Tuesday, December 19, 2017 – In order to better understand the impact of Foreign Direct Investment (FDI) on developing countries and economies, COFIDES and ESADE have sponsored the study ´Direct investment of Spanish companies abroad. Effects on destination and origin: five case studies in developing countries and economies´ to be carried out. This was done under the academic direction of Xavier Mendoza, a professor at ESADE, and with the support ofthe General Council of Spanish Economists.
This is one of the first studies in Spain to use the Sustainable Development Goals (SDG) as a frame of reference in order to evaluate the contribution that the companies make to development. Another novel aspect of the report is that it explores the organisational mechanisms and context factors that generate the greatest positive impacts, both for the recipient country of the investments and for the country of origin of the investor. To this end, a sample of specific investment projects of Spanish companies from different business sectors that have been funded by COFIDES were analysed along with all the theoretical and conceptual development.
Marisa Poncela,Secretary of State for Commerce, participated in the presentation and she stressed that this study had not been limited to analysing the direct and indirect effects of the companies’ investment on the recipient countries. It had also taken into account the effects on the competitiveness of the companies that make the investments and, at the same time, on the economy of the country of origin. In addition, she highlighted that this is a very satisfactory example of collaboration between the public and private sectors, between ESADE, COFIDES and the General Council of Economists. Also involved were Salvador Marín, president of COFIDES; Valentín Pich, president of the General Council of Spanish Economists; Enrique Verdeguer, director of ESADE Madrid; and Xavier Mendoza, professor at ESADE.
The SDGs as a frame of reference
The international community has recognised that the Official Development Assistance (ODA) is clearly insufficient when it comes to funding the targets associated with the SDGs. The private sector is therefore called upon to play a special role in achieving them. Consider the fact that in 2015, the flows of FDI directed at developing economies were six times greater than the entire ODA worldwide.
The challenge, then, is for FDI flows to developing countries and economies, or at least a significant portion of them, to involve contribution to the SDGs as an integral part of the business projects that give rise to them. At the same time, new forms of funding for development are emerging as a result of the cooperation between public and private actors, with particular mention of the role of development finance institutions, such as COFIDES in Spain, when it comes to catalysing business investment projects that generate positive effects on the recipient and origin economies.
From the perspective of the recipient country, equally or more important than the quantity of foreign investment received is its quality. As highlighted in the study, the quality of the FDI in terms of sustainable development is related to the long-term willingness of the investing company to stay in the country of destination; their interest in establishing productive links or productive chains with the local economy, promoting the transfer and dissemination of technological capabilities and good management practices; and the carrying out of operations using criteria of economic, social and environmental sustainability. This is why it is important to promote the adoption by Spanish international companies of responsible investment approaches in all cases. To this end, the SDGs are a veritable "compass" at the service of the company directors when it comes to creating "shared value" which benefits both the company and society.
Professor Mendoza showed that "as we have seen in the case studies, both the risk management and the opportunities associated with the integration of the SDGs into the strategic approach of the subsidiary, have a high component of specificity and are greatly influenced by the business sector of the company and by its business model". For this reason, "it is crucial that the company integrates the responsibilities that they have decided to take on with relation to the SDGs in the governance and in the processes of the business itself, translating them into specific objectives for every role", concluded Xavier Mendoza.
Impact on the country of origin, Spain
The FDI projects studied have a series of positive effects on the country of origin, Spain. These include the impact on the balance of payments through the repatriation of dividends and the payment of royalties, or when the foreign subsidiary creates demand for capital goods, intermediaries or complementary products that are exported from the country of origin. It also has a positive effect on employment as a consequence of the drag effect on exports and the increase of skilled employment in the parent company as a consequence of the increase in the size of the company and of the needs for coordination and monitoring. There has also been an "inverse transfer" of technology in some of the cases analysed, since it is increasingly common for FDI recipients to contribute knowledge to the investors as well. Finally, the projection of a positive image of Spain as the investor’s country of origin is another advantage of our international companies adopting responsible investment approaches.
The relationship between FDI and sustainable development: a conceptual model of synthesis
In this model of synthesis, it is highlighted that the effects on the country’s development are generated in the phase of the implementation of the FDI project on the part of the company´s subsidiary in the country and that these effects are largely a result of the organisational configuration of the subsidiary and of the role assigned to it within the multinational company. It is also highlighted that the impact of the subsidiary on the sustainable development of the country is amplified or reduced depending on the Corporate Social Responsibility (CSR) policies applied and the intensity and quality of the interactions that the subsidiary has with the various interest groups, with local businesses and the government in particular. Finally, the importance of the timeframe is emphasised, since a large proportion of the indirect effects related to knowledge spillovers require time in order to materialise, which in turn presupposes the continued presence of the investor, at least in the medium term.
The president of COFIDES, Salvador Marín, pointed out that "this study backs up the idea that companies that make direct foreign investment generate various positive effects both on the country of destination and the country of origin: creation of employment in both directions, image and drag effect, among others. In other words, growing internationally is a good idea and a policy which should receive support from various sources. If we add to this that, in addition to growing abroad, with its innovation, transfer of technology and knowledge, companies also contribute to achieving the SDGs, we can be pleased to participate in procuring responsible investments. This is the path currently being taken by various development finance institutions that are COFIDES’ counterparts in the international sphere, linking internationalisation with development through support to the private sector. Moreover, it is actually something that COFIDES has been carrying out and heading for 30 years. This study therefore confirms to us that we should continue in this manner".
Meanwhile, the president of the General Council of Spanish Economists, Valentín Pich, stressed that "it is essential that we raise awareness among companies with regard to the importance of internationalisation, on the one hand and, on the other, of the need to increase their size in order to be able to compete abroad". In this regard, the president of the General Council pointed out that "in order to encourage this business growth, which undoubtedly improves the chances of success of the export work, special attention must be paid by the government to the possible negative effects of tax, labour and trade regulations as a whole. These can translate in practice into increased taxation for companies that exceed a certain volume of workers or turnover, which could act as a disincentive with regard to this growth". Pich believes that "a change in the culture of our business sector - which is 95% micro-SMEs - that favours the creation of larger companies in order to compete in international markets” is necessary.
The international company, a key player for development
There is a broad academic consensus that although international companies, through the FDI, can produce substantial benefits, their most significant contribution to the development of a country stems from the transfer and dissemination of their technological capabilities to the local production network. In this regard, the FDI has today become the main channel of technology transfer for the majority of developing countries and economies, in which it contributes to increasing the added value of production and to increasing the training of its human capital.
These processes of technology transfer can be developed through two-way channels. First of all, it is achieved through direct investment and the transfer of technology and capabilities from the parent company to the subsidiary, including the implementation of the business model and corporate management practices, with the adjustments required by the local context. Second, knowledge spillovers into the local productive network occur as a result of certain decisions and actions of the company, e.g. when the company shares ownership of the subsidiary with a local partner, supports local suppliers so that they comply with international quality standards, supplying the local market with technologically more advanced products or well developed in partnership with some of its local clients, or locating R & D operations in the country and collaborating with universities and local research centres.
Moreover, adopting responsible investment approaches has also provided tangible benefits for companies. This is because they have contributed, on the one hand, to facilitating the adaptation of the subsidiary to the country and making the return on investments more sustainable and, on the other hand, to the promoter companies being differentiated competitively and developing new organisational capacities that have been able to be replicated in similar countries, thereby enhancing their international growth.