Theoretical Analysis of FDI

Foreign Direct Investment or the FDI is an essential and integral part of every open economy. Ability of FDI to develop the country’s economic performance is well documented and recent researches argue that utilising the FDI, both the recipient and host country are benefited. Analysing the trend of FDI inflow historically it has been observed that FDI is primarily directed to the developed economies in higher amount compared to the FDI inflow into the developing nations (Agrawal and Sethi 2017). According to the statistics, till 2000 total world inflow of FDI was as high as 1.3 trillion USD and out of this 80% was gone to the developed nations (Chan 2016). According to the same source, out of total FDI inflow 90% was sourced from the developed nations highlighting the magnitude of dominance of developed nations in the case of FDI. However, recently it has been observed that there is a certain change in the FDI inflow trend. Post Global Financial Crisis, share of the FDI inflow of the developed nation has fallen to 49% and developing nations faced substantial amount of rise in their share of FDI inflow (Desbordes and Wei 2017). This report is meant to analyse the trend of FDI inflow utilising the theories explaining FDI for the Spain as the sample economy. In addition to this, the report will perform cost and benefit analysis of the host and home country to trace the effectiveness of FDI for the respective economies.

FDI is hard to explain and there is no proper definition available.  However, over the time, various theories have been developed by the researches to explain the reason of FDI. Some of the popular definition of FDI is as follows:

Developed by Vernon during 1966, which argued that product has four stages in their life, which are innovation, growth, maturity and decline (Iamsiraroj 2016). Vernon argued that if a product is being innovated by one producer and once that firm start to export it, other firms will start to copy imitates it. In order to keep the market share intact, initial producer need to provide production facilities to the importing countries that initiates the FDI. 

According to this theory, firm-specific advantage leads to divergence from the perfect competition in the product market. It highlights that transnational companies are prone to some level of adjustment costs while investing abroad (Myro 2015). Thus, according to the internationalisation theory, FDI is a firm level strategy rather than financial decision.

Sector-wise FDI Inflow in Spain

One of the modern and most developed FDI theory that explains the FDI to a great extent. Eclectic FDI theory, argues that FDI is sourced from Ownership advantage, which allows exclusive ownership of production that influence the cost of production (Gutiérrez Portilla et al. 2016). Next to this once the Ownership advantage is fulfilled, Local advantage will came to existence. With direct investment in production, it will allow the firm to enjoy monopoly and next to this internationalisation will provide the firm a framework for analysing various ways to exploit the market for sales of goods and services of the firm.

With the ever increasing flow of FDI towards developing nations since last two decades, it can be seen that both the source and the recipient economy has been better off. When it comes to Spain, then it has been seen that the country’s manufacturing industry has faced high growth with the help of the foreign investment. According to the Table 1, it can be seen that through the investment of foreign countries like USA, UK, Italy, France and Germany 360789 jobs has been created during 2003 to 2016 (Executive Direction of Invest in Spain 2018). According to the same source besides this, 1957 deal has been signed between various foreign countries and Spain.  

Country	Total investment in million €	jobs created	number of company deal
USA	61250.6	89015	629
UK	44745.2	23511	186
Italy	41814.2	58318	361
France	40522.2	126768	417
Germany	30245.1	63177	364

Table 1: FDI in Spain by source and its economic value during 2003 to 2016

Source: (Executive Direction of Invest in Spain 2018)

On the other hand, it has been observed that through investment in construction and manufacturing industry of Spain, investing countries has gained high return. Through investment of the outsourcing countries they have gained market access to the world’s one of the fastest growing economy (Boardman et al. 2017). Through investment in Spain, outsourcing countries has imported cars and steel at lower cost and it has helped both the infrastructural and service sector of the countries like Netherland, Germany, UK, USA and others.

According to the research of (Chenayah 2017), it has been found that FDI can effectively enhance the infrastructural development, employment level and growth of an economy. Understanding the importance of FDI, various economies have pursued policy change that can attract higher amount of investment from the host countries. When it comes to the Spain, then it has been observed that since the joined the EEC or the European Economic Community during the year 1986, it started to face increased amount foreign investment. Considering the figure 2, it can be seen that during 1970 to 1982, FDI inflow was less 1% o GDP (Palomera 2015). However, once the economy opened up it faced higher amount of FDI inflow leading to better economic performance. Since 1986 to 1996 there was substantial amount of FDI inflow o support the development of the country (Harrison and Corkill 2016). Post 2000, there was certain rise in FDI inflow that supports the phenomenon under study in this report (Alaez Aller et al. 2015). As one of the key reasons for the rise in percentage share of FDI inflows in GDP is the then shift of FDI strategies of the source countries.

Cost and Benefit Analysis of FDI in Spain

 

Figure 1: FDI net inflows of Spain (% of GDP)

Source: (Data.worldbank.org 2018)

Spain is accounted for the fourteenth largest economy in the world considering its GDP value and most of its goods and services are sourced from the manufacturing sector. It has been observed that since 1986 after opening up the economy government has taken various trade liberalisation policies that aided the economy to have vast amount of capital inflow in various sectors. According to the table 2, manufacturing industries are having largest chunk of the FDI inflow, which is as high as 36.4% out of total investment and the second largest share amounted to 19.3% goes to the energy sector of Spain (Villaverde and Maza 2015). Comparing these figures with the pre 2000 figures it can be seen that FDI share was mere negligible due to the little of foreign investment inflow.

Sector	% of total FDI
Manufacturing industries	36.4
Energy	19.3
Financial and insurance	8.8
Retail and wholesale trade	10.5
Storage and transport	3.7
Construction	2.7
Agriculture	0.2
Other activities	17.7

Table 2: Sector wise FDI share of Spain during 2011

Source: (Villaverde and Maza 2015)

Considering the table 3, it can be seen that share of FDI inflow from the source countries has increased over the period. USA, the largest foreign investor for the Spain has increased its investment amount by more than 40% during 2016 as compared to 2013 figure. On the other hand Germany has enhanced its investment in Spain by five time during 2016 compared to 2013 (Executive Direction of Invest in Spain, 2018). However, when it comes to France, then it can be seen that the country has reduced its investment in Spain.  

Year Country	2013	2014	2015	2016
USA	3476.6	3829	2524.2	5011.8
Netherlands	1973.8	1245.6	2960.8	5993.1
Luxemburg	2010.9	2680.8	3712.4	2478.1
Germany	1359.5	467.7	792.4	7261.3
France	1936	2041.6	2143.5	1886

Table 3: Country wise FDI inflow trend in Spain over 2013 to 2016 (in millions of USD)

Source: (Executive Direction of Invest in Spain, 2018)

Comparing the world FDI inflow with the FDI inflow of Spain it can be seen that the country has aligned with the FDI inflow trend. Until 2000 there was little flow of FDI in Spain and the world FDI flow was also low. Post 2000, there was high rise in FDI as can be seen in the Spain too and the foreign investment inflow was ever increasing since then for both the world and Spain (Barge-Gil et al. 2017).  During 2006 to 2008, there was highest amount of rise in FDI inflow for the Spain aiding the economy to have better growth prospect with higher sustainability index.

 

Figure 2: Trend analysis of FDI data between Spain and world

Source: (Data.worldbank.org 2018)

Trend Analysis of FDI inflow in Spain and World

According to the figure 3, it can be seen that world FDI inflow is steadily rising and same scenario is persistent for the Spain too. If the present trend of FDI inflow continues, then according to the forecast, FDI inflow of the Spain can be increased to 2851 million USD and the Netherland will be the highest contributor of FDI inflow for the chosen country (Real Instituto Elcano 2018).

Conclusion:

FDI acts as one of the major catalyst of the economic development of the respective countries that not only aids the economies to have higher growth; in addition to this it acts as the stimuli to have sustainable growth. According to the analysis, it has been found that over the time there have been various theories to describe the FDI. However, among them Eclectic FDI theory and the Life Cycle Theory is the most ideal that can describe the FDI properly. Coming to the cost and benefit analysis, it has been found that both the source and the recipient country benefited through FDI. When it comes to Spain, then FDI from the countries like USA, Netherlands, UK, Germany and France has aided the economy to have better sustainability and scope to increase expenditure on infrastructural and manufacturing sector development. Trend analysis of the FDI inflow has showcased that economy has faced substantial amount of growth in FDI inflow since. Post 2000, FDI inflow enhanced largely for the developing countries like Spain and it has helped the economy to have better economic performance. According to forecasting, FDI inflow is yet to rise in future and it approves that though historically FDI has been mainly directed to the developed nations, it has increased for the developing nations too over the past 20 years. 

References:

Agrawal, S. and Sethi, T., 2017. DO BILATERAL INVESTMENT TREATIES INCREASE FDI?: EVIDENCE FROM SOUTH ASIA. In Economic and Social Development (Book of Proceedings), 20th International Scientific Conference on Economic and Social (p. 156).

Aláez-Aller, R., Gil-Canaleta, C. and Ullibarri-Arce, M., 2015. FDI in the automotive plants in Spain during the Great Recession. Foreign investment in eastern and southern Europe a er 2008, p.139.

Barge-Gil, A., López, A. and Núñez-Sánchez, R., 2017. Estimation of Foreign MNEs spillovers in Spain.

Boardman, A.E., Greenberg, D.H., Vining, A.R. and Weimer, D.L., 2017. Cost-benefit analysis: concepts and practice. Cambridge University Press.

Chan, S. ed., 2016. Foreign direct investment in a changing global political economy. Springer.

Chenayah, S., 2017. Book Review-World Investment Report 2010: Investing In A Low-Carbon Economy. Institutions and Economies, pp.115-118.

copyright Fundación Real Instituto Elcano, 2. (2018). Inicio. [online] Realinstitutoelcano.org. Available at: https://www.realinstitutoelcano.org/wps/portal/rielcano_en/contenido?WCM_GLOBAL_CONTEXT=/elcano/elcano_in/zonas_in/international+economy/ari19-2014-chislett-spain-foreign-direct-investment-on-the-rise [Accessed 12 Mar. 2018].

Desbordes, R. and Wei, S.J., 2017. The effects of financial development on foreign direct investment. Journal of Development Economics, 127, pp.153-168.

Gutiérrez Portilla, P., Maza Fernández, A.J., Villaverde Castro, J. and Hierro Franco, M., 2016. Foreign direct investment in the Spanish regions: What are the influencing factors?.

Harrison, J. and Corkill, D., 2016. Spain: a modern European economy. Routledge.

Iamsiraroj, S., 2016. The foreign direct investment–economic growth nexus. International Review of Economics & Finance, 42, pp.116-133.

Myro, R., 2015. Foreign direct investment in Spain. SEFO-Spanish Economic and Financial Outlook, 4(1), pp.37-45.

Palomera, J., 2015. The Political Economy of Spain. A brief history.

Villaverde, J. and Maza, A., 2015. The determinants of inward foreign direct investment: Evidence from the European regions. International business review, 24(2), pp.209-223.