Spain has felt the sting of the global economic crisis more than most countries, leaving organizations like the OECD and the European Commission to forecast its recovery to lag that of others. Critically, the unfavorable conditions have cut short the globalization aspirations of many Spanish companies, which over the last 30 years, pushed themselves beyond their local borders to become leaders of corporate internationalization. Yet despite recent challenges, Spain has continued to be a net foreign investor, albeit at a rapidly reducing rate of € 8 billion in 2008 compared with €51 billion the previous year. And while merger and acquisition activity has been curbed, its impact has been as powerful as ever for the country’s economic development, according to a new report titled, “Anuario 2009: Internacionalización de la empresa española" ("Yearbook 2009: Internationalization of Spanish Companies").

Published for the third consecutive year by the Círculo de Empresarios (The Circle of Businessmen) — a Madrid-based club of executives — and The Wharton School, the report assesses Spanish companies’ search for new markets and appetite for global mergers and acquisitions. Polling Circulo’s members as in the previous years, it also identifies Spain’s top corporate deals of 2008 using a number of criteria, such as the deal’s impact on the acquirer’s country and role in increasing the acquirer’s global market share. According to the report’s findings, the top deals were: the purchase by Banco Santander of U.K. financial institution Alliance & Leicester; the merger of Campofrio with U.S.-based Smithfield Foods to become the largest processed-meat company in Europe and one of the five largest in the world; Iberdrola’s acquisition of Energy East, another American company; Planeta media group’s purchase of France’s Editis publishing house; and Inditex’s international fashion-retailing expansion over the course of the year.

The following is an edited transcript of a Universia Knowledge at Wharton interview with María Jesús Valdemoros, director of the Circulo’s economics department; María Grandal Bouza, its economic analyst; and Mauro F. Guillén, director of Wharton’s Lauder Institute, who take stock of how Spanish companies are doing abroad and what challenges they face.

Universia Knowledge at Wharton: How has the crisis affected Spain and the globalization of Spanish companies?

María Jesús Valdemoros: The international financial and economic crisis occurred at the same time as Spain’s domestic crisis, and it was caused by the exhaustion of an economic model that is no longer sustainable. This has worsened the costs of a correction required by the imbalances accumulated in the Spanish economy.

As for the effects on internationalization, the instability of financial markets has clearly made it difficult to access the financing required for [recent M&A] deals. But the crisis has also generated business opportunities — for example, in terms of acquisitions. What’s more, if we focus on Fortune’s latest rankings of the 500 biggest companies in the world, 12 are Spanish and have moved up in the rankings. For example, Banco Santander has gone from 58th to 35th place and BBVA from 134th to 113th. In addition, three of the companies are among the five largest in the world in terms of annual revenue in their respective sectors: construction firm ACS (ranked third), telecom company Telefónica (fifth) and Banco Santander(fifth).

Universia Knowledge at Wharton: Brussels says Spain will be the last major economy in the European Union to emerge from the crisis. What is the Achilles heel of its economy? What are the most urgent reforms that need to be undertaken so it can emerge from the crisis?

María Grandal Bouza: The Achilles heel is that the Spanish economy seems to be in a no man’s land. On the one hand, the growth model, based on aggregate demand, construction and relatively low-cost labor, is exhausted. It is incapable of generating prosperity. On the other hand, it is in a transition, [moving] toward an economic model that better reflects the competitive parameters of a developed country, such as innovation, entrepreneurship, and the exploitation of information and communication technologies.

Two areas of reforms need to be a priority. First and foremost, education. Change is impossible without high-quality human capital and a population that is trained, critical, autonomous and entrepreneurial. The second priority [should] be a battery of reforms directed at improving how [all parts of the economy works], such as efficient mechanisms for allocating resources in the labor market. We need markets that are more competitive, flexible and free of interference.

Universia Knowledge at Wharton: What global progress have there been among Spanish companies in terms of three key criteria: shareholder returns, stock market recommendations and their profile in international press?

Mauro Guillén: Over the past year, Spanish companies have felt the crisis in terms of sales, profits and returns for their shareholders in a way that is similar to companies in other countries. Nevertheless, Spanish companies in the food, wine and banking sectors (excluding savings banks in general) have made very favorable progress, better than their European and global competitors. Stock market analysts [published] favorable recommendations [for Spanish stocks] in 2008, something that has been reflected in their increasing stock prices since March 2009.

Universia Knowledge at Wharton: What about the sectors that have underperformed, such as pharmaceuticals, chemicals, construction, real estate and media?

Guillén: When it comes to food and wine, falling raw material prices have contributed to improved profits…. Excluding savings banks, Spanish banks have shown that they have a solid capital structure as well as a successful strategy for globalization. Construction and real estate have been punished by the crisis to a greater degree than in other countries. Media is feeling the effects of unsuccessful investments and the threat of the Internet. In pharmaceuticals and chemicals, the problem comes from the rise in the price of their inputs and a lack of innovation.

Universia Knowledge at Wharton: Two of the most-prized deals that the Circulo survey identified involved U.S. companies and two others involved European companies. Has the scope of expansion of Spain’s companies changed? What challenges do they face when competing in the U.S.? And how do you rank Latin America in that regard?

Valdemoros: For several cultural, historic and economic reasons, Latin America has been the destination of choice for Spanish direct investment. Many of these factors will still exercise a powerful influence on Spanish companies’ models for globalization, especially to the degree that Latin America continues to make progress on the road to [economic] development. Nevertheless, internationalization requires diversification.

Many markets are growing and have great potential for traction, but Spanish companies barely have a presence in them. The U.S. is one of those markets. It is a very attractive place for getting into the technological and economic vanguard, but also very complicated because of the enormous competition there. To operate successfully in the U.S., you have to cover a greater cultural distance and you have to learn to manage [a business] in a social and economic environment that is very different than that of Spain.

Universia Knowledge at Wharton: Brazil continues to be one of the main markets for Spanish companies in Latin America, as was clear with the recent public share offering for the subsidiary of Banco Santander there, the biggest such deal in the world this year. What opportunities do you perceive in this market over the short and medium term? Do the 2016 Olympic Games in Rio represent an opportunity for Spanish companies?

Grandal Bouza: There are a lot of opportunities because Brazil is growing at a strong pace in terms of not only GDP and per capita income, but also institutional strength and international solvency. There is a growing middle class, which will demand more and better products and services in coming years. Rio de Janeiro has to tackle a program involving all sorts of construction infrastructure so it can deal with an event of the magnitude of the Olympic Games. Spanish companies are among the most important in the world in that sector so I perceive a great opportunity, both for those companies [that haven’t yet expanded there] as well as for others that already operate in Brazil.

Universia Knowledge at Wharton: What role has Latin America played in the global economic crisis, and what impact has it had on Spain? Has the commitment of many Spanish multinationals to Latin America been worth all the effort despite the setbacks as a result of the populist policies of some countries?

Guillén: The big Spanish companies derive a lot of their profits from Latin America. The region has been affected by the crisis in different ways. Mexico and Central America have been the economies most affected, while Peru, Chile, and Brazil especially have avoided the worst of it. Spanish companies that have a greater presence in Brazil are going to enjoy many opportunities for growth. As for populist policies, there has clearly been a significant change in Venezuela, Bolivia, Ecuador and Argentina. But the big economies — Brazil, Mexico, Colombia, Peru, Chile — have not succumbed to that temptation.

Universia Knowledge at Wharton: Small and midsize Spanish companies have yet to make major moves into foreign markets. What challenges will they face when it is time for them to internationalize? What tools can make it easier for them to move into foreign markets?

Valdemoros: You can’t generalize. Some 2,000 small and mid-size Spanish companies have a stable presence abroad — that is, in terms of production, distribution and/or product development. These companies belong to many different manufacturing and service sectors. Clearly, there should be more of such companies. The important thing is not to give them subsidies but to set in motion horizontal policies in areas such as labor, education and credit.

Universia Knowledge at Wharton: The report dedicates an entire chapter to technologies for communication and information, which was written by César Alierta, chairman of Telefónica. What state are Spain’s IT sector and companies in that sector in? What new communication routes can IT open, and in what ways is IT useful in globalization?

Grandal Bouza: In recent years, Spain’s IT sector has made progress in penetrating markets. Nevertheless, a long road lies ahead when it comes to attaining the levels [of growth experienced] in other countries. For example, although in recent times, e-commerce in Spain has been growing, its penetration rate is still low. In 2007, only 20% of Internet users in Spain purchased goods or services online, compared with 32%, on average, in Europe, and 60% in such advanced countries as the United Kingdom and Germany. On the other hand, the IT sector is continuously opening new ways of communication among users – consumers, companies and public administrators – by emphasizing social networks, which proliferate not only around individuals, but also within professional and political realms.

The efficient and innovative use of this connected world is a key to internationalization. In addition, the new routes increase the productivity of companies, and they provide a way to disseminate information and knowledge, which is essential for the development of countries and companies. Companies that do not commit themselves decisively to internationalization — and to taking advantage of the connected world — face the risk of being excluded from an economy that is increasingly globalized.