The barometer of the Círculos

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 17. Main Problems Affecting the Spanish Financial Market ............. 25

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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

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

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.

José María Bergareche Busquet

President, Círculo de Empresarios Vascos

Mónica de Oriol e Icaza

President, Círculo de Empresarios

Antón Costas Comesaña

President, Círculo de Economía

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Executive Summary

2

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

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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

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products and processes. Companies must take a greater role in public R+D. Measures to promote and finance public‐private 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 part‐time 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 part‐time 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.

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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 risk‐taking. There should also be a greater contribution to business dynamism on the part of the small and medium‐sized 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.

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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.

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Report

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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

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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 on‐line 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.

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Graph 1. Composition of the Barometer

• Functioningof justice

• Efficiency of public spending

• Corruption

• Tax burden

• Effectof use of subsidies

• Effectof publicmanagement companies

• Developmentof internaldemand

• International activity

• Foreign investment

MARKET DYNAMISM

BASIC RESOURCES

PRODUCTIVE FACTORS

BUSINESS DYNAMISM

CONTRIBUTIONOF PAs

• Quality of infrastructures

• Price of infraestructures

• Management efficiency

• Quality of business innovation

• Extentof use of ICTs

• Quality of formal education

• Language fluency

• Learningability

PHYSICAL INFRASTRUCTURES

HUMAN RESOURCES

TECHNOLOGY AND INNOVATION

• General efficiency

• Availability of skilledworkforce

• Costof skilledworkforce

• Functionalmobility in the company

• Geographicmobility

• Contributionof social partners

LABOR MARKET

FINANCIAL MARKET

• Access to financingby meansof capital

• Access to credit

• Credit development in the last 12 months

• Compliancewithpaymentdeadlines byPA.

• Compliancewithpaymentdeadlines by companies

• Contributionof entrepreneurship to development

• Contributionof SMEs to dynamism

• Relationbetweenefficiency and company growth

• Regulatory barriers and bureaucracy

• Competition in the sector

• Supervisionof competition

• Companies adaptation

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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

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.

Labor market (3.3) Financial market (2.9) Company dynamism (4.4)

Market dynamism (4.9) Basic resources (4.0) PA contribution (3.0)

1 7

43

2 6

5

1 7

43

2 6

5

1 7

43

2 6

5

1 7

43

2 6

5

1 7

43

2 6

5

1 7

43

2 6

5

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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.

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

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

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.

23%

22%

21%

16%

9%

5%4%

Other

Relation price/quality

Adaptation to the needs of local demand

Technology

Price competitiveness

Design

Spain brand

27%

20%

16%

13%

10%

7%5% 2%

Marketwith more growth/ profit potential

than that of Spain

Diversificationof marketsGrow to achieve

critical global mass

Platform for thedevelopment of activity in other markets

Better business environment in destination market

More attractive labor marketconditions

Capture of technology or otherimportant input

Other

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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.

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Graph 5. Competitive Strengths and Difficulties of the Spanish Economy

Dificultades competitivas


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,

19%

13%

13%

12%

10%

8%

7%

5%

4%3%

4%2%Sizeof market

Geographic location

Platform for thedevelopmentof activities in other markets

Workforce skills

Labor costs

Infrastructures

Quality of life

Spanish language and cultural closeness

R+D+I framework

Incentives and subsidies

OtherFiscal framework

19%

16%

11%

10%

9%

9%

8%

5%

4%3%

3%3%

Perspectives for economic growth

Bureaucracy and functioning of internal market

Political‐institutional instability

Macroeconomic instability

Functioning of labor market

Fiscal framework

Labor costs

Other

Corruption

Incentives and subsidiesR+D+I framework

Workforce skills

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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 investors1. 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.

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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

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

0

1

2

3

4

5

6

7

8

Quality of infrastructures

Quality of education system

Innovative capacity

Spain

OECD average

Country highest ranked

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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

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).

1

2

3

4

5

6

7General quality of infrastructures

Price of infrastructures

Efficiency in management of

infrastructures

Quality of formal education

Language fluency

Learning ability

Quality of innovation in companies

Level of use of ICTs

Spain (Barometer) Average OCDE (WEF/IMD)

Country with best valuation (WEF/IMD) Balanced country: Holland (WEF/IMD)

CHE

CHE

CHE

SWE

LUX

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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

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


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.

24%

13%

18%

18%

11%

7%

8% 1%

34%

19%12%

9%

8%

8%

7% 3%

Energy infrastructures

Telecommunications infrastructures

Airports

Railroads, cargo

Ports

Highways

Railroad, passenger

None

Improvement in management Improvement in price

14

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

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


22%

18%

18%

17%

10%

7%

7% 1%

Promoteentrepreneurship values fromelementary school on

Improve thequality of teaching staff

Adaptdegree offers to themarket

Increasecompanies participationin formal education

Greater privatemanagementof education

Increasepublic spending oneducation

Improve scholarship and aid policiesOther

15

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

Mexico

INNOVATION Spanish executives are not especially pessimistic about the country’s capacity for innovation. This is because, to a large degree, they do not associate innovation with just spending on research and development but also value the innovative potential of companies in defining processes and products. Among the initiatives of the public sector that they consider most effective in improving the innovative capacities of Spanish companies, these managers stress measures that will promote the participation of companies, specifically through their support and financing of public‐private initiatives and tax incentives for R+D. They assign less value to direct action by the public sector such as increases in public spending on R+D, the improvement of grants and contracts, or incentives by means of public purchases.

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

16

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

Spanish Companies


Best International Practices II.

The system of dual training in Germany

23%

20%

18%

13%

10%

9%

7% 0% Encourageuniversity‐companycollaboration in research

Fiscal incentives for D+I

Co‐financing public‐privateresearch programs

Concentration of public support to applied research in some specific

sectors

Improve financing of scholarships and work

contracts for researchers

Increasepublic spending for R+D in basic research

Promotepublic purchase of innovativecompanies

Other

Approximately 66% percent of German students follow a system of dual vocational training. This assures that the worker will be prepared for the position he will occupy in the company, reduces the initial necessary training, and increases productivity. For the students, it improves their chances in the labor market and gets them a certificate; along with the practical orientation, they receive a grant.

The system is based on training at the company (3-4 days each week) and at the school (1-2 days per week). There are 348 different kinds of dual training, and they are continually updated and adapted to the needs of the companies (45 of them having been created since 2001).

The federally legislated Vocational Training Act regulates joint action in this area by companies, trade unions, the Länder and the federal government. The majority of the system is financed by the companies.

Source: Own compilation based on different public sources

17

4. Labor Market The Spanish labor market has traditionally received very negative reviews, both in absolute terms and in comparison to neighboring countries, and has continually been out of balance. For example, the Spanish unemployment rate has been over 25% for the past two years, whereas the average in EU countries is less than 11%, and only five countries surpass 15%. Likewise there are evident anomalies such as the fact that Spain is the only euro economy that, between 2007 and 2012, carried out a labor adjustment to achieve improvements in productivity, with a significant reduction in the number of workers, while at the same time increasing the number of average hours per salaried worker. On the other hand, the average percentage of workers in temporary employment over the past decade was greater than 30% in Spain, while the EU average was 15%. In addition, part‐time work is much more rare in Spain, where the average between 2000 and 2012 was 11% of the work force, while the EU average was 18%.

Graph 11. Percentage of Workers in Temporary Employment. Average 2000‐

2012

Source: Own compilation with Eurostat data. Note: The estimated value is the simple average of the percentage of workers with temporary contracts with relation to the total workers between 2000 and 2012.

0,0

5,0

10,0

15,0

20,0

25,0

30,0

35,0

European

Union‐28

European

Union‐27

European

Union‐15

Belgium

Bulgaria

Czech Republic

Denmark

Germany

Estonia

Ireland

Greece

Spain

France

Croatia

Italy

Cyprus

Latvia

Lithuania

Luxembourg

Hungary

Malta

Holland

Austria

Poland

Portugal

Romania

Slovenia

Slovakia

Finland

Sweden

United Kingdom

Iceland

Norway

Switzerland

Macedonia

Turkey

18

The Barometer confirms that the situation of the Spanish labor market is worrisome, but has detected a generally positive perception regarding some aspects of the way it works. As can be seen in Graph 12, the perception about the efficiency of this market is slightly below the average yet is more positive about such aspects as availability and the costs of the qualified work force. Nevertheless, there are continuing negative evaluations regarding the possibility of moving workers around, both geographically and with regard to their tasks in the firm, and especially of the role of the social agents, both trade unions and management. Even more interesting, it has been discovered that the larger companies, which are generally subject to labor agreements, have maintained good relations with the unions, which has allowed them to make the necessary adjustments in their work forces and adapt their needs and competitiveness to market situations. In some cases, given the fact that many workers have lost their jobs in the adjustment, this has been achieved at a high cost.

Graph 12. Labor Market. Perceived Valuations on the Círculos Barometer

Source: Own compilation with data from the 2014 Barometer of the Círculos survey. Note: For each indicator there is a range of evaluation from “1” (worst) to “7” (best).

Evaluation of the recent labor reform is generally positive. Its most highly valued aspects are the promotion of part‐time employment and the reduction of costs when dismissing a worker. Nevertheless there is still room for improvement in this area, so as to approach European levels: in Spain the cost for unfair dismissal under an open‐ended contract fluctuates between 33 and 45 days of salary compensation for each year of work (with a maximum of 42 months), whereas the average in the EU‐15 is 21 days for each year worked (with a maximum of 24 months).

1

2

3

4

5

6

7General efficiency

Availability of skilled

workforce

Cost of skilled workforce

Functional mobility in

the company

Geographic mobility

Contribution by social

partners

19

The least positive evaluations of the labor reform have to do with uncertainty about the way the courts can rule on the causes for dismissal, and about the new modes for contracting workers following the application of the reforms.

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

the Work Market


Nevertheless, there is a perception that some labor aspects can be improved. Outstanding examples: measures to strengthen the link between salaries and productivity, and a reduction in employer contributions to the National Insurance fund. Secondly, the managers have positive opinions about improvements in active policies of employment and, to a lesser degree, the simplification of contract models.

1 2 3 4 5 6 7

The offer of new types of contracts for young

people and entrepreneurs

Objectification of the cause for dismissal in

order to decrease the arbitrariness of the …

Flexibility of “opt‐out” causes

Promotion of part‐time recruitment

Reduction of dismissal costs

20

Graph 14. Most Important Reforms to Improve the Labor Market Situation

in Spain


Although the Barometer has detected an improvement in labor relations at the large companies, this does not seem to be the case at the PYMEs (the Spanish acronym for small and medium‐sized companies), which in general have found more difficulties in adapting collective bargaining to their specific needs. On the other hand, there is still general concern about the high rate of unemployment, especially among young people, and about the difficulty of relocating workers who are out of work. For this reason, it is felt that measures should be taken to find jobs for the unemployed, even if by means of part‐time contracts, job sharing, or less attractive salaries.

19%

19%

18%

13%

12%

11%

5% 3% Wages linked to productivity

Reduction of social contributions

Improvement in active employment policies

Simplification of contractmodels

Increased sanctions aimed at theblack economy

Strict restrictions for accessto/reduction of unemployment

benefits

Decrease in temporary work

Reduction of the minimumwageand others

21

Best International Practices III.

The part‐time work system in Holland

Holland has a rate of part-time work (49.8%) that is far higher than the average in Europe (20%) and Spain (14.7%). This is the result of joint measures on the institutional, business and social levels:

• The Wassenaar Arrangement, from 1982, allowed workers to retain their jobs by lowering their salary in exchange for a reduction in the work day. It was agreed upon by the institutions, trade unions and companies. The 1996 law against discrimination related to work time achieved equal treatment between part-time and full-time workers, in proportion to the time worked, in terms of salary, social reductions and vacations (something which has still not been applied in Spain).

• The salary difference between part-time and full-time jobs, in proportion to the time worked, is 7% in the private sector and practically non-existent in the public sector.

• For its part, the Government increased funds for infant care to mothers who wanted to work part-time, thus facilitating their incorporation into the work force. (In 2011, 51.6 % of the women in managerial posts were part-time workers.)

• The great majority of part-time work in Holland is voluntary, and is not imposed by the company.

Source: “The part-time work system in Holland and its application in Spain”. Sandalio Gómez, IESE. Note: Eurostat data relative to 2012.

22

Best International Practices IV.

Active policies of employment in European countries

Different European countries such as Denmark, the United Kingdom and Belgium have instituted active policies to create employment, some of them aimed especially at resolving the problem among young people.

In Denmark, the government provides urgent assistance to young people of 18 and 19 in finding work just a week after they have received their first unemployment benefits, and it also offers salary subsidies to private companies if they hire people between 18 and 30 who have been on relief for more than a year. In addition, young people between 15 and 17 are required to present a training plan that describes what activities they are going to engage in. If the young people do not satisfy this obligation, their parents can lose their welfare benefits for the child.

In Belgium the government gives salary subsidies to companies that contract people with special difficulties, including young people. They range from 750 to 1,000 euros per month for contracts of between 12 and 24 months. In addition, the “start-up bonus” apprentice contract has been introduced, with incentives for people under 18 who want to acquire professional experience: it guarantees salaries of 500 euros per month for the first and second year, and 700 euros for the third year, as long as the last two years come after the period of obligatory minimum education.

The Work Programme in the United Kingdom is a large-scale outsourcing plan whose principal feature is a structure of financial incentives to reward private sector firms that find work for the long-term unemployed, depending on the results obtained. In addition, a substantial part of the payments are made once the person has been working for 13 or 26 weeks.

Source: “Active policies of employment for young people: Where are we going now?” Dalia Ben-Galim, Asunción Candela Terrasa, Carmen de Paz Nieves. Fundación Ideas, 2012. www.Gov. uk.

23

Best International Practices V.

Graduating the minimum salary in European

countries

Several European countries, such as the United Kingdom and Holland, vary the minimum salary so as not to harm those groups of workers who are potentially less competitive. Thus in the UK the minimum hourly wage is different for people under 18 (3.72 £), for those from 18 to 20 (5.03 £) and for those older than 21 (6.31 £).

Source: Own compilation with different public sources

24

5. Financial Market The most recent international indicators of competitiveness reflect a very poor opinion of the Spanish financial market. In addition to the vulnerability of non‐banking sources of financing, recent years have brought a weakness in the banking system and the difficulty of access to credit. As indicated by Graph 15, over the past five years the relative evaluation in the Global Competitiveness Report of some of the most important indicators in Spanish financial markets has deteriorated substantially, in some cases falling to the last places in international rankings. This contrasts with the evaluation of other economic aspects, such as infrastructures or the labor market, whose indicators have remained more stable, although in the latter case with a negative rating. This decline is doubtless related to the restructuring of the banks, especially the consolidation and injection of public money into the old savings banks and their conversion into normal banks.

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

Source: Own compilation with original data from the GCI, 2013. Note: The position of Spain relative to the global ranking of countries (on a scale of 0 to 100).

The results of the Barometer confirm this view. As shown by Graph 16, all aspects of the financial market earn negative reviews, especially access to credit and the payment periods of the Public Administrations.

0

10

20

30

40

50

60

70

80

90

1002008 2009 2010 2011 2012 2013

Financing risk capital, WEFFinanciación mercado de valores, Financing equity market, WEFBank solidity, WEFFacility access to credit, WEF

Relative position in ranking(normalized from 1 to 100)

25

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


Those surveyed in the Barometer identified the principal problems in the financial markets: a lack of alternative mechanisms for finance other than the banks, and the weak balances of those banks. This was followed by the competition for funds on the part of the public sector. The low credit rating of borrowers is perceived as being far less important.

Graph 17. Main Problems Affecting the Spanish Financial Market


1

2

3

4

5

6

7

Access to financing through

capital

Access to credit

Development of credit last 12

months

Compliance with payment

deadlines (PA)

Compliance with payment

deadlines (companies)

24%

23%

19%

19%

14%1%

Structuralweaknessof financialsourcesother than banks

Balance weakness of mainbanking institutions

Strong competition by thepublic sector to cover its

financing needs

Excessive paymentand collectiondeadlines

Unsounddemand

Other

26

With regard to complying with payment periods, the law and other steps to reduce slowness in paying by the Public Administrations were seen as positive steps, though there still remains much to be done. There is the clear perception that the problems of arrears has been very severe, but that there is now a certain improvement. It is believed that the problem is particularly centered in the Public Administrations, and that it is less serious in the private sector. Nevertheless a generalized slowness in paying is a serious concern. The problem appears to be smaller in multinational firms because they have strict internal rules regarding compliance with established periods, and the smaller firms are obliged to play by the rules, least in their relations with these large companies.

Graph 18. Perception of Compliance with Maximum Payment Deadlines to

Legally Established Suppliers

Source: Own compilation with data from the 2014 Barometer of the Círculos survey. For each indicator there is a range of evaluation from “1” (worst) to “7” (best).

During the next 12 months there is expected to be a slight restructuring in the sources of financing available to Spanish companies, which can be considered an improvement in their conditions of liquidity and a greater confidence in the future. Graph 19 illustrates this aspect by comparing the most commonly used sources of financing over the past 12 months with those that are expected to be used in the coming 12 month. Short‐term financing, including financing by means of suppliers and the value chain, will be less important in company accounts. But there will be an increase in long‐term financing through bank loans, as well as by other means, such as cash flow, the issuance of debt, venture capital and financing from the parent company in the case of the multinationals.

1 2 3 4 5 6 7

Regional government

Local government

Central government

Small companies

Large companies

27

Graph 19. Financing Sources Used by Companies

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

0%

5%

10%

15%

20%

25%Last year

Next year

28

Best International Practices VI.

Alternative sources of financing in France

In France, some 55% of the small and medium-sized companies get their financing from sources other than banks, a figure far higher than the 22% in Spain (although significantly below the 70% in the United States). These sources include the alternative capital market, the issuance of debt and the securitization of lending.

A notable case is Alternext, a capital market for small and medium-sized companies, which has almost 200 firms with a market capitalization of more than 8 billion euros. Some of the large institutional investors, such as Allianz, JP Morgan or Natixis, are part of it. Public funds have also been created to invest in the small and medium-sized firms, and some of them also participate in Alternext, such as FSI-France Investissement.

The requirements for an initial public offering on Alternext are not very arduous (two years of audited accounts, approval of the prospectus, and a minimum free-float of 2.5 million euros.) The total amount raised in 2012 was 1.3 billion euros.

There are important income tax deductions for investors from specialized funds who invest in small and medium-sized companies and maintain their investments for at least five years. These tax incentives can be as high as 25% of the capital invested, with a top limit of 20,000 euros per person.


29

6. Management Dynamism The section of Management Dynamism includes public and private aspects that reflect the functioning and competitiveness in the Spanish goods and services markets. These include the levels of competence and effectiveness in supervision, the contribution of the small and medium‐sized firms and their capacity for growth, the level of entrepreneurship, and also the obstacles that bureaucracy and regulation mean for developing markets.

The evaluation of the different aspects included in the Management Dynamism section, while generally positive, is mixed. Thus the level of market competition is seen as high –the companies can adapt to changing conditions and the efficient ones can grow– but the official supervision of this competition is not see as very positive. Somewhat less positive are aspects relative to the role of entrepreneurship in Spain’s economic development and the contribution of the small and medium‐sized companies to managerial dynamism. The aspects least valued are the regulatory requirements and administrative charges, which are thought to be excessive and an obstacle to growth. Graph 20 also makes it possible to compare the evaluation obtained in the Barometer for Spain with the results obtained in other indexes for the OECD average: for the OECD country with the best score in each variable and for a country with a balanced evaluation for the whole of the variables –in this case Sweden. The evaluation of Spain is clearly inferior to that of the other countries, with the exception of the opinion about its level of competition in the markets.

30

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

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

Entrepreneurship continues to be one of the subjects pending in the Spanish economy. This is consistent with other international studies. The impresarios surveyed feel that there is not greater entrepreneurship in Spain principally because of inappropriate regulations and because the educational system does not study the entrepreneurial spirit. But they also attribute a large part of this lack of entrepreneurship to cultural aspects, such as the lack of social recognition of impresarios and the fear of failure that exists in the Spanish culture. However, the lack of public programs to support entrepreneurs is not considered to be among the more relevant problems. The businessmen are not particularly critical with the lack of entrepreneurial initiatives, nor about entrepreneurship within companies, nor in the participation of company incubators or industrial estates. Nevertheless, the IMD World Competitiveness Yearbook, in evaluating worldwide management practices, placed Spain number 57 out of 60 countries with regard to the entrepreneurship of its managers. These impresarios give only moderate marks to recent measures taken in Spain to promote entrepreneurship: they consider that the most effective one was the tax reform to favor new companies, followed by the reduction of administrative requirements and by adequate training.

1

2

3

4

5

6

7

Contribution of entrepreneurship to

development

Contribution of SMEs to dynamism

Connection efficiency and

growth of companies

Regulatory barriers and bureaucracy

Competition in the sector

Supervision of competition

Adaptation of companies

Spain (Barometer) Average OECD (WEF/IMD)

Country with best valuation (WEF/IMD) Balanced country: Sweden (WEF/IMD)

ISR

CHE

CHE

JPN

DEU

31

As for promoting sources of financing, much more importance is given to risk capital and business angels than to such organizations such as the Alternative Stock Exchange Market or the Alternative Fixed Income Market.

Graph 21. Initiatives Taken with Regard to Entrepreneurship


It is necessary to distinguish between efforts aimed at the creation of new companies and efforts seeking the growth of small and medium‐sized companies. The businessmen surveyed believe that on occasion the measures are more directed toward creating companies than toward the rapid development of the most successful ones, and that some of these measures even have a detrimental effect on their later growth. When it comes to enhancing the growth of companies, the financial markets are considered one of the main problems, because it is felt that they are not willing to take risks to help small firms develop. Again, this is consistent with other international studies such as “Entrepreneurship at a Glance 2013”, from the OECD, which states that risk capital in Spain is less than 0.02% of the GDP, and is not especially centered around the growth of startups. In other European countries, such as Sweden or Ireland, the percentage of risk capital as a percentage of GDP is three times as large, and a considerable part of it is invested in the growth of companies, not in their creation. Those surveyed feel that other aspects that limit the capacity for company growth in

Spain are regulatory barriers and the inflexibility of the labor market. Nevertheless

there are also problems directly attributable to the companies themselves, such as a

lack of ambition by the leadership.

1 2 3 4 5 6 7

Alternative Stock Market (MAB) and Alternative

Fixed Income Market (MARF)

Greater facilities for the creation of companies

Training in entrepreneurship subjects in formal

education

Reduction of requirements and administrative burdens

Support of capital risk and business angels

Reform of tax system in favor of newly created businesses

32

Best International Practices VII.

Entrepreneurship in Israel

The Barometer has also sought to analyze the main obstacles to business creation and development in Spain, while stressing the need to streamline the procedures for obtaining licenses and permission, as seen in Graph 22. In the opinion of those surveyed, the principal problem is the duplication of requirements on different administrative levels, along with the discretional nature of the administrative decisions taken. Among these different administrations, the most inefficient is considered to be the regional autonomous governments.

Israel is considered a world-class example of entrepreneurship. Indeed, it has the highest percentage of venture capital investment as a percentage of GDP, 0.5%, easily surpassing the second country, the United States. Several factors have made Israel “The Startup Nation”.

• Government resources: the government gives financing to new companies and also supports entrepreneurs by creating associations and programs that put them in contact with investors.

• Universities: Israel has some of the best technological universities, such as Technion in Haifa. These universities are a meeting point for young entrepreneurs who later do business together.

• Mentors: the first generation of innovators, now approaching retirement, serve as mentors and investors for the leaders of the new generation.

• Army: in Israel, most people serve in the army before going to university, and become proficient in technology and communications, skills that they use later in their entrepreneurial projects.

• Culture: in Israel there is a culture of promotion and support of entrepreneurship and leadership, supported by all the institutions and areas of society.

Source: “Why Israel is a Startup Nation” http://www.techinasia.com/israel-startup-nation

33

Graph 22. Obstacles to the Acceleration of Procedures and Formalities


22%

20%

19%

16%

13%

6%4%

Duplication of requirementsbetweendifferent administration levels

Inefficiency of regional regulationsand their application

Discretion in administrative decisions

Inefficiency of state regulations and their application

Inefficiency of municipal regulationsand their application

Excessive control byCommissioners for Oaths(notaries and registrars)

Other

34

Best International Practices VIII.

Efficiency in the Administration through the use of

ICT

South Korea has speeded up relations between its Administration and companies and citizens thanks to the use of ICT. It is one of the world’s leading countries in access to ICTs (first in the ranking of the International Telecommunication Union). To do this the country has applied many measures:

• E-Government: the government has integrated IT applications in its services, with regard both to companies (G2B) and private individuals (G2C).

• Starting in the mid-1990s, the government established three master plans for the development of the information society, thus leading to the Act on Promotion of Information, Cyber Korea 21 and e-Korea Vision 2007. Advanced information infrastructures were created, information systems were introduced in public services and the private sector, and the growth of the IT industry was promoted.

• The Ministry of Information and Communication was created and plays a central role in the design, implantation and coordination of ICT policies and e-government initiatives. Coordination measures among informatization policies were promoted among all the different government ministries and agencies.

• The Informatization Promotion Fund was created, and the government financed projects in the private sector.

• The Information Infrastructures Initiative established all the infrastructures and networks necessary for the development of the ICTs, although they were based on a closed system rather than international standards.

• Internal demand was stimulated through different government measures such as free access to Internet in schools, free Internet training programs, the distribution of computers at low prices, etc.


35

Best International Practices IX. Intelligent regulation: transparency, consultations and motivated regulation

in the United Kingdom

“The Red Tape Challenge” is a program developed in the United Kingdom to reduce the burden of regulation. If companies or individuals file a complaint against a regulation, the government must demonstrate the need to maintain it (with burden of proof being on the Administration).

Through an on-line forum, the Administration promotes discussion about regulatory proposals, seeking suggestions and arguments from citizens, companies and associations. The different ministerial departments then have three months rebut these arguments, and then seek the approval of the Reducing Regulation Committee. If it is not achieved, the regulation will not go into effect. To assure transparency, the results of the process are published in the on-line platform.

More than 30,000 suggestions have been made by companies or private individuals to eliminate or modify more than 3,000 norms, with an approximate annual saving of 1 billion euros.

Source: www.redtapechallenge.cabinetoffice.gov.uk

36

7. Contribution of the Administrations

Along with the financial market, the functioning of the Public Administrations is the economic aspect that received the worst assessment on the Barometer. And while it is affected to a large degree by temporary factors, there exists the perception that Spanish Administrations function poorly because of structural problems. The Barometer survey assigns negative evaluations to all aspects of the functioning of the Public Administrations, with the worst going to corruption and inefficient public spending. Graph 23 also makes it possible to compare the evaluation obtained in the Barometer for Spain with the values obtained in the other international indicators consulted for the OECD average, for the best country in each variable and for a country with a balanced evaluation for the whole of the variables –in this case New Zealand. The evaluation of Spain is clearly inferior for all the variables.

Graph 23. Contribution of Administrations

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

1

2

3

4

5

6

7Functioning of justice

Efficiency of public

spending

Corruption

Tax burden

Effect of use of subsidies

Effect of public managing

companies

Spain (Círculos Barometer) Average OECD (WEF/IMD)

Country with best valuation (WEF/IMD) Balanced country: New Zealand (WEF/IMD)

37

The Spanish justice system also receives poor marks. The principal concern is the lack of predictability in its decisions, both in the time it takes to issue them and in their content. Another complaint is that some judges lack technical training, for example with regard to accountancy and other areas of business management. The greatest priority to control the public deficit involves the size and efficiency of the Administrations. The most important way to control this would be to reduce the size of the Public Administrations, make them more efficient and optimize and coordinate their different powers. There is less preference for raising taxes and reducing services.

Graph 24. Most Important Initiatives to Ensure an Adequate Control of

Public Deficit


There is a broad perception among the business executives that the adjustment to the public sector, while painful, has been smaller than that in the private sector, and that the cuts have been too horizontal or generalized, because a distinction was not made between efficient and non‐efficient resources and services. Example: in a context in which support should have been shown for the reassignment of productive resources among sectors, there were inopportune reductions of budgets to support exports, R+D and training. In this sense, the executives do not seem to assign sufficient value to the adjustments in the public sector, where salaries have declined on average by 6% since 2009. This rate is greater than that in the private sector where, as we have observed, the adjustment has been achieved by a reduction in jobs and improvements in productivity rather than by wage cuts. There appears to be no consensus among the executives about the need to substantially reduce and redesign the services that define the Welfare State, nor whether an improvement in the Administration and public services should be

30%

27%

24%

7%

5%4%3%

0% More efficiently designed publicadministrations

Reduction in the size of publicadministrations

Redistribution of powersof different administration levels

Increase in indirect taxes

Increaseof direct taxes

Reduction of basic servicesOther

38

achieved by choosing between private or public management. Where there is a clear consensus is that, when there is public management, it should be more efficient and possess management tools similar to those in the private sector. Some of these tools would be: greater flexibility in incorporating and managing public resources –including human resources and infrastructures– and the possibility of setting different prices depending on the urgency and specificity of the services provided.

Best International Practices X. Private methods in the human resources management of public services,

Sweden

The Barometer also registers the opinion of top managers about corruption in Spain. Specifically, they feel the most noxious corruption in business involves the fraudulent awarding of contracts and favoritism in administrative decisions. In second place, the illegal financing of political parties and trade unions, followed by the misappropriation of public funds.

Among OECD countries, Sweden’s Public Administration is one of those most open to market conditions. It is an attractive model for managing public human resources because of its permeability and flexibility for finding the most qualified person for each post at just the right time. It also makes it possible to establish the appropriate economic incentives for promoting productivity and penalizing inappropriate behavior.

On one hand, the hiring system is heavily based on the merits of the candidates for the position being offered, and these candidates are generally found through the work market (rather than from among bureaucrats who have passed some generic selective tests). Private contracting services are used to draw up shortlists of candidates. The higher-ranking posts are usually filled from outside the firm.

In addition, the system of wages depends more on the concrete job, with salary differences determined by factors such as the salary of the previous employee, the market prices, the level of responsibility and the profession. Wages are reviewed annually and depend on job performance and results.

Finally, except for high posts designated by the government, promotions depend on individual evaluations and suffer no hierarchical restrictions.

Source: OECD

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Graph 25. Areas of Greatest Concern Regarding Corruption for

Company Activity


Quantitatively, corruption in Spain is not perceived to be much more serious than in surrounding countries, in part because its principal focus, real estate activity, has lost importance in the country’s economy. Nevertheless it is thought that corruption is having an important negative effect on how the Spanish economy is assessed. This is confirmed by the 2013 “Corruption Perceptions Index”, from Transparency International, which scores countries on how corrupt their public sectors are seen to be, with the more corrupt countries lower down on the list: Spain occupies 40th place in a total of 175 countries. (Ireland and France are in positions 21 and 22 respectively; Portugal is 33, Poland 38, Italy 69 and Greece 80). The risk of tolerating current levels of corruption is that this would produce a climate of general mistrust, which in turn could create a vicious cycle: an excess of ex ante regulation or ex post control that, in some cases, could become indiscriminate and arbitrary.

18%

17%

16%13%

9%

9%

6%

6%6%

Fraudulent awarding of public contracts

Favoritism in publicadministration decisions

Misappropriation of public fundsIllegal financing of political parties

Tax fraudby companies

Bribes to public servants

Illegal financing of social agents

Favoritism in legal decisions

Fraudulentpracticesbetween companies and others

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Finally, Spanish managers feel that any tax reform should take into account its impact on Spanish companies with regard to their competitive environment. They consider that the best measures to increase tax revenue are, first, to fight fraud and reform the corporation tax, with a reduction of rates in exchange for the elimination of tax deductions and refunds. These options are preferred over others like a reduction in direct tax rates in exchange for hikes in other kinds of taxes.

Graph 26. Most Beneficial Tax Reforms for Spanish Company Growth

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


24%

23%

14%

13%

12%

7%

4%3%

Plan of action against fraud

Lowering of corporation taxwith the suppression of

deductionsand reductions

Reduction of social contributions with anincrease in VAT

Introduce greater transparency in taxcontributionsand tax distribution

Homogenization of tax rates in thewholeof state territory

Lowering of the corporation tax rate with anincrease in VAT

Lowering of corporation tax ratewith anincrease in personal income tax

Other

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8. Conclusions Spain has made enormous economic progress in these more than 35 years of democratic coexistence, with an increase in per capita income in real terms of more than 70% between 1977 and 2013. This achievement is the fruit of more than three decades of effort on the part of everyone: workers, impresarios and Public Administrations. But after more than six years of deep economic crisis, doubts are emerging about whether our past strengths will be enough to achieve another 35 years of growth in a global environment that is much more competitive. The Círculos that have promoted this Barometer feel that this is achievable, but only if we tackle structural weaknesses that, because of the urgency of the crisis, had not been addressed with the necessary depth and perseverance. These weaknesses affect basic aspects in the functioning of a market economy where we are different from our more competitive European partners: the educational system, the institutions of our labor market, and the functioning of our Public Administrations. Our first priority should be the creation of employment, especially for young people. Recent reforms, principally in the labor and financial markets, receive a positive evaluation but are seen as still insufficient to generate the sustained employment that Spanish society requires. The Barometer has identified some of the aspects that must still improve if we are to reach that objective:

Unemployment is the greatest concern, and fighting it must be the main priority of Spanish society.

For the job market to function better, there must be a closer link between the salary and productivity of each individual worker, and a reduction in the employer contributions to Social Security.

Training, especially of a professional nature, should be improved, and should include dual training that is jointly financed and managed with the companies.

Se considera importante que los valores y habilidades asociados al emprendimiento formen parte intrínseca de todas las etapas formativas.

It is important that the values and skills associated with entrepreneurship be a basic part of all stages of training.

The high cost of energy is one of the greatest concerns to these businessmen, principally in the industrial sectors.

The financial vulnerability of Spanish companies must be reduced. They are excessively indebted, are too dependent on the banking sector, and are late in paying, especially the Public Administrations.

These Public Administrations should be reduced in size and optimize their work on different levels, thus avoiding a fragmentation in the internal

42

market. In addition, they should be less arbitrary and more predictable, in both what they do and with regard to the time periods they set to do it.

We businessmen realize that we must help improve all these aspects in our areas of responsibility: we must generate business and create jobs, improve the competitiveness of our companies, stimulate and encourage excellence among our workers, and support innovation and entrepreneurship so as to increase economic dynamism and contribute to the harmonious development of society. We are also willing to help our social partners and the Administrations to improve the deficiencies identified in this Barometer. Specifically, over the short term we commit to thoroughly analyzing professional training in Spain, and to proposing ways in which companies can help develop integral, international dual training. Over the past 50 years Spain has undergone the greatest economic development in its history, and among us all we have the capacity to assure that the next 50 years will be equally exceptional.

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9. Recommendations

Basic resources

INFRASTRUCTURES

A transparent, predictable and stable regulatory framework that will assure prices, especially for energy, that do not put Spain at a competitive disadvantage in international circles.

Improve the mechanisms of decision taking, evaluation and control of investments in infrastructures, with priority for those in transport of merchandise by rail and in logistical hubs that will facilitate different modes of transport.

EDUCATION

Improve the quality of teachers, develop meritocracy and excellence and encourage talent in both professors and students.

Respond to the challenges of the global economy through greater proficiency in foreign languages, and entrepreneurship and connection with the labor market, especially at the higher levels of education.

Promote from primary school and all successive levels of education the values of entrepreneurship –along with the skills and aptitudes for designing, organizing and executing projects– so that they are an integral part of the education of young people.

Education in taxation matters so as to produce citizens who are aware of their responsibilities toward helping sustain the Welfare State and its public services in the face of an ageing population.

Implement public‐private collaboration to develop programs of entrepreneurship among young people, as is done on Canada, Germany and Belgium.

Vocational training is one of the matters pending in the Spanish educational system. It should include dual training, in which companies should have a more active role.

THE ECONOMY OF KNOWLEDGE

Competitiveness and internationalization of the Spanish economy demand

greater innovation in processes and products.

Encourage public‐private participation through greater company‐university

collaboration, linking the financing of public universities to spin‐offs or to

projects with private companies.

Stimulate internal innovation in the companies and promote greater penetration

of the ITCs in the value chains.

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Following the Digital Agendas for Europe and Spain, develop a regulatory

framework based on expanding the digital single market, the protection of data,

confidence in the digital sphere, copyright, and the free circulation of

information.

Improving governance of the Internet in the new global context is a key element

for competitiveness, confidence, accessibility and digital transparency.

Develop additional tax incentives beyond those contained in the Law of Support

to Entrepreneurs, such as:

‐ link the deduction with greater flexibility to maintaining the work force,

‐ allow the deduction to be applied to several organizations within the same

group

‐ revise upward the top amount that can be deducted.

Labor Market

Rationalize and simplify the hiring system by creating three kinds of contracts, for both part‐time and full‐time work: indefinite contract, contract for specific entrepreneurial needs (for a set duration), and a youth contract (training).

Compensation for dismissal should be the same for part‐time and full‐time work,

with 18 days pay for each year of work, thus following the experience of the

United Kingdom, Portugal, Germany and Sweden.

Active policies to create employment are a matter pending in Spain. There should

be compliance with government commitments to promote jobs through

programs of immediate training, in collaboration with the companies, as is the

case in Germany, Denmark and the United Kingdom.

Increasing employment is a priority. For young people this means dual training,

incentivized contracts and the creation of a specific minimum wage linked to

training. These measures are already applied in Germany, Australia, Holland and

the United Kingdom.

A closer connection between productivity and salaries. A more direct link

between pay and improvements in each worker’s productivity.

To create more jobs, companies need to to Social Security, both for persons

who are considered to be self‐employed and for regular salaried workers, so as

to be more in line with OECD countries.

More flexibility on the job: greater movement of workers so they can carry out

jobs different from their own, even if this means working at different

professional levels.

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Financial Market

Continue efforts to reduce slowness in paying, principally on the part of the

Administrations, so that both companies and Administrations will comply with

the Late Payment Law.

It is essential to normalize the flow of credit. In this context, the process of

banking union being promoted by the EU should be an incentive for the banks to

complete their restructuring.

Diminish the dependence of bank financing in the economy and develop

alternative sources.

Develop alternative sources of financing for companies (venture capital,

Alternative Stock Exchange Market, Alternative Fixed Income Market) in

particular, a firm’s own resources.

There should be neutrality regarding the taxation of a firm’s own capital

resources and outside financing.

Management Dynamism

Eliminate the bureaucratic, fiscal and labor obstacles that hinder the creation

and growth of Spanish companies. Eliminate measures that limit the size of a

company and thus provoke threshold effects.

The urgent development of a coordinated program among all the Public

Administrations –including regional autonomous communities and

municipalities– to speed up permissions and licenses. Apply the Law of Market

Unity uniformly and effectively.

This program should be transparent, with a system to measure the average

length of time in receiving licenses and permissions. They should be published

periodically by the Public Administrations: the national government, regional

autonomous communities and city halls.

Companies and their executives should lead by example and by supporting

entrepreneurship. Along with institutions, they should encourage mentoring,

while business angels and venture capital should increase.

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Contribution of the Administrations

It is necessary to guarantee the basic principal of legal certainty by means of

laws that are clearer and more stable.

Public decisions –both administrative and judicial– should be more transparent

and predictable. So as to be able to take better decisions, civil servants and

judges should improve their technical knowledge.

Taxation should not be a disadvantage in relation to a company’s principal

competitors. The rates of direct taxation should be reduced; another possibility

is to reduce deductions and bonuses in corporation tax, along with a reduction of

the money that companies are obliged to pay for workers’ National Insurance.

The fight against fraud is a priority. One the one hand, there should be an

increase in funding for Tax Agency inspections, which should be speeded up, and

the sanctions for tax violators should be increased and made public (as is done

in Norway and Holland). There should also be tax incentives to stimulate

business. In addition, the authorities should encourage tax payment by

electronic means, following the lead of the Scandinavian countries and South

Korea.

Promote a better relationship and cooperation between the taxpayer and the

Tax Administration. The tax authorities have to cooperate with people who fulfill

their obligations, following the lead of the United Kingdom and Belgium.

Accelerate the resolution of conflicts by administrative and judicial means.

Introduce alternative mechanisms for resolution of tax litigation (such as

arbitration and mediation) as in the United Kingdom, Portugal and Belgium.

Public management should be improved by introducing instruments similar to

those in the private sector. Among them:

‐ the chance to pay more for special quality attention, for example when

receiving urgent service.

‐ Change the model for contracting, dismissing and paying public employees,

making it more similar to the one used in the private sector, and putting it on

the same level as the public sector in other countries in the European Union

like the UK, Denmark and Sweden.

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10. Annexes

10.1. Methodology The Barometer of the Círculos has been carried out jointly by the Círculo de Empresarios, the Círculo de Economía and the Círculo de Empresarios Vascos. The study was based on both published sources and specifically designed surveys, and was been completed with exhaustive personal interviews.

PUBLISHED SOURCES This comparative analysis of the strengths and weaknesses of Spain was based on data from different national and foreign sources, principally from studies of competitiveness. In this sense, basic sources were the Global Competitiveness Report of the World Economic Forum and the World Competitiveness Yearbook of the IMD. The aim was to provide a comparative overview of the main advantages and disadvantages in competitiveness of Spain. This served to identify areas meriting greater attention and aspects that could be added to this study. The consistency of the results of the survey by the Barometer of the Círculos has been checked against those variables that are measured in both the Barometer and other published studies. Graph 27 locates each variable according to the points received (from 1 to 7) on the Barometer of the Círculos (horizontal axis) and on one of the studies mentioned earlier (vertical axis). As can be seen, there is a clear consistency in the results of the Barometer of the Círculos and other studies of competitiveness, which confirms the representative nature of the Barometer of the Círculos survey.

48

Graph 27. Comparison of the Barometer Results and Similar Variables

of Other Indexes

Source: Own compilation.

The Survey of the Barometer of the Círculos This report is based on a survey of Spanish businessmen that has provided the basis for the principal conclusions and recommendations. The sample is based on surveys of 360 members of the three Círculos. To insure that it is truly representative, it has been augmented by the opinions of another 30 managers of Spanish companies that are not members of the Círculos. They are from some very important sectors of the Spanish economy such as tourism and the car industry, and include foreign companies in Spain. Thus the total number of executives surveyed is 390. Of these, 154 –some 39%– responded2, a figure that is considered high. As can be seen in Graph 28, a wide range of companies was surveyed, especially in the sectors of professional services, financial services, construction, electronics and telecommunications. With regard to the size of the companies, approximately a third are large firms, of between 1,000 and 10,000 employees, but the sample represents all sizes of companies.

2. Only those surveys that answered more than 65% of the questions were taken into account.

Equivalentvariable value

Variable valuebarometer

1

2

3

4

5

6

7

1 2 3 4 5 6 7

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Graph 28. Profiles of Those Polled. Principal Activity of Their

Company

Source: Own compilation

Graph 29. Profiles of Those Polled – Number of Employees in their

Companies

Source: Own compilation

0 5 10 15 20 25 30

Agriculture, forestry and fishing

Renewable energy

News media and entertainment

Travel, tourism and leisure

Trade distribution, retail sales and consumer goods

Automotive and components

Environment, water and waste treatment

Logistics and transport

Mining and steel

Aerospace and aeronautics

Chemical and pharmaceutical products, biotechnology, life …

Food and drink

Energy

Electronics, informatics technology and telecommunications

Construction and engineering services

Banking, insurance and other financial services

Professional services

More than 10,000[PERCENTAGE]

From 1,000 to 10,00034%From 500 to 1,000

[PERCENTAGE]

From 51 to 500 21%

From 1 to 5012%

50

The survey consists of 53 questions, grouped into the following sections:

I. Situation and expectations for the market.

II. Basic infrastructures in Spain.

III. Functioning of the labor market in Spain.

IV. Functioning of the financial market in Spain.

V. Management dynamism in the Spanish economy.

VI. Data on the person surveyed.

In all these sections (with the exception of Data on the person surveyed) there were questions regarding evaluation (56% of the total) and prioritization (44% of the total). In those questions regarding evaluation, the respondents were asked to assign from 1 to 7 points to different aspects, with 1 as the most negative value and 7 as the most positive. In the questions regarding prioritization, a multiple‐choice system was used: respondents were asked to chose from among the three most relevant responses and then rank them in order of importance. They also had the possibility of including other options that they considered relevant, and which were not initially provided. To tabulate the answers of a quantitative nature, a simple average has been used. For qualitative‐type questions, a double methodology was used. First, the options have been ordered according to the total number of persons surveyed, independent of the order of priority that they might have for that respondent. These results were later compared with a weighted analysis in which a different value was attributed to the chosen options according to the order of priority that they have for the respondent. In this way a score of 3 was awarded to the options chosen in first place, a score of 2 for those selected in second place, and a score of 1 for those selected in third place. The results obtained in the analysis reveal great coherence between the weighted and non‐weighted analysis, except in those cases in which there is a significant difference between the two, which is then expressly mentioned.

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In‐depth interviews The results of the survey were completed with in‐depth interviews of some 60 minutes with 20 businessmen who had taken part in the initial sampling. To give a balanced, overall vision of business in Spain, they were selected because they represented different industrial sectors, geographical areas, and domestic and foreign multinationals firms doing business here. The interviews explored more fully the areas analyzed in the Barometer, and yielded a more detailed overview about how different problems affect the companies, with more detailed descriptions on specific subjects.

Economy & Finance

The barometer of the Círculos