Overseas forays soothe pain in Spain for large firms

24th October 2010, Comments 0 comments

Spain is struggling to emerge from its worst recession in generations but its largest firms have continued to thrive thanks to the billions of dollars they have invested abroad over the past two decades.

"The country's main multinationals are going from strength to strength. The acquisitions made abroad are significantly reducing the reliance on a domestic market that is in the doldrums," according to a report by the Elcano Royal Institute, Madrid-based think-tank, published last month.

"But for these investments some of these companies would barely survive the downturn in their home market."

Overseas operations accounted for just over half, 53.3 percent, of total revenues during the first half of the year for the 33 Spanish companies in the benchmark Ibex-35 stock exchange index that had announced their results for the period when the report was released.

While overall domestic revenues for the firms were down 0.88 percent compared to the first half of 2009, those from abroad jumped 10.5 percent.

Spanish firms began aggressively expanding abroad after the country joined the European Economic Community, the precursor to the European Union, in 1986 as they sought to gain size to counter the greater threat they faced of being bought by a European peer.

Spain's entry into the eurozone in 1998 helped fuel the foreign shopping spree because it allowed Spanish firms to raise funds for acquisitions at far lower rates than had been possible before.

The country's outward foreign direct investment surged from an average of 2.3 billion dollars per year in 1985-1995 to a peak of 137 billion dollars in 2007, according to the United Nations Trade and Development Agency UNCTAD.

Spain now has ten firms, including energy giant Repsol YPF, Santander bank and former state telecoms monopoly Telefonica, in the Fortune Global 500 list of the world's biggest companies by revenue. A decade ago it had none.

"Spain, along with South Korea and Taiwan, has produced the largest number of truly global multinationals among the countries that in the 1960s had not yet developed a solid industrial base," the Elcano Royal Institute report said.

Spanish firms focused initially on Latin America, drawn by Spain's linguistic and cultural ties to the region and the privatisation there that had opened up sectors of the economy that had been previously closed to foreigners.

After gaining size in the region they turned their sights on Europe, especially Britain, as well as the United States, and more recently Asia.

Spanish firms' forays into Latin America were initially criticized by the international financial media as risky but they have paid off, said Mauro Guillen, a management professor at the University of Pennsylvania who wrote a book on the rise of Spanish multinationals.

"Without a major presence in Latin America, it would have been impossible for them to compete in Europe. And nowadays they are obtaining huge profits in emerging economies while in Europe their business has stagnated," he told AFP.

The International Monetary Fund predicts Latin America, where Telefonica and Spanish banks like Santander and BBVA are market leaders, will expand by 5.7 percent this year and by 4.0 percent next year.

By contrast it expects Spain, which entered into recession during the second half of 2008 following the collapse of a property bubble that had fueled growth for over a decade, to shrink by 0.3 percent this year and grow by just 0.7 percent in 2011.

Santander predicts Latin America will account for 45 percent of its profits by the end of the year, up from 36 percent last year.

"Latin America is the fishing ground of growth for the group," the head of Santander's Latin American operations, Francisco Luzon said in an interview published in July in daily newspaper El Pais.

© 2010 AFP

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