Complex global and national context
In 2018, and despite the general improvement and renewed global economic dynamism, foreign investment (FDI) flows to Europe were reduced by half, to $172 billion. This was an anomalous year due to the repatriation of the profits accumulated by American multinationals after the fiscal reform approved by the Donald Trump Administration, which had a great impact on the FDI flows to some countries that accommodate the financial functions of these companies, like Ireland or Switzerland.
The global figures for 2018 clearly show the effect of the repatriations carried out by US companies, although the evolution of both greenfield investment projects (+ 41% in value) and cross-border mergers and acquisitions (+ 18%) is positive.
In this context, the current situation presents numerous challenges for Southern Europe and its cities, which have to decide what their strategic commitment is and define clear strategies that allow them to position themselves in the new scenario and attract those investments with the greatest local value.
Political and economic risks and political uncertainty add to the challenges; as well as the decrease in the rates of return on FDI, which could be a key factor in its slowdown, and the increasing attention and supervision of investment activities by the authorities, both national and supranational.
Although the outlook for 2019 is positive in terms of investment flows according to analysts, the underlying trends show structural weaknesses due to political factors, commercial tensions and the return of protectionist tendencies. The new investment policies combine facilitation initiatives in less developed countries with others of a defensive and protectionist nature with respect to investment in strategic sectors of the most advanced economies.
At the same time, changes are taking place in international production, which is increasingly driven by intangible assets, licenses and trade in services that grow faster than FDI and generate increasingly lighter forms of investment in tangible assets.
In Europe, the greatest current uncertainty is centered on Brexit, and although at the moment it seems to be having a limited effect on FDI, at least until the terms and dates of the exit are clear, the perspectives and the uncertainty it generates are not good allies for investment decisions.
A sustained commitment; a closer look at the investment stock
The volatility of intra-company financial flows and the variability introduced by large-scale mergers and acquisitions when analyzing short periods of time make it worthwhile to analyze structural indicators such as those linked to the investment stock, which show more lasting confidence of investors in the local economy and in their companies, through data recently published by UNCTAD (corresponding to 2018) and by the Registry of Investments in Spain (corresponding to 2017).
The world stock of FDI has registered its first decline in ten years. Although this is still a significant milestone, the magnitude of the decline is moderate (-1.1%), keeping the stock in any case very close to historical highs, above $ 32 trillion.
In this context, Spain’s good performance in recent years, both in greenfield projects and cross-border mergers and acquisitions, which marked an historic peak in 2018, means that the stock received by the country experiences its third consecutive year of growth. Thus, according to UNCTAD, $659 billion (+ 2.1%) of accumulated investment was reached, representing 46.2% of GDP for the year. Out of the five big European countries, this figure represents the second highest ratio after the United Kingdom.
Madrid’s international investment position
As is the case with flows, Madrid concentrates a significant part of this investment stock (68.1% in the last year), which is already well above the pre-crisis levels. The ability of the city to attract large companies and their headquarters has a significant impact here, since they account for 91% of the stock in the country.
Madrid also has a significant weight in terms of the employment associated with this investment: in the last year available, Madrid registered 405,000 direct jobs linked to foreign investments, 29.1% of the total in Spain. Despite the year-on-year decline registered for the last year for which data is available, employment is also above the maximum reached before the crisis. This figure represents 14.2% of the employed population in the region.
Regarding the origin of foreign employment in Madrid, the first 10 countries account for more than 86%. Particularly noteworthy is France, with 23% of foreign employment in the region (93,805 jobs), followed by the United States (59,288 jobs, 14.6%), Germany (46,209, 11.4%) and the United Kingdom (42,869). 10.6%). Particularly striking is the weight of Madrid at the national regarding employment from regions such as the Middle East (56% of employment in the Arab Emirates or 81% from Qatar) and from some Latin American countries (Chile, Panama, Argentina or Costa Rica, although in absolute values the latter present discrete figures). Among the main countries, the greatest increases in employment levels since 2013 in absolute values have been registered in France, the United States and the Netherlands, while in relative terms the increases in employment from Denmark, Mexico, China or Qatar are interesting.
From a sectoral perspective, 81% of employment in Madrid is concentrated in the Services sector (35% of the national total), compared to 6% in Industry (15.5% of the national total) and 3.4% in Construction (29.5% of the total in Spain). The weight of the primary sector is, as expected, marginal. Particularly noteworthy in this regard are Wholesale and Retail Trade (97,019 jobs), Administrative and support service activities (72,021 jobs), Information and Communications (54,648 jobs, more than half at national level, with a very relevant weight in Consulting, Programming and related activities) and Manufacturing (53,489 jobs, in which Manufacture of other transport equipment and Manufacture of pharmaceutical products are very prominent). Madrid stands out at a national level in Financial and Insurance activities, Transport and Storage and Professional, Scientific and Technical activities, exceeding 40% in all of them.
This greater weight in services and lower in industry is also reflected in other figures, such as those offered by tangible fixed assets, which, by definition, do not take into account financial and intangible assets, and, therefore, provide greater relevance to regions with a greater industrial base. In the last year for which data is available, Madrid reached 19,451 million, 17.1% of the national total.
The investment situation in Madrid: Evolution of flows
As analyzed in previous editions of this blog, foreign investment series tend to be very volatile, so the quarterly information should be taken with caution when it comes to assessing the situation and understanding trends. In addition, the figures are affected by a strong reporting lag, so it is usually convenient to wait until the end of the year to evaluate the final quarterly figures (the figures currently available for the first quarter of 2019 will undoubtedly suffer modifications in future updates).
In any case, the latest data offered by the Registry for the first quarter of 2019 show how Madrid, with 3,422 million euros received, has concentrated 75% of the investment in Spain. In absolute terms, although these figures are lower than those of the first quarter of 2018 (2018 recorded the historical record of flows received in Madrid), the figure is in line with the quarterly average recorded since 2009, and is 15% higher than the average of the first quarters since 2013. The United States has been the main investor in Madrid (1,365 million), followed by the United Kingdom (809 million), Canada (396), Mexico (167) and France (156) .
If you want to know more about foreign investment in Madrid, we recommend the following articles and case studies: