BBVA Research considers that boosting the international competitiveness of Spanish companies is crucial to accelerate the exit from the crisis

Top Quote Exports of goods and services, which already account for 33% of GDP, have been one of the best surprises during the crisis. End Quote
  • (1888PressRelease) December 05, 2012 - They are the only component of aggregate demand that has exceeded the pre-crisis level, significantly absorbing the fall of GDP and becoming the real lever for exiting from the crisis, according to BBVA Research's Economic Watch “The internationalization of Spanish companies”. However, the report points out that, even though exports have performed fairly well, the number of exporting companies can still be “improved”.

    The Spanish economy is currently immersed in a complex and intense process of adjustment and changes where the internationalization of its companies is crucial, because as long as this adjustment process continues, domestic demand will be unlikely to fuel economic growth in Spain, and because a high level of negative net foreign debt has accumulated which has at one point exceeded 90% of GDP.

    In this context, Spanish exports, which already performed excellently in relative terms from 1999 to 2007, have significantly absorbed the fall of GDP and become the real lever for exiting from the crisis for many companies. So far, it is the only component of aggregate demand that has comfortably exceeded its pre-crisis value, reaching 334,500 million euros (goods: 228.9; services: 105.6) of aggregate annual added value in the third quarter of 2012.

    According to ICEX, Spain had 37,250 regular exporting companies in 2011, of which 20,579 had exports of more than 50,000 euros a year, i.e. companies with a proven capacity to compete on the international markets, and ready to lead the process of reallocation of factors to the sectors and companies showing the greatest growth potential. However, BBVA Research believes that there are still challenges that need to be tackled. Among them, "to generalize this performance among all other companies and sectors, improve the growth potential of the Spanish economy and tear down the barriers to the reallocation and efficient use of production resources".

    BBVA Research also highlights in its Economic Watch ‘The internationalization of Spanish companies’ that from the year Spain joined the EMU to 2011, the share of Spanish exports of goods and services in global trade fell by only 8.9%, despite the outstanding increase in exports by China, India and many other emerging economies. Meanwhile, the main industrialized economies have seen their export share in international trade drop between 20% and 40% during the same period.

    In general, the evolution of the export share in these countries is scarcely related to that of relative export prices, which suggests that the rest of the determinants of the export share have played a more significant role than the evolution of the competitiveness-price ratio itself. BBVA Research believes that Spain's case is different, given the positive role played by the determinants of the export share unrelated to the price.

    However, this evidence does not mean that the competitiveness-price ratio is not important. If the relative export prices had performed like those of Germany, Spain would have been able to win nearly 20% of share in global trade between 1999 and 2011, which would have meant 6% more GDP.

    This good relative performance of the share of Spanish exports has occurred in parallel to greater geographical (towards emerging and fast-growing markets –EAGLEs–) and production diversification (towards sectors with a greater complexity and capacity to extend the exports to other goods and services, thus benefiting from the accumulated knowledge). In both characteristics, the sector composition of Spanish goods exports clearly stands out above the global average.

    Among the sectors better positioned to export, with higher levels of complexity and connectivity, machinery (33%), other chemicals (11%) and other metal products (8.9%) stand out for their share of Spanish exports.

    However, the BBVA Research report points out that only 12% of Spanish companies exported goods and 9% exported non-tourist services in the 2001-2011 period, according to the Bank of Spain's database. A significant degree of concentration is added to this characteristic: 1% of the companies with the highest exporting volume account for 67% of total exports, and the figure rises to 93% when 10% of the companies are considered.

    BBVA Research believes that the problem is not so much that there are few companies that export (although this figure can also be improved), but that there are too many small companies which are unable to export.
    Key factors in internationalization

    BBVA Research also believes that the factors that determine the internationalization process of Spanish companies can be summarized into two strongly interconnected categories.

    Firstly, the decisions on the factors of production, such as the company size, the investment in physical capital, the quality of the human capital used and expenditure in R&D and in the adoption of foreign technology. Thus, exporting companies are on average eight times bigger than non-exporting companies, use nearly three times more physical capital per worker, make much more intensive use of human and technological capital, and their temporary employment rate is 9.3% compared to 23.3% on average for the economy as a whole.

    All this results in exporting companies recording a level of productivity (real production per employee) two or even three times higher than the productivity of non-exporting companies.

    Secondly, we need to consider the decisions on market and financing strategies, such as the efforts made to diversify production and the innovation on products already marketed, or the search for alternative financing other than the one available through traditional banking channels, including foreign capital participation.

    The report also shows that the likelihood of exporting increases with the company's size, the stock of real capital per worker, the investment in R&D and in the adoption of new technologies, the use of qualified workers, the competition in the main market, and the participation of foreign capital in the company's share capital. In addition, the likelihood of exporting increases if throughout the year the company makes product innovations and diversifies its production to include more than one product.

    Specifically, a 1% increase in the company's size increases the likelihood of exporting by 5%, while a 1% increase in the stock of real capital per employee would increase the likelihood of exporting by 1.8%. Moreover, achieving a product innovation throughout the year increases the likelihood of exporting by two percentage points, while production diversification results in a 1.7 percentage point increase.

    Medium and long-term growth

    Taking into account the previous results, the Economic Watch highlights that the policies aimed at company internationalization should be a central element in a medium and long-term growth strategy with effective growth measures.

    The institutional framework should strive to improve on an ongoing basis the environment in which companies operate: improvements in the markets for factors of production (labor and capital markets, access to financing and to new technologies and production innovations) and improvements in the markets for goods and services.

    As regards the labor market, the recent labor reform has entailed a significant advance by offering companies more flexible and efficient mechanisms for making use of the labor factor. The simplification in the number of employment contracts and the introduction of incentives to hire workers on an indefinite basis, until temporary employment becomes residual, would improve even more the labor market and company productivity.

    As for the capital market, it is necessary to reinforce the mechanisms and entities with whom to share the credit risks, promote mutual guarantee institutions, reduce the consumption of capital that these credits involve for banking institutions, encourage other forms to complement bank financing, and improve the implementation and scope of venture capital firms.

    Reducing the administrative burden imposed on companies by the various public administrations and achieving an efficient and flexible regulation and administration is also fundamental to promote competition among companies in a single market. The improvement of the economic and regulatory environment is also fundamental in the operation of the markets for the production factors and products.

    According to the ranking published by Doing Business, Spain ranked 44 in 2012, but was number 55 in foreign trade facilities. Spain should set the strategic goal of changing all the regulations necessary to become, for example, one of the 10 top global economies in each of these categories within a limited period of time.

    Another key aspect is to actively promote exports by making the most of economies of scale in improving economic diplomacy and foreign intelligence through trade offices and greater coordination and closer relationships with Spanish companies abroad.

    Finally, as regards technological capital, it is necessary to make the most of economies of scale in R&D processes. In this sense, it is crucial to make it easier for smaller companies to contract technology services form large institutes specializing in providing the transfer of knowledge, technology and innovations.

    To sump up, BBVA Research believes that “the improvement of the economic and regulatory environment is fundamental, not only to tear down barriers and obstacles to business activity, but also to improve the international competitiveness of Spanish companies and accelerate the exit from the crisis”.

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    BBVA is a customer-centric global financial services group founded in 1857. The Group has a solid position in Spain, it is the largest financial institution in Mexico and it has leading franchises in South America and the Sunbelt Region of the United States. Its diversified business is biased to high-growth markets and it relies on technology as a key sustainable competitive advantage. BBVA ranks among the leading Euro zone banks in terms of ROE and efficiency. Corporate responsibility is at the core of its business model. BBVA fosters financial education and inclusion, and supports scientific research and culture. It operates with the highest integrity, a long-term vision and applies the best practices. The Group is present in the main sustainability indexes.

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