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The “Barometer of the Círculos” June of 2014
The “Barometer of the Círculos” June of 2014
The “Barometer of the Círculos” June of 2014

The “Barometer of the Círculos”

June of 2014

TABLE OF CONTENTS

Letter from Círculos …………………………………………… ………………….iii

Executive Summary…………………………………………

2

Introduction and Principal Results ……………… …………………………………2

Market Dynamism ……………… ………………………………………………….6

Basic Resources ……………… ……………………………………………………11

Labor Market ……………… ………………………………………………………17

Financial Market ……… ………………………………………………

………

24

Management Dynamism

………………………………………………

………

29

Contribution of the Administrations ………………………………………

…… 36

Conclusions ………………………………………………

……………………….41

Recommendations………………………………………………

…………………43

Annexes…………………………………………………………

…………………47

INDEX OF GRAPHS

Graphic 1. Composition of the Barometer

4

Graphic 2. Aggregated Results of the Barometer 2014

5

Graphic 3. Elements that Make the Products and Services of Spanish Companies Attractive

7

Graphic 4. Most Relevant Reasons for Investing Abroad

7

Graphic 5. Competitive Strengths and difficulties of the Spanish Economy

9

Graphic 6. Basic Resources: Comparison of General Indicators with Other OECD Countries

11

Graphic 7. Basic Resources. Perceived Valuations on the Círculos Barometer

12

Graphic 8. Need for Improvements in Prices and Management

13

Graphic 9. Most Relevant Measures to Improve Education in Spain

14

Graphic 10. Most Relevant Public Actions to Improve Innovative Ability of

Spanish

Companies

16

Graphic 11. Percentage of Workers in Temporary Employment. Average 2000-

2012

17

Graphic 12. Labor Market. Perceived Valuations on the Círculos Barometer. 18

Graphic 13. Impact of the Recent Labor Reform Measures on the Efficiency of

the Work Market

19

Graphic 14 Most Important Reforms to Improve the Labor Market Situation in

Spain

20

Graphic 15. Financial Market - Relative Position of Spain in the Global Ranking of Countries (2008-2013)

24

Graphic 16. Financial Market. Perceived valuations on the Círculos Barometer

25

Graphic 18. Perception of Compliance with Maximum Payment Deadlines to Legally Established Suppliers 26 Graphic
Graphic 18. Perception of Compliance with Maximum Payment Deadlines to Legally Established Suppliers 26 Graphic
Graphic 18. Perception of Compliance with Maximum Payment Deadlines to Legally Established Suppliers 26 Graphic

Graphic 18. Perception of Compliance with Maximum Payment Deadlines to Legally Established Suppliers

26

Graphic 19. Financing Sources Used by Companies

27

Graphic 20. Company Dynamism. Perceived Valuation on the Círculos Barometer

30

Graphic 21 Initiatives Taken with Regard to Entrepreneurship

31

Graphic 22. Obstacles to the Acceleration of Procedures and Formalities

33

Graphic 23. Contribution of Administrations. Perceived Valuations on the Círculos Barometer

36

Graphic 24. Most Important Initiatives to Ensure an Adequate Control of Public Deficit

37

Graphic 25. Areas of Greatest Concern Regarding Corruption for Company Activity

39

Graphic 26. Most Beneficial Tax Reforms for Spanish Company Growth

40

Graphic 27. Comparison of the Barometer Results and Similar Variables of Other Indexes

48

Graphic 28. Profiles of Those Polled. Principal Activity of Company

49

Graphic 29. Profiles of Those Polled – Number of Employees in their Companies

49

Letter from the Círculos The Barometer of the Círculos project has two purposes: to identify
Letter from the Círculos The Barometer of the Círculos project has two purposes: to identify
Letter from the Círculos The Barometer of the Círculos project has two purposes: to identify

Letter from the Círculos

The Barometer of the Círculos project has two purposes: to identify and track the principal strengths and competitive weaknesses in our business climate, and to propose concrete measures and structural reforms to correct these weaknesses.

The Barometer of the Círculos will come out annually and will quantify the opinions of top Spanish managers about key aspects of our economy. The yearly development of the criteria in the Barometer will give the Spanish economy some yardsticks to measure its development, with regard to both the situation at a given moment and to structural conditions.

The Barometer is developed around three elements that distinguish it from other indicators about the comparative competitiveness of countries:

It takes as its starting point the results for Spain of the principal indicators about comparative competitiveness among countries. It thus identifies the most important conclusions of these sources and integrates them into a homogenous measurement so that they can be taken as comparative reference with the analysis of the Barometer itself.

It generates information and analysis based on the opinions of a wide range of businessmen and managers in Spain who are members of these Círculos. This is

something unique, a result of the very nature of the Círculos, which are able to access

very interesting sample of the Spanish business world and high levels of business and management responsibility.

a

It

generates practical results that are useful when taking decisions, both by investors

and public institutions. To this end, it provides clear and rigorous conclusions about

competitiveness relative to the Spanish economy, and about areas of business where the Public Administrations and the companies themselves should take action.

We hope that successive issues of the Barometer de los Círculos will generate wide debate that bring transparency and objectivity about the competitiveness of the Spanish economy, as well as useful ideas for its continued improvement.

Finally, we wish to express our gratitude to the sponsoring bodies (DKV Seguros Médicos, Fujitsu, Santander and Telefónica) whose cooperation has made possible the publication of this Barometer.

has made possible the publication of this Barometer. Antón Costas Comesaña Mónica de Oriol e Icaza
has made possible the publication of this Barometer. Antón Costas Comesaña Mónica de Oriol e Icaza

Antón Costas Comesaña

Mónica de Oriol e Icaza

President, Círculo de Economía

President, Círculo de Empresarios

de Economía President, Círculo de Empresarios José María Bergareche Busquet President, Círculo

José María Bergareche Busquet

President, Círculo de Empresarios Vascos

iii

Executive Summary 1
Executive Summary 1
Executive Summary 1

Executive Summary

Spain is one of the great economic success stories of recent decades, with an increase
Spain is one of the great economic success stories of recent decades, with an increase
Spain is one of the great economic success stories of recent decades, with an increase

Spain is one of the great economic success stories of recent decades, with an increase in per capita income in real terms of more than 70% between 1977 and 2012. At present it is a large economic power, both for the size of its domestic market and its membership in the European Union, which is one of the two largest economies in the world. The importance of Spain in the international economy is also the result of the success of its exporting companies and multinationals, many of which are global leaders in their sectors. The position of Spain and its companies in the world economy is a guarantee of a high quality of life and a future full of possibilities.

Over the past decade Spain has undergone one of the greatest turnabouts in economic activity in its history. After a period of growth based on internal demand and the construction sector, the economy is being transformed through a very important adjustment as companies adapt to the new reality and the unprecedented development in the area of exports and innovation. This change is not turning out to be an easy one. The Spanish economy is going through a period that will determine its future for decades. More than ever before, what we do today will define the wellbeing of tomorrow’s Spaniards.

THE BAROMETER OF THE CÍRCULOS

The Círculo de Empresarios, the Círculo de Economía and the Círculo de Empresarios Vascos, as independent forums of businessmen and civil society, feel it is essential to collaborate in this transformation of the Spanish economy that has come about because of the country’s economic crisis. It is in this context that the Barometer of the Círculos has appeared: it seeks to help diagnose the situation of Spain’s economy, define the process for transforming it, and examine the changes that will be necessary to make that a lasting transformation.

We consider that the changes that are coming about –through globalization and the omnipresent appearance of new technologies– make it necessary to accelerate Spain’s transformation, something that will require that all the country’s social and political forces –including civil society– work together.

Given the magnitude of Spain’s problems –especially its debt and unsustainable level of unemployment– we believe it is necessary to reach agreement about a diagnosis and set out the main lines of action to generate the competitiveness that will allow us to rise in the global ranking. In this way it will be possible to mobilize the country toward regaining prosperity and maintaining the bases for the Welfare State that we have achieved together. These are the context and aims of this project.

The Barometer shows the way Spanish businessmen perceive the strengths of the country’s economy: those aspects that make it a center of attraction for global business and are the basis of our future growth. But to consolidate these strengths, the Barometer also identifies areas where we must still improve as a society. The aim is to show in a constructive way where we are now, and the areas in which we must

improve –whether at the most basic level or in our perception of the management context–
improve –whether at the most basic level or in our perception of the management context–
improve –whether at the most basic level or in our perception of the management context–

improve –whether at the most basic level or in our perception of the management context– to consolidate our economic future.

The Barometer is centered on five aspects of economic activity: (i) the present perception of Spain as a market and production center in the global context; (ii) an evaluation of the potential of our basic strengths in physical infrastructure, human recourses and technology to consolidate future growth; (iii) an evaluation of our real estate, labor and financial markets as focus points of economic activity; (iv) those factors that determine our long range growth such as the quality of education, entrepreneurship, and the functioning of the markets for goods and services; and (v) the contributions of the Public Administrations to the development of our competitiveness.

MARKET DYNAMISM

Expectations for growth in domestic demand are moderately optimistic, in line with the most recent forecasts for growth released by analysts and official organizations. Nevertheless, most of company growth will come in the international context: in both exports and, to a lesser degree, increased investment overseas.

The main strengths of our economy for attracting foreign investment continue to be the size of the Spanish national market, our geographic location, and the possibility of using company activities in Spain as a platform for reaching other markets. But to attract more productive investment in the short term, it should be noted that foreign companies are concerned about the perspectives for growth in domestic demand and macroeconomic and political and institutional instability.

BASIC RESOURCES

Overall there is satisfaction with the quality of Spain’s physical infrastructures. Nevertheless there are seen to be important deficiencies in the management of these infrastructures, as well as in the mechanisms for setting prices and in the way decisions are made about new investment. The energy field, especially the electric sector, is seen as the industry most in need of better management and cost control.

As for human capital, there is a high level of top technicians, principally engineers, and Spanish managers. But there is a generalized perception that the level of education is an important vulnerability for the Spanish economy, and something that could worsen over the long term. The most important deficiencies are considered to be a lack of knowledge of foreign languages and the low quality of professional training as preparation for employment. Companies must take a greater part in designing courses of study, selecting candidates and financing dual vocational training.

There is no pessimism about the country’s innovative capacity. While it is recognized that little money is spent on research and development, Spanish companies get high marks for their innovative potential through technological improvements in defining

products and processes. Companies must take a greater role in public R+D. Measures to promote
products and processes. Companies must take a greater role in public R+D. Measures to promote
products and processes. Companies must take a greater role in public R+D. Measures to promote

products and processes. Companies must take a greater role in public R+D. Measures to promote and finance publicprivate initiatives and tax incentives for R+D are preferable to direct measures by the public sector, such as an increase in public funding on R+D or incentives through public purchases.

LABOR AND FINANCIAL MARKETS

Reactions to the recent labor reforms –especially to the lowering of costs for dismissing workers and the encouragement of parttime employment– have generally been positive, although there is concern about the way courts might rule on some of the less precise aspects of these reforms, such as objective appraisals of the causes for firing workers. Nevertheless there are still important problems for management when it comes to moving workers around, either geographically or within the workplace, and in linking wages to individual productivity. In this sense, the role of the trade unions and management is seen as negative, especially by making it more difficult to sign collective contracts on the company level.

The availability of a qualified work force and the costs of salaries are seen as an asset. It is felt that unemployment, especially among youth, is the problem of greatest priority. Urgent measures must be taken to generate employment through training contracts and parttime work. It would also be beneficial to link salaries to worker productivity and to reduce the costs for management by lowering its obligatory contributions to workers’ social security programs.

The international perception of our financial sector has suffered notably. Overseas, there is a low opinion of the Spanish financial market. Traditionally, non bank sources of financing have been vulnerable, and in recent years the weakness of the banking sector has made access to credit difficult.

Late payment in commercial transactions has been reduced somewhat, although it is still seen as a serious problem, and there is a generalized failure to comply with existing laws. The problem is most common in the Public Administrations, in spite of the positive effect of measures to pay suppliers to the public sector.

MANAGEMENT DYNAMISM There are high marks for the level of competition in the Spanish market,
MANAGEMENT DYNAMISM There are high marks for the level of competition in the Spanish market,
MANAGEMENT DYNAMISM There are high marks for the level of competition in the Spanish market,

MANAGEMENT DYNAMISM

There are high marks for the level of competition in the Spanish market, which contributes to management dynamism, but there is a less positive opinion of the authorities responsible for overseeing this competition. The capacity of companies to adapt to changing conditions, and the capacity for growth of efficient companies, are seen as key factors in their success, although they are undervalued by society as a whole.

Society does not sufficiently value entrepreneurship, which must be stimulated by a change in aptitudes and attitudes toward entrepreneurs and risktaking. There should also be a greater contribution to business dynamism on the part of the small and mediumsized companies.

Government regulatory requirements are considered an obstacle for entrepreneurship, and are especially noxious to business growth. Economic policy should shift more toward favoring this growth, instead of just creating companies:

tax incentives should be linked to growth more than to the mere creation of companies or their size.

PUBLIC ADMINISTRATIONS

Along with the financial market, the functioning of the Public Administrations is the economic aspect that is most poorly rated in the Barometer. It is thought that the poor functioning of the Administrations has a structural cause, one that has been aggravated by the economic crisis. The priority should be to improve the efficiency of the Public Administrations, reduce their size, and optimize their functions –on all their different levels.

While it has been painful, adjustment of the public sector has been less than that in the private sector, and the cuts have been overly horizontal, without prioritizing essential aspects for long term growth. Improving the Administration and public services does not necessarily mean choosing between private and public management, but rather assuring that when there is public management it has the appropriate instruments, comparable to those in the private sector.

There is a poor opinion of the Spanish judicial system, which is considered unpredictable in its sentences and the time it takes to reach them. It would be good if judges received specific training in technical aspects of business management.

Any tax reform should take into account its effect on companies and their competitive surroundings, both inside and outside Spain. Fiscal measures should foment competition among businesses, not harm it. In this sense, there should be a fight against fraud, and a reform of the corporation tax, with a reduction in tax rates in exchange for the elimination of deductions and bonuses, and an increase in indirect rather than direct taxation.

Corruption is not seen to be much more serious in Spain than in neighboring countries.
Corruption is not seen to be much more serious in Spain than in neighboring countries.
Corruption is not seen to be much more serious in Spain than in neighboring countries.

Corruption is not seen to be much more serious in Spain than in neighboring countries. But it is having an appreciable negative effect on how our economy is perceived. Corruption, because it generates suspicion, could cause vicious cycles that lead to an excess of ex ante regulation or ex post control which, in some cases, could become indiscriminate and arbitrary.

There must be no tolerance of fraudulent adjudications and favoritism in administrative decisions. The illegal financing of political parties and labor unions, along with the embezzlement of public funds, have also been a source of concern and should be tackled with stronger fines, control mechanisms and greater demands for transparency.

Report 1
Report 1
Report 1

Report

1. Introduction and Principal Results Spain is one of the world’s great economic powers both
1. Introduction and Principal Results Spain is one of the world’s great economic powers both
1. Introduction and Principal Results Spain is one of the world’s great economic powers both

1. Introduction and Principal Results

Spain is one of the world’s great economic powers both for the size of its domestic market and its membership in the European Union, which is one of the two largest economies in the world. It is also one of the great economic success stories of recent decades, with an increase in per capita income in real terms of more than 70% between 1977 and 2012. The importance of Spain in the international economy

is also the result of the success of its exporting companies and multinationals, many

of which are global leaders in their sectors.

Nevertheless the drive and leadership of the Spanish economy was truncated to a large degree six years ago by one of the longest and deepest economic crises suffered in modern Spain. Between 2008 and 2013 the Spanish economy contracted by 6.5% and 3 million jobs were lost, some 15% of the total number of people who were employed in 2008. As a result, a total of 6 million were unemployed in 2013, making us the European Union country with the second highest rate of unemployment, after Greece, something incompatible with our ambitions to be an advanced society.

The severity of the crisis has brought about a sectorial adjustment of the greatest importance. Starting from a situation where economic activity was linked to internal demand and the real estate sector, the economy is being transformed through an unprecedented development in the area of exports and innovation. This adjustment is not turning out to be easy. Spanish salaries have in general shrunk, with a reduction in the nominal unit labor costs of 7% since 2009, which has returned us to

a position relative to the average in the euro zone similar to the one we occupied in 2000. At the same time, between 2008 and 2013 the export of goods and services increased from 26% to 34% of the GDP.

Thus there is a perception that the end of this period of economic recession may be at hand. However there is no consensus about whether we have taken advantage of the crisis to consolidate a more competitive economy over the long term, something that would allow us to confront in a lasting way a setting that is increasingly demanding, both inside and outside the European Union.

At this key moment, the Círculos want to contribute to the construction of Spain’s future by providing clear and precise information about how our traditional strengths are being secured and how our structural imbalances and deficiencies are being resolved. The Barometer of the Círculos seeks to do this by providing an annual indicator of development, including both events at a given moment and overall

structural aspects of the economy, as well as making recommendations on how to improve its
structural aspects of the economy, as well as making recommendations on how to improve its
structural aspects of the economy, as well as making recommendations on how to improve its

structural aspects of the economy, as well as making recommendations on how to improve its competitiveness.

From the point of view of methodology, the Barometer of the Círculos works by means of three instruments. First, a selective review of the principal economic indicators that are periodically published about competitiveness, compared by countries, and their most important conclusions. Second, an on line survey, which this year was answered by 154 Spanish managers, most of whom are members of one of the three Círculos. Each year this survey measures the opinion of managers about the strengths and weaknesses of our economy and the principal regulations that have recently been applied or will be in the near future. And third, a series of individual, in depth interviews with more than 20 directors of companies that are the leaders in their respective sectors. These interviews make it possible to validate the results of the online survey, while at the same time detecting relevant nuances about the origin of competitiveness at companies that are leaders in the Spanish economy, and about priorities in general economic policy.

The Barometer is based on five sections that provide a full vision of the principal aspects that affect competitiveness and business dynamism in Spain. Graph 1 shows the five sections, as well as the variables that are analyzed in each one of them.

Graph 1. Composition of the Barometer • • Functioning of justice • Efficiency of public
Graph 1. Composition of the Barometer • • Functioning of justice • Efficiency of public
Graph 1. Composition of the Barometer • • Functioning of justice • Efficiency of public

Graph 1. Composition of the Barometer

• • Functioning of justice • Efficiency of public spending CONTRIBUTION MARKET • • Corruption
• Functioning of justice
• Efficiency of public spending
CONTRIBUTION
MARKET
• Corruption
OF PAs
DYNAMISM
• Tax burden
• Effect of use of subsidies
• Effect of publicmanagement companies
BUSINESS
BASIC
DYNAMISM
RESOURCES
PRODUCTIVE
• Contribution of entrepreneurship to
development
FACTORS
• Contribution of SMEs to dynamism
• Relation between efficiency and
company growth
LABOR MARKET
• General efficiency
• Regulatory barriers and bureaucracy
• Availability of skilled workforce
• Competition in the sector
• Cost of skilled workforce
• Supervision of competition
• Companies adaptation
• Functionalmobility in the company
• Geographicmobility
• Contribution of social partners
FINANCIAL MARKET
• Access to financing by means of capital
• Access to credit
• Credit development in the last 12 months
• Compliance with payment deadlines by PA.
• Compliance with payment deadlines by companies
by PA. • Compliance with payment deadlines by companies Development of internal demand International activity
Development of internal demand International activity Foreign investment
Development of internal
demand
International activity
Foreign investment

PHYSICAL INFRASTRUCTURES

Quality of infrastructures

Price of infraestructures

Management efficiency

HUMAN RESOURCES

Quality of formal education

Language fluency

Learning ability

TECHNOLOGY AND INNOVATION

Quality of business innovation

Extent of use of ICTs

4

The results of this initial edition of the Barometer show, in first place, a more
The results of this initial edition of the Barometer show, in first place, a more
The results of this initial edition of the Barometer show, in first place, a more

The results of this initial edition of the Barometer show, in first place, a more positive juncture and a high degree of consensus about the early, though moderate, improvement in the principal indicators of economic activity. Likewise, as the recovery gains ground, the Spanish economy is seen to have solid strengths such as the quality of its infrastructures and a trained work force, along with the size and location of its domestic market. Finally, the Barometer has detected structural weakness and urgent problems that need to be resolved without delay. Outstanding among the former are the inefficiency of our Public Administrations, the high levels of unemployment, and professional training that is not very competitive. Urgent action must be taken to consolidate the tax code, reorder the Administrations to reduce public spending and increase their efficiency, and improve financial markets.

Graph 2 shows the average scoring obtained by the total number of variables included in each of the sections in this first edition of the Barometer. As can be seen, the Market Dynamism section earns the highest average score, 4.9 in a range of 1 to 7. It is followed by Company Dynamism, 4.4; and Basic Resources, 4.0. The sections receiving the least approval are Financial Market, PA Contribution and Labor Market, with an average score of 2.9, 3.0 and 3.3, respectively. As reflected in the Barometer , Spain has obvious strengths in some areas, and clear weaknesses in others, which confirms that there are economic and institutional imbalances that need to be corrected.

Graph 2. Aggregated results of the Barometer 2014. Result of the evaluations, from 1 to 7, for the sections of the Barometer

4 5 3 2 6
4
5
3
2
6

1

7

Market dynamism (4.9)

4 3 5 2 6 1 7
4
3
5
2
6
1
7

Labor market (3.3)

4 3 5 2 6 1 7
4
3
5
2
6
1
7

Basic resources (4.0)

4 3 5 2 6 1 7
4
3
5
2
6
1
7

Financial market (2.9)

4 3 5 2 6
4
3
5
2
6

1

7

PA contribution (3.0)

4 3 5 2 6 1 7
4
3
5
2
6
1
7

Company dynamism (4.4)

Note: The range of measurements is from 1 to 7. The midpoint of the range of measurements is 4.

In the following six chapters we will analyze these aspects in greater detail, and in the final chapter concrete recommendations will be made on how to overcome the weaknesses that have been detected.

2. Market Dynamism In the section Market Dynamism, the Barometer reflects expectations for growth, both
2. Market Dynamism In the section Market Dynamism, the Barometer reflects expectations for growth, both
2. Market Dynamism In the section Market Dynamism, the Barometer reflects expectations for growth, both

2. Market Dynamism

In the section Market Dynamism, the Barometer reflects expectations for growth, both in internal demand and exports and overseas investment. It also identifies the most attractive markets for Spanish companies and the advantages and disadvantages of Spain as a destination for foreign investment.

Expectations for increased internal demand are moderately positive, in line with the most recent predictions about growth provided by the Bank of Spain: growth of 1.2% and 1.7% of GDP for 2014 and 2015, respectively. There are even greater expectations about growth in overseas investment, and above all for an increase in international activity by Spanish companies.

The preferred overseas destinations of Spanish companies are, in first place, Latin America, followed by Europe –the euro zone, Eastern and Western Europe– for both export and overseas investment.

When it comes to exporting, the competitive advantages of Spanish companies are above all related a good quality/price ratio, an appropriate adaptation to demand, and technological aspects. Competitiveness in price, however, is not considered to be such an important factor for Spanish products and services in international markets, which indicates that, increasingly, competition involves producing products and services with greater added value, and that increased competitiveness in the economy has been effective. In this sense the nominal unit labor costs in Spain have dropped by 7% since 2009. This has brought us back to levels similar to those that Spain had in 2007 and has returned us to the same competitiveness relative to the euro zone that we had in 2000. This improved competitiveness has mostly been achieved through a reduction in the number of salaried workers and through improvements in productivity; the contribution of reduced salaries to the improvement in competitiveness has been only 2.6 percentage points of the 7 points of total improvement.

Graph 3. Elements that Make the Products and Services of Spanish Companies Attractive Other Spain
Graph 3. Elements that Make the Products and Services of Spanish Companies Attractive Other Spain
Graph 3. Elements that Make the Products and Services of Spanish Companies Attractive Other Spain

Graph 3. Elements that Make the Products and Services of Spanish Companies Attractive

Other

Spain brand

Design

Price competitiveness

Technology

5% 4% 23% 9% 16% 22% 21%
5% 4%
23%
9%
16%
22%
21%
competitiveness Technology 5% 4% 23% 9% 16% 22% 21% Relation price/quality Adaptation to the needs of

Relation price/quality

Adaptation to the needs of local demand

Source: Own compilation with data from the 2014 Barometer of the Círculos survey. Note: The percentages are calculated according to the number of persons surveyed who have chosen that option as one of the three most relevant.

The reasons why Spanish companies make direct investment in foreign countries have more to do with the potential for growth than with the specific business conditions in those countries. When asked about their principal motives for foreign investment, the businessmen surveyed stress the potential for growth and profitability in those overseas markets, followed by the possibility of diversification and the need of growth. They assign considerably less importance to aspects such as the conditions of the labor market in those countries or acquiring technology or other inputs, as can be observed in Graph 4.

Graph 4. Most Relevant Reasons for Investing Abroad

Other

4. Most Relevant Reasons for Investing Abroad Other Capture of technology or other important input Market

Capture of technology or other important input

Market with more growth/ profit potential than that of Spain

5% 2% 7% 27% 10% 13% 20% 16%
5% 2%
7%
27%
10%
13%
20%
16%

More attractive labor market conditions

Better business environment in destination market

Platform for the development of activity in other markets

Platform for the development of activity in other markets Diversification o f m a r k

Diversification

of markets

Grow to achieve critical global mass

Source: Own compilation with data from the 2014 Barometer of the Círculos survey. Note: The percentages are calculated according to the number of persons surveyed who have chosen that option as one of the three most relevant.

Spain as a center of international activity There has also been an analysis of Spain’s
Spain as a center of international activity There has also been an analysis of Spain’s
Spain as a center of international activity There has also been an analysis of Spain’s

Spain as a center of international activity

There has also been an analysis of Spain’s strengths and difficulties in attracting investment and activity by foreign multinational companies. Companies here that are affiliates of foreign firms were asked to explain why their parent companies decided to choose Spain. Almost half of the respondents stressed the size of the Spanish market, the country’s geographical location, or the possibility of using its activities in Spain as a platform for reaching other markets. Less important were other aspects such as labor costs, the quality of life or the infrastructures.

Other reasons for some multinationals locating part of their activity in Spain:

improvements stemming from the recent labor reform law, the existence of quality suppliers, and the pool of skilled workers on different levels, e.g., telecommunications and informatics engineers.

Graph 5. Competitive Strengths and Difficulties of the Spanish Economy Fiscal framework Other Incentives and
Graph 5. Competitive Strengths and Difficulties of the Spanish Economy Fiscal framework Other Incentives and
Graph 5. Competitive Strengths and Difficulties of the Spanish Economy Fiscal framework Other Incentives and

Graph 5. Competitive Strengths and Difficulties of the Spanish Economy

Fiscal framework Other Incentives and subsidies

3% 4% 2% 4% 5%
3% 4% 2%
4%
5%
19%
19%

R+D+I framework

Size of market

Spanish language and cultural closeness

7% 13% 8% 10% 13% 12%
7%
13%
8%
10%
13%
12%

Quality of life

Geographic location

Infrastructures

Labor costs

Platform for the development of activities in other markets

Workforce skills

Dificultades competitivas

Workforce skills R+D+I framework Incentives and subsidies

3% 3% 3% 4% Other 5%
3% 3% 3%
4%
Other
5%
19%
19%

Perspectives for economic growth

Corruption

8% 9% 9% 11% 10%
8%
9%
9%
11%
10%

Labor costs

16% Bureaucracy and functioning of internal market

Fiscal framework

Functioning of labor market

Politicalinstitutional instability

of labor market Political ‐ institutional instability Macroeconomic instability Source: Own compilation with data

Macroeconomic instability

Source: Own compilation with data from the 2014 Barometer of the Círculos survey. Note: The percentages are calculated according to the number of persons surveyed who have chosen that option as one of the three most relevant.

As for the difficulties of the Spanish market in attracting foreign investment, what most concerns those reps of foreign companies here are the macroeconomic and political institutional instability, and the perspectives for economic growth. They also stress the high level of unemployment, which has a negative effect on Brand Spain. Other aspects that need to be improved regard taxes, the functioning of the labor market and labor costs, and bureaucracy. But corruption is not one of the principal concerns of foreign investors in deciding to set up operations in Spain.

The businessmen also stress aspects that would discourage foreign investment here, such as a competitive disadvantage with regard to other countries in energy costs,

the regulatory uncertainty and arbitrariness in this and other sectors, the lack of unity of
the regulatory uncertainty and arbitrariness in this and other sectors, the lack of unity of
the regulatory uncertainty and arbitrariness in this and other sectors, the lack of unity of

the regulatory uncertainty and arbitrariness in this and other sectors, the lack of unity of the market, and the tax system.

These results are consistent with other reports about competitiveness, such as the Global Competitiveness Report of the World Economic Forum (GCR), whose 2013 2014 edition stresses the most problematic aspects for doing business in Spain: apart from access to financing, they include bureaucracy, labor legislation and tax rates. In other reports, such as the Barometer of the Business Climate in Spain (1), bureaucracy and aspects of the labor market are also perceived as problematical for potential foreign investors 1 .

Thus in general terms there seems to be moderate optimism about economic activity, and while there continue to be occasional events and structural aspects that work against foreign investment –such as the economic crisis and political institutional instability– both the survey and the interviews that were carried out reflect the capacity of the Spanish market for producing and providing goods and services of high added value in the global context.

1 Barometer of the Business Climate in Spain from the Perspective of the Foreign Investor (2012). Invest in Spain/ICEX, International Center for Competitiveness, IESE.

3. Basic Resources Under the heading Basic Resources, the Barometer analyzes aspects of production having
3. Basic Resources Under the heading Basic Resources, the Barometer analyzes aspects of production having
3. Basic Resources Under the heading Basic Resources, the Barometer analyzes aspects of production having

3. Basic Resources

Under the heading Basic Resources, the Barometer analyzes aspects of production having to do with physical infrastructures, education and the innovative capacity of the Spanish economy.

Spain obtains good results in most of the indicators of international competitiveness that are periodically published with regard to the quality of its physical infrastructures, but poorer results with regard to the quality of the educational system and the capacity for innovation.

Graph 6. Basic Resources: Comparison of General Indicators with Other OECD Countries

8 7 6 5 4 3 2 1 0 Quality of Quality of Innovative infrastructures
8
7
6
5
4
3
2
1
0
Quality of
Quality of
Innovative
infrastructures
education
capacity

system

Spainof Innovative infrastructures education capacity system OECD average Country highest ranked Source: Own compilation

OECD averageinfrastructures education capacity system Spain Country highest ranked Source: Own compilation with

Country highest rankededucation capacity system Spain OECD average Source: Own compilation with original data from the

Source: Own compilation with original data from the Global Competitiveness Report, 2013. Note: For each indicator there is a range of evaluation from “1” (worst) to “7” (best).

Spanish managers confirm those general perceptions about the quality of our basic resources. As demonstrated in Graph 7, the evaluation of the quality of the infrastructures in positive, whereas innovation and, principally, education are more negative. The evaluation of management and the price of physical infrastructures are substantially lower than that of its quality. In the case of education, proficiency in foreign languages is notably low.

Graph 7 also makes it possible to compare the evaluation obtained in the Barometer for Spain with the results obtained by other countries in the most important studies (the Global Competitiveness Report, or GCR, and the World Competitiveness

Yearbook, WCY ). For those variables for which there is information, we depict the values
Yearbook, WCY ). For those variables for which there is information, we depict the values
Yearbook, WCY ). For those variables for which there is information, we depict the values

Yearbook, WCY ). For those variables for which there is information, we depict the values obtained for the OECD average and for two concrete countries: the OECD country with the best score in each variable and a country with a balanced evaluation for the whole of the variables –in this case Holland. The evaluation of Spain is clearly inferior, with the exception of the quality of its infrastructures, and also more unbalanced.

Graph 7. Basic Resources: Comparison of General Indicators with Other OECD Countries

General quality of infrastructures

7 CHE 6 SWE 5 4 3 2 CHE 1 CHE LUX
7
CHE
6
SWE
5
4
3
2
CHE
1
CHE
LUX

Level of use of ICTs

Price of infrastructures

Quality of innovation in companies

Efficiency in management of infrastructures

Learning ability

Quality of formal education

Language fluency

Spain (Barometer) Country with best valuation (WEF/IMD)
Spain (Barometer)
Country with best valuation (WEF/IMD)

Average OCDE (WEF/IMD)Spain (Barometer) Country with best valuation (WEF/IMD) Balanced country: Holland (WEF/IMD) Source: Own compilation

Balanced country: Holland (WEF/IMD)Country with best valuation (WEF/IMD) Average OCDE (WEF/IMD) Source: Own compilation with data from the 2014

Source: Own compilation with data from the 2014 Barometer of the Círculos survey, the 2013 Global Competitiveness Report (World Economic Forum) and the 2014 World Competitiveness Yearbook (IMD). Note: For each indicator there is a range of evaluation from “1” (worst) to “7” (best).

PHYSICAL INFRASTRUCTURES In spite of general satisfaction with the quality of physical infrastructures in
PHYSICAL INFRASTRUCTURES In spite of general satisfaction with the quality of physical infrastructures in
PHYSICAL INFRASTRUCTURES In spite of general satisfaction with the quality of physical infrastructures in

PHYSICAL INFRASTRUCTURES

In spite of general satisfaction with the quality of physical infrastructures in Spain, there are seen to be important deficiencies in their management as well as in the mechanisms for setting prices and in the taking of decisions about investments. These deficiencies are of a general nature, but are most pronounced in the energy sector.

In this sense, Graph 8 shows that the energy sector is the one that the greatest percentage of those people surveyed includes among the infrastructures that need improvements in prices and management. This message is particularly clear among the managers of industrial companies, for whom the price of energy has become one of the principal problems: they feel their foreign competitors get prices closer in line with their competitive needs. They also stress that the unpredictability and lack of transparency in setting energy prices lead to the general perception of uncertainty in the Spanish economic setting.

Graph 8. Need for Improvements in Prices and Management

Improvement in

management

8% 1% 24% 7% 11% 13% 18% 18%
8% 1%
24%
7%
11%
13%
18%
18%
Improvement in price 7% 3% 8% 34% 8% 9% 12% 19%
Improvement in price
7% 3%
8%
34%
8%
9%
12%
19%

Energy infrastructures18% Improvement in price 7% 3% 8% 34% 8% 9% 12% 19% Telecommunications infrastructures Airports Railroads,

Telecommunications infrastructures

AirportsEnergy infrastructures Telecommunications infrastructures Railroads, cargo Ports Highways Railroad, passenger None

Railroads, cargoinfrastructures Telecommunications infrastructures Airports Ports Highways Railroad, passenger None Source: Own

PortsTelecommunications infrastructures Airports Railroads, cargo Highways Railroad, passenger None Source: Own compilation

Highwaysinfrastructures Airports Railroads, cargo Ports Railroad, passenger None Source: Own compilation with data

Railroad, passengerinfrastructures Airports Railroads, cargo Ports Highways None Source: Own compilation with data from the 2014

NoneAirports Railroads, cargo Ports Highways Railroad, passenger Source: Own compilation with data from the 2014

Source: Own compilation with data from the 2014 Barometer of the Círculos survey. Note: The percentages are calculated according to the number of persons surveyed who have chosen that option as one of the three most relevant.

EDUCATION

There is a general perception that education is an important vulnerability in the Spanish economy, and one that could get worse in the long run. The most important deficiencies are seen to be a lack of knowledge of foreign languages and the low quality and recognition of professional training.

Nevertheless, some strengths have been detected in Spanish training. In particular, it is felt that the quality of the top Spanish technicians, principally engineers, and managers is high, even when compared to our principal competitors.

To improve the quality of education in Spain we must encourage the values of entrepreneurship
To improve the quality of education in Spain we must encourage the values of entrepreneurship
To improve the quality of education in Spain we must encourage the values of entrepreneurship

To improve the quality of education in Spain we must encourage the values of entrepreneurship during primary education, improve the quality of the teachers, make sure education is appropriate to market needs, and get companies to participate in education. Greater public financing or more private management of education are considered to be less important.

In short, it is very important for companies to get involved in education, not only in the design of the programs –particularly in dual vocational training– but through greater control of the funds that the companies contribute to worker training programs, which last year totaled some 2 billion euros. While management participation in education is easier in countries with a greater such tradition, like Germany, it is also true that Spain has a certain tradition in this area: its schools for apprentices, which in recent years are being lost due to greater centralization in regulated education. A good example of business participation in training in Spain are the programs of “training with the obligation of hiring”: the companies train workers through public financing, principally from the different regional autonomous communities, in exchange for a firm commitment to contract these trainees in the future.

Graph 9. Most Relevant Measures to Improve Education in Spain

Other Improve scholarship and aid policies

Increase public spending on education

and aid policies Increase public spending on education 7% 1% 7% 10% 22% 18% Promote entrepreneurship
7% 1%
7% 1%
7% 10%
7%
10%
22%
22%
18%
18%

Promote entrepreneurship values from elementary school on

Greater private management of education

17% 18%
17%
18%

Improve the quality of teaching staff

Increase companies participation in formal education

Adapt degree offers to the market

Source: Own compilation with data from the Barometer of the Círculos, 2014. Note: The percentages are calculated according to the number of persons surveyed who have chosen that option as one of the three most relevant.

Best International Practices I. Adapting diplomas to the needs of the market in Querétaro, Mexico
Best International Practices I. Adapting diplomas to the needs of the market in Querétaro, Mexico
Best International Practices I. Adapting diplomas to the needs of the market in Querétaro, Mexico

Best International Practices I. Adapting diplomas to the needs of the market in Querétaro, Mexico

Through the creation of the Aeronautical University of Querétaro (UNAQ), the Mexican city of Querétaro has found an important place in the world aeronautics industry.

Although the UNAQ was officially created as a public institution on November 23, 2007, its origins date back to the middle of 2005, when the government of the State of Querétaro, supported by the federal government, took part in an international competition to attract Bombardier Aerospace, a Canadian manufacturer of aircraft and a leader in the sector. The arrival of the company attracted many auxiliary firms and led to the creation of the first aeronautical production cluster in Mexico.

Immediately a team of professors was formed to give courses in aeronautical production. Today the UNAQ offers the business sector training and consultancy services, designs programs and courses depending on specific company needs, and forms teams to implement them.

Source: Own compilation based on different public sources

INNOVATION

Spanish executives are not especially pessimistic about the country’s capacity for innovation.