On November 22, a storm was raging about the rescue of Ireland by the European Union (EU) and the International Monetary Fund (IMF), which could amount to 90 billion euros. Fears were growing that the economic contagion could spread to Portugal, Spain and other euro zone economies. On that day, the Circle of Entrepreneurs and the Wharton Business School presented in Madrid the 2010 Annual Report on the Internationalization of the Spanish Company.
The goal of that publication, now in its fourth edition, is to take the pulse of Spanish companies in a global context. As this year’s edition was being presented, Claudio Boada, president of the Circle, sounded an alarm about the erosion of Spain’s prestige in the international arena. “The country is losing its credibility in the marketplaces [of the world] at an accelerated rate, and the reforms performed by the government [such as those involving labor regulations], will not help to improve that situation, if they remain brief.”
Boada also warned that despite the fact that the economic crisis is slackening in some countries, Spain’s way out of the current situation will be slower and more painful than for other countries. “After three years of economic crisis, we witnessed the first steps in the recovery in 2009, leaving behind the worst of the crisis. In 2010, the situation has improved somewhat, but in some countries more so than in others,” he said.
One of the countries left behind in this positive trend is Spain, where this year’s report describes the situation as dismal. The experts at the Circle and Wharton write, “In 2009, Spain suffered its worst recession since 1960, experiencing a 3.6% decline in its GDP from 2008.” As expectations deteriorated, companies reacted by slowing down or reducing their investment plans and adjusting their head counts, the report notes.
Looking forward, the prospects are not very encouraging, because the country will trail behind others in the recovery, registering a negative growth rate of -0.3% in 2010, according to IMF forecasts published in October. Unemployment and public debt are the big obstacles that are weakening the country’s recovery.
“I don’t want to depress you with the economic situation of Spain,” said the president of the Circle, but “we have to act decisively so that we don’t wind up being Greece or Ireland.” Boada added that the solution to the crisis is in the hands of the country’s companies and their managers. “If we also get some support from the government, we will get out of this [crisis] earlier. So I congratulate the companies [we recognize in this report] for their creative and positive attitude, as well as the other companies that are trying to trying to get us out of the crisis.”
The Pros of Globalization
In a survey in this year’s edition of the report, members of the Circle said that major achievements of Spanish companies outside their homeland in 2009 included the following:
- Abenoga, the Spanish technology company, won the concession to construct a turnkey co-generation power plant in the Mexican state of Tabasco. This project will help the Mexican government comply with its commitment to reduce by 50% its emissions of greenhouse gases by 2050. This project will transform condensed water into steam, and natural gas into electrical energy.
- BBVA increased its ownership of China Citic Bank, the seventh largest Chinese bank in terms of assets, to a total of 15% of China Citic’s capital.
- Spanish wind-power company Gamesa signed an agreement to supply wind turbines to the Chinese autonomous region of Inner Mongolia.
- Venezuelagranted a turnkey contract to build a combined cycle power plant to a consortium formed by Iberdrola Engineering and Construction – the energy engineering firm – and Elecnor. The project, which will cost about $2 billion, will be one of the largest in Latin America.
- OHL, the Spanish construction firm, won the right to build the largest highway interchange in Miami, Florida at a projected cost of US$560 million.
- A consortium led by Sacyr Vallehermoso, the Spanish construction firm, won a contract to build locks for the widening of the Panama Canal. The project will add 40% to the current cargo capacity of the Canal on maritime routes that bring together the Atlantic and the Pacific oceans.
Boada said the strategy of corporate internationalization is the main recipe for counteracting the impact of the crisis on companies. “It is a strategic decision that no one has regretted when it has been done with care and intelligence.” He added that those companies that have pursued their international expansion plans despite the crisis “have made the right decision. Sooner or later, they will enjoy the benefits.”
Mauro Guillén, director of Wharton’s Lauder Institute of Management and International Studies, agrees. He noted during the presentation that “combining innovation and internationalization is the only way out of the crisis because this is not a temporary crisis; it involves the readjustment of the very foundations of competitiveness.”
Nevertheless, Spain’s total outbound foreign direct investment in 2009 amounted to only 11.758 billion euros, 77% lower than during the previous year. Moving in the other direction, foreign direct investment into Spain declined 78% from the previous year, and amounted to 10.82 billion euros.
In 2009, Spain continued to be the seventh-largest country in terms of inward foreign investment – trailing behind only the U.S., France, the United Kingdom, Hong Kong, Belgium and Germany — with 3.78% of the worldwide total. However, Spain’s total stock of outward Foreign Direct Investment into other countries dropped one notch, winding up in tenth spot with some 3.4% of the total.
Not all prospects for the future are bleak. The annual report notes that global trade and production are currently in a recovery phase. If the global economy does not suffer any further disruptions, global merchandise trade should return to a pattern of growth by the end of 2010.
Guillén said that given the slow pace of the economic recovery of Spain, the best opportunities for companies nowadays are overseas, especially in the emerging markets. “They have experienced enviable rates of growth, while the developed economies are experiencing stagnation and lethargy,” he noted.
Guillén stressed that the countries that provide the best opportunities for growth, according to the members of the Entrepreneurial Circle, are Brazil, with 20.3% of the votes in a survey, followed by the U.S. with 19.2%, and China, with 14.8%. In terms of business sectors, the best opportunities are in energy (according to 22% of respondents), financial services and insurance (10.4%), and services for information-technology and telecommunications (9.8%). “These countries and sectors are going to win the lion’s share of foreign investments,” he said. He added that there are golden opportunities for Spanish infrastructure companies in the U.S. “Where I live [in Philadelphia], the average highway is more than 50 years old.”
On the other hand, Guillén called for the business community to close ranks in support of one idea – a foreign currency war could “lead to an escalation in trade protectionism.” The report stresses that recessions and their effects are a breeding ground for protectionism. “When economic output declines and unemployment increases, there is a growing temptation to blame international trade; to block out imports and subsidize domestic industry, even though such measures are counter-productive from a political viewpoint,” he noted.
During the Great Depression of the 1930s, governments applied protectionist measures that exacerbated and expanded the impact of the crisis worldwide. Although governments have committed themselves not to adopt measures of that sort, nowadays there are serious threats that can unleash protectionism in the future, such as high unemployment, the differential growth rates between various countries, and growing public spending by governments. Guillén said, “History does not repeat itself, but there are similarities with what happened during the 1930s. Let’s hope that we won’t have to write another chapter in the story of protectionism and its awful consequences.”
The Lessons of Ireland
According to Guillén, the internationalization of its companies will help improve Spain’s image in global markets. The report notes that although stock markets performed better in 2009 than in previous years, this trend was accompanied by a decline in both the recommendations of the analysts of investment banks and coverage by the international financial press.
The report stresses that the quantity and quality of media coverage are extremely important variables because investors, analysts, managers and politicians around the world all use publications such as the Financial Times and the Wall Street Journal to gather information and viewpoints about the growth of the economy and companies. As a result, “The financial press contributes to creating images, and induces currents of opinion,” the report notes.
Experts at the Circle and Wharton add that the coverage of some sectors was critical, especially in the case of construction and real estate. Nevertheless, Spanish banking, except for the country’s savings banks, has been viewed positively. In 2009, Santander was the multinational mentioned the most, with 616 mentions, followed by Telefónica with 245.
Given the weakened economic condition of Spain, and the fear that things will worsen after the rescue of Ireland, some multinationals are disassociating themselves from the label of “made in Spain” in order to avoid association with a higher country risk, which would make investors sell their positions at the slightest sign of any problems in Spain’s economy.
Guillén insisted that Spain is neither Ireland nor Greece. Consider the size of those countries, he noted. Ireland has only four and a half million people, and Greece has only ten million, compared with 46 million people in Spain. “How many multinationals from those other countries are well-known for their competitiveness?” he asked.
He stressed that two lessons need to be learned from Ireland’s rescue: “In the first place, [the Irish] lack the strong banks and companies that you need for an economy to be strong. And second, you have to know how to sell yourself as a country.” He added, “The Celtic Tiger has brought itself up from poverty over the past two decades, transforming itself into the Irish Miracle, basically because it knew how to sell itself as a country. It boasted about its youthful population, its readiness to innovate, and the fact that it spoke English, and so forth. It knew how to generate confidence in its economy, and how to attract significant foreign investment. I hope that this year’s report helps to increase confidence in Spanish companies and the Spanish economy.”