source
for these variables
is
in
Institute Nacional
1986.
de Estadfstica, Encuesta Industrial and Fundacidn
Empresa Publica, Programa de Investigaciones Econdmicas.
31
TABLE
TOTAL OUTWARD
FDI
2
BY PURPOSE AND COUNTRY OF DESTINATION'
32
TABLE
OUTWARD MANUFACTURING
FDI BY
3
FORM OF INVESTMENT AND INDUSTRY'
33
TABLE
INWARD MANUFACTURING
FDI BY
4
FORM OF INVESTMENT AND COUNTRY OF ORIGIN
u
TABLE
INWARD MANUFACTURING
FDI
5
BY FORM OF INVESTMENT AND INDUSTRY'
$5
TABLE
6
INTERNALIZATION ADVANTAGES OF SPANISH FIRMS
A. Ownership of subsidiaries
Figure
Foreign Direct Investment
in
1
Spain.
1960-1992
Inward FDI
Outward FDI
1955
1965
1975
1985
1995
Manufacturing Foreign Direct Investment
Inward FDI
Outward FDI
1995
Source:
Moreno More" (1975):92, 95; Aguilar (1985):65-66; Ministerio de Comercio
(1993):226-227, 231; Duran and Herrera (1984):381-382; Mufioz et al. (1978):68.
Figure 2
Outward FDI by Mode. 1988-1992
400OO0
-i
r
300000
= 200000
/
c
o
100000
-
Capital increases
—
Greenfield
Acquisitions
-
1987
1988
1989
1990
1991
1992
Outward FDI by Goal
150000
«5
o
1
100000
-
50000
-
1993
Long-term loans
MIT
|
HI Willi
3
II
LIBI
PI PI™
1060 OOBMbEOO
1
Figure 3
Inward FDI by Mode, 1983-1993'
1200000
1000000
«
800000
CO
CD
Q
i
600000
E
t
400000
o
-
Capital increases
—
Greenfield
200000
Acquisitions
-
1982
1984
1986
1988
1990
1992
Long-term loans
1994
"Data for 1984 refer to January-November only.
Source:
Boletfn Econtimico de ICE several issues.
,
Figure 4
Receipts and Payments
for Patents. Royalties
and Fees
Payments
Receipts
1955
Source:
1965
1975
1985
1995
Ministerio de Comercio, Balanza de paeos de Esparia ; Banco de Espaiia, Balanza
de pagos several
.
issues.
Date Due
Lib-26-67