What is a foreign company?
October 2014.- In Catalonia, there are 5,700 foreign companies, creating an estimated 23 % of industrial employment and 43% of exports. When we talk of foreign companies, we refer to companies with over 50% of their capital in foreign hands. Sometimes we talk of companies with foreign capital participation: then we refer to companies with a minimum of 10% of foreign investment and in Catalonia we can find 7,000 of these. (Invest in Catalonia from Informa, SABI and ORBIS).
On a state level there are 13,917 foreign companies (with over 50% of foreign capital) and 15,072 companies with a minimum of 10% of foreign capital (Dun & Bradstreet).
All these foreign companies are fruit of foreign investment and, in turn, generate new foreign investment. In Catalonia, it is estimated that half of foreign investment comes from foreign companies already located in the region.
Is it easy to calculate foreign investment?
The circumstances surrounding foreign investment are many and its accounting is complex. How can one register, for instance, an investment made in 2012-2013 at a warehouse in Catalonia by a company 65% owned by foreign capital based in Madrid that is not published in the press? What about a small investment that is published? Who accounted for it and when? How about the purchase of a Spanish company by a foreign company? And operations of Spanish holding companies that have no productive effects? And what about investments or reinvestments depending on how are they being financed?
According to data from the foreign investment record from the Ministry for the Economy and Competitiveness, in the first two quarters of 2014, foreign investment in Catalonia fell 59%. What does this figure take into account?
According to the Ministry registered figures (DataInvex database), in 2013 the investment flow into Catalonia - 3,527 MEUR (productive investment, not holding companies) - grew 32%, and in the first half of 2014 (523 MEUR) it saw a decrease of 59% over the first half of the previous year. On a Spanish level, foreign investment grew 9% (15,994 MEUR) in 2013, and decreased 33% (4,431 MEUR) in the first half of 2014.
Growth of productive foreign investment (datainvex)
|2014 (first half)
We can then see that these figures – above all the quarterly and half yearly – are erratic and fluctuating, with strong increases and decreases. This is due to:
- Registration is done afterwards, once the investment already made. Foreign investment is liberalized (Royal Decree 664/1999 of 23 April) but all direct foreign investment is subject to a notification after the investment has been made for administrative, statistical and financial purposes. Statistically it is calculated on the period in which it became effective, but this involves delays and updates. In the fourth quarter of each year higher figures are usually registered.
- The “headquarters” influence comes into play. There are productive investments that are assigned to each Autonomous Community; others go to the "entire territory"; but unless there is no further information from the company, the investments are allocated to where the company has its headquarters. The Madrid region benefits greatly from this effect.
- We find cases of a few large operations which can explain fluctuating figures depending on the year. An example is the 2007 purchase of Endesa by Enel; another is the purchase of Altadis in 2008 by Imperial Tobacco.
- Regardless of the amount of projects and apart from the holding companies, in some cases, foreign investment does not generate a real increase in capital or productive capacity of the economy. It may be the case of an acquisition, for example.
These Ministry registered figures reflect operations of non residents that represent:
- The establishment or expansion of branches of foreign companies.
- The participation of over 10% in listed companies
- Participation in unlisted companies.
- Joint ventures or acquisitions operations.
- Other forms of investment (in foundations, cooperatives, financial interest groups) where the invested capital exceeds 3 million euros.
- Investment companies holding foreign securities (holding companies) to fiscally optimize a business group (these are usually excluded from analysis because they do not generate productive resources).
- The reinvestment of subsidiaries, in the event that capital comes from abroad and not from the subsidiary itself.
They do not take into account:
- Investments financed with loans from the foreign parent company to the subsidiary.
- Foreign investments in real estate.
- Reinvestment of profits if not capitalized.
- Restructuring within a group when the parent company is not a resident.
- Transfer of assets or shares between non-residents.
The Catalan Statistics Institute uses this source to publish data for Catalonia.
Another source of foreign investment data is the Balance of Payments published by the Bank of Spain. The data does not match with the Ministry registered figures. Where is the difference?
Unlike the registry, the Balance of Payments only covers the net value of the transactions. The differences regarding net investments from the registry are because, over and above covering what is in the registry, the Balance of Payments includes also:
- Investments financed with loans from the foreign parent company to the subsidiary
- Foreign investments in real estate.
- Reinversion of profits
To obtain an order of magnitude, net investment of the 2013 registry in Spain represented 53.2% of the net investment of the Balance of Payments. The reinvestment of profits is a greater magnitude when there are more foreign companies in a specific region.
The figures of the Balance of Payments are used by the UNCTAD in its reports with international aggregations and comparisons.
According to the Financial Times, a private database, Catalonia continues to be the European leader in attracting international investment projects in the first half of 2014.
Beyond the public sources, we can find private databases such as the European Investment Monitor (Ernst&Young) and the fDi Markets (Financial Times).
fDi Markets is a service from the Financial Times, the most comprehensive online database of crossborder Greenfield investments available, covering all countries and sectors worldwide. It includes:
- New physical projects or expansions of existing investments that creates new jobs and capital investment.
- Joint ventures only where they lead to a new physical operation.
It doesn’t include mergers & acquisitions (M&A) and other equity investments are not tracked. There is no minimum size for a project to be included.
Data is collected real time, includes projects, investment amount and jobs created meaning that it allows for more evaluations regarding the impact of the in vestments on the economy and goes through a rigorous quality control process. A team of in-house analysts daily search the Financial Times newswires and internal information sources, thousands of media sources, project data received from over 2,000 industry organisations and investment agencies, and data purchased from market research and publication companies.
According to fDi Markets, Catalonia attracted 92 investment projects in 2013 and was the leading continental European region in terms of international investment attraction (3,003 MEURO) and job creation (7,437), only behind South East Britain and Ireland, and ahead of West Midlands, Ile-de-France, Scotland and West Netherlands.
Between January to July 2014 and according to fDi Markets, Catalonia attracted 52 investment projects with an associated investment of 1,172 MEUROS (1,866 in January to July in 2013) and the direct creation of 3,756 jobs (5,450 in the first six months of 2013). On a European level Catalonia continued in 2014 as the first continental region of Europe in terms of number of projects attracted and in job creation.
Foreign Investment in Western Europe (January-July 2014). fDi Markets
|South East (UK)||252||6,996||17,543|
European Attractiveness Survey
The European Investment Monitor 2014 (Ernst&Young) is another investment database according to which Catalonia attracted 85 investment projects with an associated investment of 711 MEUROS in 2013.
This same source, via a survey amongst 808 international decision-makers of all origins, creates the European Attractiveness Survey that in 2014 signals Barcelona as the sixth city most attractive in Europe for investing. It defines the attractiveness of a location as a combination of image, investor confidence and the perception of a country or area’s ability to provide the most competitive benefits for FDI.
Invest in Catalonia works with its own databases of management and materialisation of foreign investment projects.
With the data collected from press and companies, which include acquisitions, expansions and reinvestments, greenfields and new investments, in the first six months of 2014 Invest in Catalonia detected the establishment of 106 foreign investment projects in Catalonia creating some 6,600 jobs (Invest in Catalonia investment database).
62.3% of these projects are expansions and new investments, in other words, investments in the same product or investments in new products by companies already established in Catalonia. 50% of these projects belong to the ICT, chemical, automotive and fashion and textile sector. 54% are being performed by Japanese, British and North American firms. The majority are located in the Barcelona area (49%), the Vallès area, Tarragona and Baix Llobregat.
If we only look at projects managed by Invest in Catalonia, we can see that in the first 9 months of 2014, 42 projects have come into existence (7.7% more that the same period in the previous year), with an investment of 194 MEUROS (34.6% more than the same period in 2013). Amongst those published in the press, we can find projects by companies such as Seat, Basf, Sap, Dow Chemical, Novartis, Booking and HP. At present, Invest in Catalonia has a portfolio of 228 open projects.
To sum up
Foreign investment data varies. Diverse sources of information record different figures. Some sources report investments once they are performed, and others when announced; some show distortions caused by the “headquarters” effect and don’t always reflect the actual location where the investment is materialized; others do not include mergers and acquisitions or reinvestments; others are based on first hand information derived from daily management. There are sources that use registry data; others use data from the press and the companies themselves; and others, data from surveys.
In other words, we don’t always mean the same thing when we talk about foreign investment and it is difficult to perform more general regressions, interpretations and extrapolations based on some data, or from one unique source or from one moment in time. We can detect trends if we look at a sufficiently wide time scale, but we have to be aware of what we are measuring when the time comes to make conclusions.
Finally, beyond global statistics and figures, qualitative aspects should also be taken into account. Different types of foreign investment have different effects on a region’s economy. Thus, considering that the ability to attract new economic activities by international companies is a key factor for modern economies, foreign investment that expands the productive capacity of a plant and create jobs and wealth has a much higher qualitative value than that arising out of, for example, the purchase of shares in a company or acquiring a company already operating in the region.
And this is what raw data cannot always explain.