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The competitiveness of Spanish industry.


The Spanish economy has undergone a transformation in the last decade, in the course of which it has emerged as a significant industrial power. This process has been associated, in part with EC membership since 1986, a result of which has been a reorientation of trade away from traditional trading partners, such as Latin America and towards the EC. In 1991, 67.2 per cent of Spanish exports of manufactures went to other EC countries, compared with 51.2 per cent in 1980. Spain has, too, been a favoured destination for foreign direct investment in recent years, facilitating the development of new industries.

Spain, however, faces a number of challenges in the next few years. First, it has to contend with economic and monetary union (EMU). This will entail not only monetary discipline to ensure that the Maastricht convergence criteria are met, but also continuing effort on structural policies to sustain competitiveness. Second, the persistence of a rate of unemployment which has been the highest in the EC for several years, coupled with the social policy aim of encouraging a higher rate of female participation in the labour force means that employment creation will be a priority. Third, the need has been identified for Spanish industry to internationalise in order to underpin the economy's performance.

A fourth challenge is to ensure a more balanced regional pattern of development. Much of the growth in the late-1980s was in the relatively more prosperous Madrid and Catalonia regions, as well as in the autonomous region of Valencia, all of which benefited disproportionately from the inward investment boom. In contrast, some of the 'rustbelt' areas in the North have been adversely affected by the decline of traditional industries such as shipbuilding and steel-making, while the less-developed regions in the South and West continue to lag behind in their industrial development. For political as well as economic reasons, redressing the regional balance is vital.

In meeting these aims, Spanish industry has a pivotal role to play both in supplying domestic demand and in securing foreign earnings. Before 1975 and the end of the Franco regime, Spain had successfully industrialised its economy, largely by concentrating on consumer goods manufactures and with quite significant protection. In the wake of the 1973/4 oil crisis, industrial growth faltered, as can be seen from Chart 1, with the result that manufacturing production in 1984 was no higher than it had been a decade earlier. Renewed growth in output only occurred from 1984 onwards, considerably helped by a substantial labour cost advantage, but with different industries, notably motor vehicles, leading the way. However, as the OECD (1992: p. 78) notes, 'Six years of rapidly rising wages, coupled with the appreciation of the peseta, have considerably reduced the wide labour cost margin that Spain enjoyed in the past'.

The key question for the Spanish economy today is whether the downturn in production that has occurred in the last two years is merely a cyclical pause, or whether Spanish manufacturing can again adjust to new competitive challenges which imply the need for a further quantum leap. Although the devaluations of the last year have helped to restore price competitiveness, Spanish industry still needs to make significant changes to modernise and to compete effectively in world markets.

This note assesses the competitive position of Spanish industry in the light of the challenges of the mid-1990s and considers what this implies for policy in the years to come.

Spanish macroeconomic performance in the last decade

As Chart 2 shows, Spanish economic growth has exceeded the EC average for much of the last 30 years. The exception was the period from 1976-81, when the economy experienced widespread problems, although from 1985 onwards, the momentum of growth was restored. In the early phases of this renewed growth, consumers' expenditure led the way, but subsequently the 'virtuous' investment and export sectors have contributed more.

The effects of the late-1970s crisis in the economy are seen graphically in the rise in unemployment which rose from negligible levels in the early-1970s to reach a peak of nearly 22 per cent by 1985. Indeed, despite the growth since then, it remains amongst the highest in Europe, having climbed from a low of 16 per cent back to over 21 per cent. Although demography and social policy have manifestly played a part in the persistence of unemployment, with an increase in the labour force of nearly 10 per cent between 1984 and 1990, the overall participation rate, at 49.8 per cent is low by EC standards (see Anderton (1993) in this issue of the Review for a fuller discussion of employment issues in Spain).

The challenge of EC membership

Spain's accession to the EC in 1986 marked a significant turning point in the economy, since it meant both a reorientation of trade and an injection of competition into what had been a largely protected market. The question now is whether Spain can sustain the advances it has made since 1986, continuing to catch-up in real terms (as Italy did in the 1960s), or whether the more competitive environment in the run up to EMU will create difficulties.

On the whole, analyses of the prospects for Spain's manufacturers are not particularly encouraging. Thus, Martin's contribution to Buigues et al (1990) shows that in Spain the bulk of the sectors sensitive to the single market are areas of weakness rather than strength:

'In conclusion, from the overall analysis carried out...on the international competitive position of Spanish firms in the most affected industries...a first impression of vulnerability..emerges. |T~his impression is worse if one takes into account that all trade performance indicators...offer an upwardly biased image of Spanish industry's competitiveness, given that they incorporate the effects of its relatively high level of both tariff and non-tariff barriers.'(Martin, 1990, pp 207, 209.)

The Spanish position is complicated because the economy is still in transition from accession to the EC in the first place--tariffs were only due for complete removal by the end of 1992. Added to the perception of relative vulnerability is Martin's finding that Spain's areas of strength tend to be in the slower growing product areas such as clothing and textiles and its areas of weakness in the fast growing sectors like chemicals and electrical and electronic machinery and consumer products. Indeed the weak industries tend to be concentrated in areas of high demand growth, high capital/labour ratios and high R&D, where the scope for economies of scale is relatively good and the level of public purchasing relatively high. The strong industries tend to lie at precisely the opposite end of the spectrum according to these characteristics. However, Spain's previous ability to restructure TABULAR DATA OMITTED in a manner not dissimilar to Japan suggests that looking only at current patterns may give a misleading picture of its potential in the EC.

Ambitions for the later 1990s

The aims of Spanish policy have been articulated most recently in the ambitious 'Convergence Programme' (Spanish government, 1992), which is intended to bring the country into line with the monetary discipline and standard of living of its EC partners by the end of the century. A key part of achieving this will be success in the plans to internationalise Spanish manufacturing further.

Spanish industry

As Salmon (1991) notes, 'The contemporary structure of the Spanish economy reflects its own peculiar evolution perhaps more than that of other western economies'. The aftermath of the civil war of the 1930s was international isolation and acute economic difficulties resulting from the destruction wrought during the war. Indeed, it took until 1950 for industrial production to return to its 1929 level, and the country remained over-whelmingly dependent on agriculture for employment. By the late-1950s, though, Spain was moving gradually away from its previous autarkic stance and there were radical changes in economic policy. Helped by growth elsewhere in Europe which not only provided markets for Spanish goods, but jobs for migrant workers, and with an upsurge in tourism earnings, the Spanish economy grew rapidly during the 1960s. GDP grew at an annual average rate of 7 per cent between 1959 and 1971, and industrial output by 9.4 per cent per annum between 1960 and 1973 (Salmon, 1991).

Although foreign trade increased its share in GDP, tariff barriers remained significant prior to accession to the EC. Foreign investment had played a large part in the industrialisation of the country (Lieberman, 1982), but relied substantially on protection. Salmon argues that the 'economic growth in the 1960s masked problems embedded in both the organisation and structure of the economy ... the character of Spanish industry was midway between that of a newly industrialising country and an advanced one, with competitive advantage often based on relatively low labour costs in traditional industries.' Salmon (1991) points out that 'Spain still lacks an indigenous high-technology base' and continues to be dependent on imported technology and licensing limited to the domestic market.

In the manufacturing sector, Spain has few large companies and hardly any of international standing. This is regarded as an impediment to international success, as is the preponderance of mature technologies and a relative specialisation in labour-intensive products. Foreign ownership of major industries has long been extensive, but has tended to restrict export business because the subsidiaries have focused on the domestic market. Indigenous firms have been characterised by a relatively high proportion of family ownership and substantial involvement by the major banking groups. There is very little production abroad by Spanish companies, which inhibits internationalisation. This imbalance can be seen in the period 1986-9, when the ratio of direct foreign investment by Spanish companies to inward investment by foreign companies was just 21 per cent.

Strengths and weaknesses

The OECD (1992), in its assessment of the Spanish economy notes that 'the considerable increase in export capacity associated with sizeable capital-productivity gains following the investment boom of the second half of the 1980s, and export promotion efforts again in 1991 outweighed the effects of the continuing deterioration of unit labour costs. As a result, export volumes grew at about the same rate as imports ... and sizeable gains in market share were recorded.' Other features of the Spanish industrial sector noted by the OECD include:

* Multinationals account for two-fifths of exports of manufactures; especially important in motor vehicles.

* Spanish firms are becoming more export orientated, moving away from the defensive policies which aimed at maintaining domestic market share in the early years of EC membership.

* Exports to the EC are especially strong.

* The Spanish marketplace for goods is becoming more competitive, but the continuing vested interests and oligopolistic services markets, occasion high prices.

Overall competitiveness

Spain's current competitive position on various 'routine' macroeconomic indicators is fairly encouraging, although it is important to recognise that as these are retrospective measures, they are not necessarily good predictors of future success.

Starting with labour costs, data presented in the latest OECD Economic Outlook (OECD, 1993) show that Spanish compensation per employee (which includes non-wage labour costs) in 1991 was 80 per cent of the average for the OECD-Europe countries, and only lower in Portugal and Greece. Wage inflation has, though, been rapid and it can be seen from Chart 4 that in terms of relative unit labour costs, Spain has been losing ground in recent years relative to its main EC competitors. However, unit labour costs is a notoriously difficult variable to interpret when an economy is going through rapid structural change. Indeed, to the extent that rising labour costs are associated with desirable qualitative improvements in outputs, they can, counter-intuitively, signal an improvement in competitiveness. The fact that Japan, Singapore and Korea appear to do relatively badly on such indicators emphasises the point. Nevertheless, the three devaluations in the last year look to have been a necessary correction to restore the competitive position.

Table 2 shows that the output of the Spanish manufacturing sector grew in line with the EC average between 1985 and 1990, and fell similarly in the downturn of the last two years. More encouraging for the future strength of the Spanish economy has been the growth of output of investment goods, where Spain's performance between 1985 and 1990 was more like that of Japan than its European partners.

Employment in manufacturing grew quite markedly between 1985 and 1990, but is a two-edged characteristic. In its own right, the increase in manufacturing jobs is desirable given the prevailing level of unemployment, but it is less encouraging from the perspective of productivity growth, since these aggregate figures suggest that Spain has not kept pace with other countries. Indeed, according to data reported in the OECD's latest report on Spain (OECD, 1993), manufacturing productivity fell by 1.5 per cent in 1990, although it then rose by 3.9 per cent in 1991 and by 3.5 percent in 1992. This is explained, in large part, by the degree of employment protection in Spain which is considered to make the labour market very inflexible. Nevertheless, there has been a sharp drop in manufacturing employment in the last two years especially in some of the traditional sectors, such as textiles and clothing, facing structural decline.

An alternative approach to measuring the competitiveness of the Spanish economy is to look at the characteristics of the economy as seen by industrial companies. A major comparative survey carried out by IFO (1990) indicates that the factors affecting competitiveness most in need of improvement are the cost of credit, indirect labour costs and rigidities in the labour market. On the whole, the survey suggests that propensities to innovate in both products and processes are similar in Spain to other EC countries.
Table 2. Manufacturing output in leading OECD countries

 (Indices, 1985 = 100)

 1985 1988 1990 1992

US 100 116 120 120
Japan 100 113 126 120
France 100 108 115 112
Italy 100 114 117 112
Germany 100 107 119 120
UK 100 114 118 111
Spain 100 113 118 114

Source: OECD.
Table 3. Production of investment goods in leading OECD

 (Indices, 1985 = 100)

 1985 1988 1990 1992

US 100 114 122 118
Japan 100 117 136 126
France 100 108 119 113
Italy 100 120 125 112
Germany 100 107 123 122
UK 100 111 121 112
Spain 100 142 144 128

Source: OECD.

Given that Spanish industry starts from a relatively low technology base this could be seen as a weakness.

Questions about factors influencing innovation indicate that Spain does particularly badly on finance for innovation and on having access to marketing know-how, especially in the less-favoured regions.

An attempt to categorise Spanish manufacturing according to four broad classes of products: labour-intensive; knowledge-intensive; medium capital intensity with high materials use; and medium capital intensity with high labour use (see Magaziner and Hout, 1980), finds that although Spain has a low share of the knowledge-intensive industries, the share increased markedly in the late-1980s, from 9.9 per cent to 13.7 per cent of industrial output, while the labour-intensive proportion has fallen to a similar degree.

The share for the medium capital-intensity with high labour use also grew, from 30.9 per cent to 34 per cent, helped by the inclusion of the automobile sector.

Sectoral composition

Spanish industry, in aggregate, has performed encouragingly since the mid-1980s, and has appeared to adapt favourably to the intensification of competition brought on by accession to the EC. Vinals (1990), writing at a time when the rapid growth of the economy might have overshadowed concerns about its underlying competitiveness, nevertheless felt that Spanish industry had to address a number of awkward problems in order to remain competitive in the single market. Implicit in his analysis is the view that Spain has enjoyed the honeymoon of its marriage with the EC, but will need to make significant adjustments as its economy becomes more deeply integrated into Europe. While stressing rigidities in the labour market, he also points to shortcomings in technology and a relatively underdeveloped capital market as drawbacks. Potential problems are, inevitably, greater in some industries than in others. This section examines the characteristics of different industries and assesses their prospects.

A first disaggregation is to look at the three broad categories of manufacturing. This shows that the investment goods industries contributed most to overall growth in output in the second half of the 1980s, though it is also those industries that led the downturn in production. To a considerable extent, this reflects trends in the automobile industry which enjoyed a boom period in the late-1980s, but which has been predictably hit by the recession in the EC. As Table 4 shows, its production grew by 77 per cent between 1980 and 1990, with most of the growth coming after 1985. Consumer goods rose more steadily, underpinned by the relatively buoyant food processing industry, while intermediate goods were relatively flatter, especially after 1985 when they did not grow much, with basic metal production a particularly weak feature.


During the 1980s, there were substantial shifts in the structure of Spanish industry. The most striking change is the rise in the share of the automobile industry in the value of production and of value added. Other sectors which have expanded their share of value added include chemicals, food, drink and tobacco, machinery and printing and paper. Although production of electrical machinery grew rapidly after 1985, its share of value added fell, suggesting growing import penetration in components. In part, the changing structure of industry is the result of foreign investment, which has favoured some sectors to a much greater extent than others. Thus, automobiles, machinery, electrical machinery and chemicals have benefitted, whereas industries such as textiles, toys or shipbuilding have lacked such investment.

The data in Table 5 show that the productivity performance of Spanish industry has varied considerably in different sectors. Productivity actually fell in mechanical engineering, clothing, leather and paper, printing and publishing between 1985 and 1990. By contrast, in dynamic sectors including motor vehicles and electrical engineering, the growth of productivity has been reasonably strong. These trends clearly show up in the evolution of Spanish exports discussed below.

Spanish industry is, in many ways, at a crossroads. Some of its traditional strengths, such as the leather and footwear industries continue to enjoy a competitive advantage in international markets, but are vulnerable to import penetration from lower cost producers from the third world. In these sectors and in textiles, printing, paper and board and in plastics, much of the capacity is in small firms which may face difficulties in financing expansion or in gaining adequate access to international distributive networks. Thus, despite the success that many have enjoyed in recent years, they may struggle as they become more exposed to international competition. By contrast, in sectors such as automobiles, Spain has benefited from substantial inward investment in recent TABULAR DATA OMITTED years and has a high propensity to innovate. Recent investment in the industry has led to the implementation of state-of-the-art management and reinforces the strength of the industry, perhaps especially in components, although the recently announced closures at SEAT demonstrate a vulnerability to strategic shifts in location by multinational companies.

This points to a distinction between the industries which are well-integrated into the EC economy and those which are rooted in an older and more domestically-orientated tradition. The clothing and footwear sector, for example, is characterised by low rates of investment and R&D and by a relatively high proportion of activity in the 'informal' economy. There has always been a rapid turnover of firms, and the footwear industry is concentrated in certain regions, notably Valencia. Regional specialisation may also be an issue in other industries, such as toys, which is located predominantly in Valencia and Catalonia. Although there is a tradition of craft skill in the manufacture of footwear, especially, there are threats for many of the traditional industries at the bottom end of the market from low-cost imports and at the top end from high-quality producers in other EC countries. These characterisations are by no means immutable. Indeed, in leather, toys and parts of the food processing industry, significant efforts have been made to upgrade by paying attention to non-price factors such as quality and design.

Other industries, including domestic appliances, shipbuilding and metal products were the subject of major 'reconversion' programmes in the 1980s which have enabled them to improve their competitive position. However, it remains to be seen to what extent they will be able to build on this start and the outlook for some of the staple industries remains mixed. In machine tools and other machinery, the fragmented supply-side may be an obstacle to progress, in spite of efforts to upgrade through innovation and investment in modern machinery.

SWOT analysis (strengths, weaknesses, opportunities and threats) based on work done for the Industry Ministry has examined the different industries on the basis of a range of criteria. These include existing stock of know-how and propensity to innovate, human resources, ownership and attractiveness to foreign investors, and use of modern manufacturing techniques. This exercise suggests that four industries have the most promising opportunities in the next few years. These are:

* Leather

* Motor vehicles

* Machine tools

* Domestic appliances

Three other industries also judged to have good opportunities are toys, jewellery and food products. Those with the worst prospects are textiles, railway equipment, paper products and basic metals, while wood products and furniture are not much better. In between, can be found a group with marginally favourable prospects comprising: computing and electronics; chemicals; rubber and plastics; clothing; machinery; aerospace; and with less favourable prospects: shipbuilding.

Bearing in mind that this is a qualitative assessment and that there are shortcomings in the data, the conclusion that emerges is that Spanish industry is reasonably well placed to confront the challenges of EMU and globalisation of markets. However, this will require continuing efforts to increase the proportion of industry that is effectively internationalised and to ensure that strategies to upgrade qualitative attributes are pursued. In aerospace, for example, Spain has a bare 2 per cent of the EC market and its leading company in the sector depends on co-operation with the major producers in other EC countries. Even for the successful automobile industry, it can be argued that a preponderance of assembly work with little R&D or higher management activity is a drawback that it will be desirable to remedy. This is emphasised by the current problems at Volkswagen, which will have implications for SEAT's plants.

Regional differences

The regional pattern of industrial development in Spain in the period of rapid expansion up to 1975 strongly favoured the regions containing the three main industrial cities, namely Madrid, Catalonia (Barcelona) and the Basque Country (Bilbao). A relative decline occurred in regions such as Valencia, Andalucia and Asturias in which the industrial structure was dominated by traditional industries such as textiles, furniture making and food processing. Data reported by Suarez-Villa and Cuadrado Roura (1993) show that manufacturing accounted for 50 per cent of GDP in the Basque Country in 1975, and 41 per cent in Catalonia. The relative growth of the three regions was accompanied by substantial population movements from the less-favoured regions of the country with the result that the broad shift of employment away from agriculture towards industry and services was also a regional shift.

During the period of stagnation between 1975 and 1985, the difficulties confronting many industries led to large-scale employment losses in a number of regions. The Basque country and to a lesser extent Catalonia suffered particularly because of their high shares of industrial employment, though a sharp fall in migration meant that the resulting rise in unemployment was greatest in some of the less-developed regions such as Andalucia and Extremadura. The decade also saw a relative resurgence of manufacturing in Aragon and Valencia. According to Cuadrado Roura (1991), these trends were symptomatic less of deindustrialisation per se, except perhaps in the Northern regions along the Cantabrian coast, but of the effects of rapid structural change from older to more modern industries, processes and specialisations.

Following Spain's accession to the EC, which entitled the country to support from the Structural Funds, regional development was given fresh impetus. This was aided by the new constitutional framework implemented in 1978, which devolved power to the 17 autonomous regions, and saw the elaboration of regional development plans. As Suarez-Villa and Cuadrado Roura (1993) note, wider sectoral objectives, notably the quest for international competitiveness, led to policy initiatives aimed at reinforcing the operating efficiency of industry in the more dynamic regions in the East of the country. Complementary policies to improve infrastructure were introduced in order to stimulate industrial links between these dynamic regions and other parts of the country, and thus achieve a more widely spread industrial development.

Perhaps predictably, these policies led to a disproportionate share of industrial investment, especially foreign investment, going to the more dynamic industrial regions, especially Valencia and Catalonia (Cuadrado Roura, 1991). Suarez-Villa and Cuadrado Roura (1993) argue that the outlook for the former and for Aragon, both of which they regard as favourably located 'second tier' regions, is promising because they are well-placed to meet demand from the EC while benefitting from their links with adjacent, but less dynamic Spanish regions. On the whole, the areas with very traditional manufacturing structures on the Cantabrian coast have failed to attract investment, especially in newer industries. They also suggest that Murcia and Andalucia may gain from the dynamism of neighbouring 'Mediterranean' regions. In contrast, the regions in the North have faced continuing problems of declining industries, while those in the centre lack the links which could act to stimulate their industrial development. In the North, the outlook for Asturias and Cantabria is likely to depend on the capacity of the Basque Country to recover its previous industrial strength.
Table 6. Spanish relative export performance in
manufacturers--cumulative change 1986-92

difference between growth of export volume and size of market
(in percentage points)

 1987 1988 1989 1990 1991 1992

Spain -1.10 -2.57 -1.66 8.00 16.45 18.40
Germany -3.80 -6.67 -8.05 -12.66 -20.30 -22.13
Italy -2.30 -3.58 -8.44 -14.13 -18.08 -21.29
France -5.10 -8.68 -8.50 -9.62 -12.49 -12.73
UK 0.60 -2.22 -1.28 0.76 -1.08 -1.42
Japan -5.00 -11.84 -16.76 -17.79 -21.89 -26.39
OECD -1.40 -2.92 -3.63 -4.20 -6.72 -8.22

Note: positive figures mean better than expected performance.

Source: OECD Economic Outlook (various up to 1992).

Export performance

Spanish exports of manufactures grew rapidly during the 1980s, comfortably out-pacing the EC average. As Table 5 shows, exports of manufactures grew by 257 per cent between 1980 and 1991, with intra-EC exports, especially of machinery, to the fore.

An overview of Spain's trade performance can be obtained from OECD figures which relate export performance to the buoyancy of markets. Table 6 sets out the cumulative effect of changes in market size and TABULAR DATA OMITTED export volume, which show that Spain has gained relatively by expanding its export volume more rapidly than the markets it serves have grown. This, again, has to be treated with some caution because of the difficulties inherent in calculating volume figures for exports, where unit values based on some physical measure (numbers or weights of items, rather than quality) are generally used.

Relative specialisation in particular industrial products is bound to be an important element in trade performance. This is summarised in Table 7 which shows the picture for Spain in the four main divisions of manufactures in the SITC, and for the 3-digit product codes which account for at least 1 per cent of total manufactures' exports and in which Spain's relative specialisation is 40 per cent or more of that of the EC (used as a benchmark).

The index of specialisation shown in the tables is computed as the proportion of Spain's total manufactures exports accounted for by the product in question, divided by the corresponding ratio for the EC as a whole. Thus, Spain's exports of division 5 (chemicals) is only 65 per cent of the EC average, whereas it exports 21 per cent more in division 7 (engineering) than is the norm for the EC. For the period 1980-9, Spain's relative specialisation appears to have been in the most rapidly growing division of the SITC (7), though it is also relatively specialised in the slowest growing (6).

At the more detailed level, the 11 commodities shown are those which, in 1989, formed the backbone of Spain's exports. Between them, these industries account for nearly half of Spain's exports of manufactures, with motor vehicles (781), and parts for motor vehicles (784) representing a quarter of total exports of manufactures. The list suggests that Spain is strongest in industries which are not obviously high technology, with a rather low representation in specialist chemicals, office machinery, telecommunications equipment and electronics. Moreover, industries such as cars are amongst those in which new competition can be anticipated from Eastern Europe.(1)

Inward investment

Spain's success in attracting inward investment has been a key feature of its recent economic development. According to OECD data, investment in Spain increased sharply at the time of its accession to the EC, and more recent data show that this has continued but at a declining rate over the past two years.(2) As Chart 6 shows, the manufacturing sector continued to draw in growing levels of investment in the latter half of the TABULAR DATA OMITTED 1980s. However, as Chart 7 shows, financial and business services were also strongly favoured.

The scale of inward investment has been important not only because it has offset the deficit on current account that emerged as the Spanish economy expanded, but also because it has contributed to the modernisation of industry. It is, however, a moot point whether this investment represents an endorsement of the competitive advantages of Spain, or is itself the prime source of the country's competitiveness. To the extent that the latter applies, the emerging opportunities for investment in Eastern Europe where significantly lower labour costs can be exploited may be a problem.

Outlook for manufacturing

If Spain is to maintain its relatively favourable rate of progress, the structural composition of industry needs to change, with an improvement in performance in the higher demand growth industries. To an extent, such a switch is an inevitable result of increased competition. The weaker firms will tend to diminish in importance and investment will tend to shift towards sectors where the rate of return appears greatest. Foreign direct investment has continued to grow in importance but the emphasis has turned away from manufacturing towards services. Nevertheless since net FDI has more than quadrupled over the period (in nominal terms) real FDI in manufacturing has still risen substantially over the period.


However, in the view of Larre and Torres (1992) the Spanish economy still remains rather unbalanced, with labour market rigidities and a relatively weak infrastructure. They therefore question how long this lack of balance can be sustained and emphasise the need for structural change.

In many ways, the major changes in the modern trading and producing world are coming not so much from the actions of government but from the actions of multinational firms and the rapid pace of technological change which is transforming the pattern and method of production. The most obvious of these changes is the information technology revolution which is affecting all sectors of the economy. This enables a much more flexible siting of production and the ability to fragment the process. Flexible manufacturing systems have also greatly reduced setting up costs and eased the process of customising production so that the minimum efficient scale has fallen.

Thus although there is a simultaneous trend towards the globalisation of markets, there is still a role for local production. Indeed, one of the trends in modern productive systems is the development of 'niche markets', enabling specialisation in a very closely defined product, while simultaneously achieving the advantages of relatively large scale.

Nevertheless this trend, which appears to be continuing, opens up new opportunities for Spanish companies, which are not disadvantaged by the relative peripherality of their location in the European market. The opportunities are greatest for those companies who do not rely for their success on the maintenance of a substantial cost differential obtained by having low wages in an industry where the skills required are relatively easily obtained as they will be readily open to competition from both inside and outside the EC.

This process of requiring continuing change and training is an increasing feature of the world market and one which the European Single market is designed to tap. Also, the Community is fostering networks, focusing money on the improvement of the infrastructure for Spain, Portugal, Greece and Ireland involving all aspects of communications. Added to this is the positive side of EC industrial policy encouraging collaboration among the member states and placing the emphasis on the new technologies and materials which are thought capable of providing the major growth opportunities in the 1990s and indeed in the longer run. As the largest, least peripheral and most developed of the member states involved, Spain is likely to be the major beneficiary from these programmes if it capitalises on them.

However, this process of capitalisation involves a considerable cultural change in the way in which companies and markets operate where the requirements are flexibility, rapid response, continuing innovation and learning and good organisation. Some of the requirements for this come from the process of increasing competition which prevents companies from being able to innovate more slowly and exploit a captive market. Both the strength of multinationals and the opening up of the single market are eroding that ability. However, there is more than one possible response to this increase in competition and firms can collapse in the face of the challenge if they wait too long or cannot develop the skills and organisational base to respond. The gains can be reaped in both public and private sectors and in services as much as manufacturing. Some member states have espoused the cause of competition more vigorously than others through programmes of privatisation and deregulation to try to enforce the changes in management style through external pressure. It is not clear what the optimum approach is but firms within Spain and operating elsewhere in the world market will be faced by competitors operating under these rules. One of the characteristics of the single market is 'competition among rules'. It is no longer possible to argue that Spanish traditions are different and that others will have to adapt to them. There is no means of compelling foreign firms and how that competition among rules is resolved will depend upon Spanish consumers and competitors at home and mainly non-Spanish forces abroad. What seems certain is that it will involve a much more open and competitive market than at present and that being able to succeed in those new circumstances requires major changes in the underlying processes of business behaviour now as the learning process is long.

Industrial policy

Spanish industrial policy has evolved considerably in recent years. In the early-1980s, the main thrust of policy was 'reconversion' of old industries such as shipbuilding which were seriously in decline. These policies have, by and large, run their course as their main targets have been transformed. Latterly, the emphasis in policy has shifted to measures affecting the competitive environment and to upgrade factor inputs.

Aims of industrial policy

According to Espina (1992) there are five main dimensions of industrial policy.

* macroeconomic stability and the creation of a climate favourable to competitiveness

* active intervention to upgrade human resources

* support for R&D and for the diffusion of technology

* improvements to the quality and marketability of products, including attention to environmental concerns, design and product standards

* pressure to internationalise Spanish business via strategic alliances, commercial networks and foreign investment as has happened elsewhere.


In seeking to upgrade Spanish industry, policy faces a number of constraints. Perhaps the most binding is the need to respect EC (and possibly GATT) rules on state aids and competition policy. Given that direct subsidies are generally held in disrepute, this may be less of a constraint in practice than it appears at first sight, as the industry ministry itself does not believe that most measures which could flout international rules are likely to be of much value in assisting Spanish industry.

A second problem is the scale of foreign ownership of key segments of industry. In the past, trade barriers resulted in foreign investment being focused mainly on production units aimed at the domestic market. While this has manifestly changed in the automobile sector which is the leading exporter, greater contributions from other industries with high external ownership will be needed to secure a viable export base. There are worries in Spain that foreign ownership can also militate against the development of the more advanced processes and functions in industry which tend to be part of an upgrading strategy, when the investment has been primarily thought of as exploiting lower Spanish labour costs. In such cases the logic of the investment for the multinational might be lost if more highly skilled or capital-intensive technologies were to be employed. Although there is no iron rule that foreign ownership excludes development of 'higher' functions, such as R&D, it is an area that requires attention in relation to the technology and internationalisation aims. Some countries make the commitment to developing these functions as the business matures a condition for the provision of government support at the outset.

There is also a critical mass problem to overcome. With few very large companies, Spain faces a difficult challenge to alter the balance of ownership. Nearly one-third of Spanish direct investment in other EC countries between 1984 and 1989 was in Portugal, with correspondingly small amounts going to the core EC countries.

Existing policy framework

The policy followed by the Industry Ministry in recent years has intended to follow what can be termed 'best practice' in the context of the paradigm developed by OECD in the light of the academic and policy debate. This policy is regulated by the EC Common Industrial Policy and OECD and international treaty obligations.

The government has implemented a wide ranging set of policy instruments as the main components for achieving its aims. These comprise:

* The encouragement of technological innovation

* An industrial and technological programme for the environment (PITMA)

* Support for small firms

* Support for quality and safety (PLACSI)

* A plan to internationalise industry

* Privatisation

There are many specific measures involved which are detailed in Ahijado et al (1992), MICT (1992), Espina (1992). The greatest emphasis has been placed on innovation and technological development. This part of the policy has largely been implemented through horizontal measures which have an impact on many sectors, such as by encouraging telecommunications, new materials and biotechnology. These areas of focus are common to most of Spain's main competitors and potential partners in cross-border industrial joint ventures.

It is difficult to assess the likely impact of these policies as there are no existing quantitative estimates of the effects of past or present policies. By following this largely horizontal approach the government hopes to increase the pace of change without introducing major distortions to private sector priorities and views the private sector rather than itself as the engine of growth. By trying to follow established best practice it hopes that the rules of the game will be clear both to domestic and foreign players and that it will be widely accepted that these contribute to providing the 'level playing field' for fair competition that has so pre-occupied the negotiating position of some countries in recent years.

Conclusions and policy implications

The core challenge for Spain in the coming years is to see through its internationalisation programme and to achieve an upgrading of its industrial base sufficient to support its development aims for the 1990s.

Spain has an important advantage as it is catching up from behind and already moving at a faster rate than most of its competitors. It can thus exploit a large number of the competitive advantages merely by emulating the behaviour of others. By growing faster it will tend to have a younger capital stock, which will tend to embody more efficient techniques. Having a more dynamic environment will also tend to reinforce the process of cultural change that is required. However, the results are not guaranteed. Any point in the spectrum between dynamic catching up and retreat towards competition based on traditional products and lower labour costs is possible. Government has an important but not the only role in determining whereabouts in that spectrum Spain will end up.

Plausible forecasts suggest that Spain's main markets are likely to increase by around 3 per cent a year, while the overall growth of the economy could be a little faster. This would narrow disparities relative to the EC average. From the point of view of feasible growth rates, given the levels of unused resources, particularly labour, the lower levels of productivity and technological advance, a rather faster rate of growth is clearly possible if the system is not too rigid. Rates of 5 per cent would not be inconsistent with previous Spanish history. Higher rates would require clear changes in structure if they were to be achieved without unacceptable inflation (or an impossible conjuncture in the framework of EMU). There must also be doubts about the ability of the infrastructure to cope. Price inflation is already high and needs to fall in order to achieve convergence towards economic and monetary union in the EC, so further pressures would worsen the difficulty.

The constraints on the growth of the world market appear rather more binding than those on Spain in particular as a result of the catching up hypothesis we have outlined. Energy constraints, environmental constraints, technological constraints, the wish for more leisure, and so on all suggest that there are limits to sustainable growth. However, in purely arithmetic terms, Spain could in principle grow for 20 years at rates 2 per cent above the EC average without reaching those frontier constraints given the starting point.

In any country, industrial policy must be adapted to existing structures of enterprise. Given the paucity of Spanish owned transnationals, the emphasis in policy, according to Espina (1992), needs to be predominantly on horizontal policies such as establishing networks of support services for SMEs and on encouraging an appropriate balance of co-operation and competition between them. Such networking can be justified particularly at the local level where firms, by combining, can gain access to shared services which contribute to competitive advantage. This industrial district approach in Spain is seen as a means of overcoming the disadvantages that follow from lack of size vis-a-vis large companies. Catalytic policies of this sort have been applied in Spain, for example, the networking associated with improving design capability under the Plan de Diseno and the IMPI small firms network. Co-operation on training policy is also an important component of industrial policy which improves the mobility and flexibility of the labour force as a means of consolidating the advantages of industrial districts. Although Spanish industry has made considerable progress in modernising its systems of production and organisation it still has to overcome a number of hurdles if the ambitious convergence plan is to be realised. Successes are evident in upgrading some traditional industries and (at least until the current recession) in building new strengths, notably in automobiles.

But questions remain about the underlying ability of Spanish industry to maintain the momentum of the late-1980s. There is a vulnerability to a fall off in inward investment which would both lower aggregate investment and restrict a key channel of technology transfer. Spain also suffers from its relative lack of major players in global markets. The role of policy in determining the balance of the outcome is therefore crucial.


(1) Although a study by NERA (1992) for the European Commission concludes that there is not likely to be much direct diversion from Spain to Eastern Europe in manufactures.

(2) Barrell and Pain (1993) show that there was a significant increase in Japanese direct investment in Spain after it joined the EC according to their model of the pattern of Japanese foreign investment.

(3) OECD (1991).


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Author:Ahijado, Manuel; Begg, Iain; Mayes, David
Publication:National Institute Economic Review
Date:Nov 1, 1993
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