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Economic pain and some room for hope in the post-COVID-19 FDI scenario: what Madrid will not lose sight of

We are still coming to terms with impact the Covid-19 crisis is going to have on world economies and on international trade and investment flows. From a microeconomic perspective, the pandemic will also have an impact on business strategies and bring about changes in the preferences and incomes of citizens on a global scale.

With almost all governments taking drastic measures to contain the spread of the virus, different organizations such as the OECD, the European Union, the IMF or UNCTAD have already predicted that the economic impact will be very significant.

Regarding trade and investment flows, on March 23, 2020, UNCTAD estimated that direct investment flows could fall between 30% and 40% between 2020 and 2021, depending on the duration of the pandemic and consequently, on its impact on growth, as well as on trade flows and global supply chains.

Several changes in the dynamics of international investment seem possible. On the one hand, there will be an increase in FDI in the future, but, predictably, with flows of a more regional nature, into new sectors and technologies. Smaller projects will gain prominence, which will require the adaptation of the investment promotion and facilitation ecohsystem.

In addition, there is a new regulatory framework in place that is much more restrictive for investment, not only in Spain and Europe, but in all developed countries. In the European case, screening tools or prior controls of investments have spread to all countries in a large number of sectors and technologies. These measures try to protect the European industry from opportunistic investors and are mainly aimed at investors and state or corporate controlled funds from Asia or, where appropriate, from America.

In this context, the suspension of the Foreign Investment Liberalization regime was approved in Spain at the end of March, within the framework of Decree-Law 8/2020 and 11/2020. The Decree and regulations that will regulate foreign investment from now on are being processed urgently. The most important regulatory amendments are the following:

⇒   Foreign investment is defined as one in which the investor comes from countries outside the European Union and the European Free Trade Association and takes a stake equal to or greater than 10 percent of the share capital of a Spanish company, or when as a result of the corporate operation, legal or business act, effective participation in the management or control of said company ensues.

⇒   Critical infrastructures and technologies, provision of essential supplies, sensitive information and the media, and, in general, all sectors that affect public order and public health, are considered to be those indicated in EU  Regulation

⇒   A series of assumptions regarding the characteristics of the investing party, fundamentally, if it is controlled by the government of third countries; if the foreign investor holds a stake or has invested in sectors that affect security, public order or public health in another member state or if he has an administrative or judicial proceeding underway in another member state.

⇒   The Government reserves the right to suspend the liberalization regime in sectors other than those mentioned above.

⇒   Investment operations must obtain prior authorization, in accordance with article 6 of Law 19/2003, which states that prior authorization will be granted by the competent bodies and through the procedures provided by the regulation.

⇒   A simplified and transitory regime is established for operations that were already in progress when the new regime came into force and for operations between 1 and 5 million euros. Operations of less than 1 million euros will not need authorization. The requests will be addressed to the General Directorate of International Trade and Investments, which will resolve them after a review from the Foreign Investment Board.

⇒   The instruction of sanctioning procedures will correspond to the Directorate of Commerce and Investments and, where appropriate, to the Secretary of State for Commerce.

 

Regulatory change, both in Spain and in the surrounding countries, looks to be permanent, at least in the medium term. The impact that the new regulation will have on foreign investment in Spain remains to be seen, both from the point of view of the attractiveness of Spain as an investment destination and the decisions of multinational companies, and from the point of view of the contribution of foreign investment to national accounts. At MIA we are convinced that non-regulatory facilitation and investment promotion mechanisms are now more necessary than ever and that our role, as a counterweight to the effects of screening measures, is more  important than ever.

We understand that at this point our task is crucial, for the following reasons:

⇒   The crisis is expected to be long, especially in certain sectors.

⇒   We need to understand what is happening and assimilate that the post crisis scenario will change profoundly and is very uncertain.

⇒   We cannot limit ourselves to trying to save face this fiscal year. Our challenge must be to maintain Madrid as an economic space of reference in the new post-COVID-19 scenario and for this we will have to begin by defining what city we want to be and what city we want to show investors.

⇒   It is time to rethink our priorities, strategies and go the extra mile.

 

We face the future confident in the potential of our city and with the hope that the reopening of the economies triggers a new virtuous cycle of capital flowing internationally, in search of opportunities. Not surprisingly, we are convinced that in this new scenario, prosperity will continue to be linked to the opening of economic borders.

We will have to be prepared for when that moment comes, to prove ourselves once again as an attractive destination for productive investment. Madrid will continue to be an open and welcoming city, both for its citizens and for investors. At MIA, innovation will be paramount when helping investors who bet on Madrid.