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International capital flows are strongly influenced by country-specific patterns that can be best understood in historical and comparative perspective. A long-term empirical analysis of French and German investment in Spain reveals that the core capabilities of foreign firms and their relations with local partners have spurred the rise and development of two national models of international investment, characterized here as "political" and "technical." The research identifies the main actors and the ownership advantages of the two models that have proved to be so resilient over time. [PUBLICATION ABSTRACT]

International investment, particularly its long-term national and global impact, is a fascinating dimension of modern capitalism. Over the past fifty years, international business scholars have added considerably to what is known about foreign direct investment (FDI). Advances in the field were facilitated by the decision to view the subject as being about the transfer of resources other than capital: notably, technology, management and organizational skills, and entrepreneurship.1 Such transfers affect the economic and social development of both home and host countries over time.

Before tackling the issue of FDI, however, scholars struggled to understand why firms chose to invest abroad and to discover how they overcame the "liability of foreignness," that is, the difficulties inherent in the exploration of unfamiliar markets. The concept of "ownership advantages," which goes beyond the classic idea of comparative advantages to imply the existence of market failure, proved useful in explaining the foundations of international investment. Ownership advantages are the basis of both internalization theory and John Dunning's eclectic paradigm, known as OLI, which stands for ownership, location, and internalization advantages. While both models hold that multinational firms respond to market imperfections, internationalization theory explains the internal transfer of knowledge by global firms. OLI, on the other hand, maintains that firms invest abroad only under certain circumstances: when they possess ownership advantages in particular markets, when they are ready to keep investing in these markets, and when locations offer obvious advantages. The concept of ownership advantages paved the way for relevant studies of the multinational firm that were based on the application of theories developed outside the field of international business, such as the product life cycle, transaction-costs analysis, or the resource-based view of the firm.2 All these theories added a dynamic dimension to the analysis of FDI. The evolutionary theory of the firm goes a step further by focusing on the evolution and accumulation of ownership advantages at the firm level and arriving at the concept of "path dependence."3 Although most of the work on international business theory has been done in the United States and Great Britain, Scandinavian scholars contributed the "sequential-entry paradigm," which describes the stages of development of FDI at both the country and the firm levels.4 Recent comparative institutional research has shed light on FDI processes that occur beyond the usual fields of study, linking them to issues of economic development.5

Clearly, business history can illuminate path dependence. Business historians, in fact, began early on to examine the rise and development of multinational firms, and they have shown a steady interest in examining the past through the lens of international business theory, in extending their research areas, and in developing new concepts.6 Much remains to be done, however. The challenges are not merely to provide further empirical evidence for testing existing theories but also to examine investment flows over the long term, by undertaking comparative research at the firm and country levels and identifying and explaining patterns of FDI.

In our article, we take a modest step in these directions. Our initial premise is that international investment flows are influenced by patterns distinctive to each country, which are best understood both historically and comparatively. Our goal, therefore, is to clarify how models of FDI in particular countries arise and evolve over time. We focus on the long-term development of French and German FDI in Spain, on the grounds that France and Germany have been modern Spain's most influential investors, representing two generations of international investment. These two countries were the strongest supporters- and beneficiaries- of Spain's entry into the European Union in 1986. Despite institutional instability, Spain has received a considerable amount of inward FDI during the past 150 years. This is the first time that direct investment by the French and Germans outside their own borders has been systematically compared with the inward FDI of Spain.

We have drawn extensively from archival and bibliographical research in order to track the development of French and German investment and expertise and to examine the strategies followed by the two countries' historically most relevant firms in Spain. Our contribution is twofold. We explain the historical rise and resilience of national FDI patterns by looking at how foreign firms develop and accumulate ownership advantages and establish relations with local partners. We then characterize the empirical and comparative bases for those patternspolitical in the case of France, technical in the case of Germany. We are less concerned with Spain's institutional framework. Nor do we address the development patterns of French and German FDI elsewhere or take up other important milestones in the economic and business history of the three countries, as we are focusing on long-term developments in this article.

Establishing the French Investment Model in Spain, c. 1800-1913

"Spain," wrote the French banker Emile Péreire in 1854, "is like the new California. . . . [T]he country needs only an efficient railway network and capable entrepreneurs."7 Indeed, French capital was to play a major role in the nineteenth-century international economy.8 Although French investors did not approach Spain differently than they did other relatively backward countries, they exerted a remarkable influence on Spanish institutions beginning in the late eighteenth century. French banks played a strong role in Spain's colonial trade and public finance, and France became a model for Spanish modernizers.9 The devoted Francophile Alfonso de Cabarrus, adviser to King Charles III and developer, in 1872, of Spain's first central bank, the Banco de San Carlos, exemplifies the "sweet dominance" of France."10 Numbering more than eleven thousand inhabitants, the French comprised the largest foreign community in Spain.11 Because of its geographic position, Spain was viewed as a critical piece of the French plan for a "Mediterranean system." The first generation of French international capitalists envisioned a railroad network that would link Africa, Europe, and Asia. Prominent figures in this early stage of French investment were the Péreire brothers, owners of Crédito Mobiliario, Spain's most active investment bank (established in 1856). They adhered to the philosophy of SaintSimonism, which assigns to banks the crucial role of agents of development.12 Despite the Utopian nature of the Mediterranean system, French capitalists managed to build a large part of the railroad system, which stretched from Portugal to Russia, in addition to their best-known work, the Suez Canal (1869).13

Throughout the nineteenth century and up to World War I, by relying on their prestige and accumulated experience as lenders to the Spanish state, French investment banks became indispensible to the country.14 Banks like Péreire and Prost-Guilhou, both family owned and managed, coexisted with those of the Rothschilds, the traditional haute banque française, and commercial banks like the Crédit Lyonnais (CL), the Société Générale, and Paribas. The latter, which was family owned and managed, competed with the banks established by the Rothschilds throughout Europe.15 There is considerable evidence of the prominence achieved by the Rothschild, Péreire, and Prost-Guilhou families in nineteenth-century Spain.16 The Rothschilds' control over Almaden's state-owned mercury mines and Spain's tobacco monopoly, set against the chronic financial difficulties of the Spanish government, enabled that family to gain extensive knowledge of the country and to exert enormous influence over the Spanish government. We know that they built strong networks with the Spanish financial and political elite.

French influence gathered even more momentum in 1855 with the passage of a set of laws regulating foreign investment and establishing rules for the railway business. Considered by Spanish economic historians as the starting point of modern international investment and business in Spain, these laws gave foreign firms considerable freedom and a stable legal framework, both to exploit natural resources and to operate in the country.17 It did not take long for the French banks to assume the lead in the most promising businesses of the time: mining, railways, and utilities. Crédito Mobiliario, Compañía de Ferrocarriles del Norte de España (Norte, 1856), Minas de Bermelo (1856), Gas Madrid (1857), and the insurance firm El Fénix Español (1864) were all under Péreire's control. Prost-Guilhou soon adopted a similar strategy, launching the insurer La Unión in 1857, while the Rothschild family controlled the Madrid-Zaragoza-Alicante railway company (MZA, 1856) and the Sociedad Minero Metalúrgica de Peñarroya (1881). Being a latecomer did not prevent Paribas from getting its share of French and Spanish business and establishing the Banco Hipotecario Español (1872) and the Banco Español de Crédito in 1902.18 By the turn of the century, French investors controlled twenty-six of Spain's fifty largest industrial firms.19 Their influence was even greater in the financial and insurance sector.

Less prominent entrepreneurial families also played a role in nineteenth-century Spain. The Cros, Lebon, Mahou, Delclaux, and Rivière families, through their eponymous firms, came to dominate the Spanish chemical, gas, beer, glass, and metal industries.20 Assisted by Spanish partners, and managing to integrate quickly into their new environment, these firms showed a remarkable ability to survive. They were managed essentially in the same way as the larger, more visible firms, under the leadership of a powerful director-general, usually an engineer. In the case of the large firms, the director-general reported periodically to his Paris-based superior, while helpful Spaniards, often aristocrats who had been educated both in France and in the French schools that had been established in Spain, were awarded seats on their boards, albeit without executive powers. In some instances, however, Spaniards were able to advance into the top ranks, even becoming director-generals themselves.21 This elevated status was achieved by Eduardo Maristany, an engineer who developed his managerial skills at MZA and Peñarroya; by Juan Barat, another engineer, who worked for Norte; and by Leon Cocagne, the key person at the Hipotecario and Español de Crédito banks and long-term president of the French chamber of commerce in Madrid. Created in 1882 in Madrid and 1883 in Barcelona, the French chambers were controlled by the director-generals of large Franco-Spanish concerns.22

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Despite the disappointing profits earned by many of these busi- nesses owing to the slow growth of demand, FDI soared, and French investment took the lead in the Spanish industrial revolution. (See Table 1.) France also dominated Spain's foreign trade from 1855 through 1913.23 (See Figures 1 and 2.) French investors and firms forged an investment model that we characterize as "political" for three reasons: First, being a "first mover" in Spain allowed French capitalists to shape the legal framework of foreign investment and to gain significant advantages in ownership and knowledge. Second, French activity was led by investment banks, whose prominence and focus on infrastructure, mining, and public finance gave them privileged access to the Spanish political and financial elite. Third, all these arrangements, when added to a centralized and hierarchical management structure, ensured French control over Franco-Spanish business.

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German Capital Investment in Spain, c. 1880S-1936

The Belle Époque witnessed both the rise of imperial Germany as an industrial power and the transformation of Spain into a market that both older (Britain and France) and newer (Germany and the United States) powers sought to dominate. German leadership was based on capital- and knowledge-intensive industries, a close connection between industry and banking, and a strong commitment to exports. The ability to serve foreign markets became a crucial factor in sustaining the investment and research efforts made by German industrialists at home.24 German firms soon discovered that Spain was an attractive market, full of promise, and they found they could work well with their local partners and even deal effectively with the institutional environment, however unstable it was. The increasing prestige of German science and culture also helped to create a favorable attitude among the Spanish public toward German firms.

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Our research confirms that universal banks and industrial expertise were also crucial factors in penetrating the domestic market.25 The contacts established by a young Deutsche Bank employee, Arthur Gwinner, with the local bourgeoisie and with influential individuals in Madrid- such as former politician Segismundo Moret- became the foundation for the Banco Hispano-Alemán (1886), the Compañía General Madrileña de Electricidad (1889), and Deutsche Bank's Barcelona and Madrid branches of the Banco Alemán Transatlántico in 1904 and 1907, respectively.26 Other German and Swiss banks gave support to German industrial firms prior to World War I, but the networks they created did not seem to match either the strength or the institutional influence of the French. One exception was the alliance created by the Catalonian lawyer, politician, and financier Francese Cambó with the president of Allgemeine Elektrizitäts-Gesellschaft (AEG), Walther Rathenau, to promote the electrification of Barcelona and other Spanish large towns.27 Cambó managed to recruit several Spanish investment banks, notably Urquijo, to help both with this endeavor and with the many other businesses he promoted until the outbreak of the Spanish civil war in 1936. Other Spanish lawyers served as mediators between foreign and domestic investors throughout the twentieth century. On the German side, the German chamber of commerce made the first visible attempt to influence the Spanish legal system. Established in 1917 in Barcelona, the chamber's goal was to provide a stable, liberal framework for Spanish-German trade, although the founding members and early leaders lacked the prominence of their counterparts in the French chambers.28

Both the timing and the industrial specialization of German FDI had an enormous impact on the model we are describing. German investment focused, quite reasonably, on the fields over which German firms exercised clear leadership. Spain's policy of protectionism, which had intensified since the late nineteenth century, posed a challenge that most electronics and chemical firms surmounted by creating firms with Spanish names, partners, and presidents. Although they acceded to the protectionist goals of the national industries, the firms, such as AEG, BASF, Bayer, and Hoechst, among others, were nevertheless fully controlled from their German headquarters. This strategy, which required the cooperation of Spanish industrialists, led to the stable partnerships that were an essential feature of German FDI in Spain. Siemens, however, followed a different strategy by establishing a factory near Barcelona in 1910.29

It is important to note that, until 1936, the Spanish subsidiaries of the German chemical and pharmaceutical industry were merely commercial units; their main interest was in securing safe markets abroad for rising domestic production at home.

Our own research on the German dye industry in Spain shows that the high quality, falling production costs, and good service provided by German manufacturers allowed them to neutralize the impact of Spanish tariffs and to obtain a share of about 80 percent of the Spanish synthetic-dye market by the eve of the Great War.30

German FDI and German-Spanish trade increased during the internar period. Rising consumption levels and a bilateral commercial treaty signed in 1926 paved the way for further operations, despite the increasing nationalism of Spain's economic regime. Germany remained a secondary trade partner for Spain, however.31 (See Figure 1.) IG Farben, Continental, Schering, Merck, Boehringer, and Linde became major foreign investors, either in association with local firms or as fully German firms with prominent Spaniards on their boards. Insurance and trading firms also proliferated. These activities were related as much to the development of the second industrial revolution in Spain as they were to the technological strength of German firms. As a result, the existing German-Spanish business circles grew both quantitatively and qualitatively. On the eve of the Spanish civil war (1936-39), the Germans, who numbered around seven thousand inhabitants, comprised the second largest foreign community, after the French. They were largely concentrated in Barcelona and Madrid, but they established a broad educational and cultural network nationwide.32

Until 1936, the largest German firms were organized in a way that ensured full control by their parent companies.33 Top managers, who were usually German and had either scientific or commercial backgrounds, stayed in Spain for long periods, often indefinitely. The key person in these firms was the technical director. As Spanish economic nationalism intensified, favoring the establishment of joint ventures and of a range of partnerships, the assignments were divided between "political" leaders (members of the board, usually Spanish lawyers, whose specialty was dealing with the government), and "technical" leaders (German managers, who handled the commercial and industrial side of the business and were in constant touch with their German headquarters).

In summary, German investors arrived relatively late in Spain and encountered an increasingly protectionist environment. They built most of the advantages they enjoyed on their own technical and commercial capabilities. German universal banks played an important though not yet fundamental role, and German firms established stable relations with Spanish industrial and financial partners. These firms sought full control over their Spanish subsidiaries through an organizational pattern that was unique within the context of twentieth-century FDI in Spain. This model, which we characterize as "technical," differs from the "political" model that had been built by French firms in the previous century.

The French Model Challenged, 1913-1945

The second industrial revolution posed many challenges for French international investors. This does not mean that the French economy became less competitive in the international arena or that it lost ground in the industrial contest.34 Michael S. Smith recently stated that the French economy of that period underwent a restructuring that enabled it to be at the forefront of the second wave of industrialization.35 The research we conducted for this section supports Smith's thesis.36 Between the two world wars, the influence of French investment and entrepreneurship in the Spanish economy waned, while Spanish firms exhibited increasing dynamism and German and American expertise became more apparent. Even so, in 1936, France held onto its dominant position in Spain's FDI and foreign trade. With around fourteen thousand inhabitants, the French foreign community was still the largest in Spain.37

French investors continued to dance to the tune played by the banks, even though these institutions were going through a difficult time, as demonstrated by the fall of Crédit Mobilier in France and the shutdown of Paribas' Spanish subsidiary.38 The consensus among scholars is that French investment banks, which were traditionally dynamic, had become conservative and risk averse in reaction to the crisis of the 1890s.39 However, we have found evidence that many French firms operating in Spain responded intelligently to that crisis: they entered new industries, developed technology, and followed patterns of growth and organization similar to those later adopted by their German and American counterparts. Even so, many historical French firms were absorbed by their Spanish partners, partly as a result of rising Spanish nationalism and evolving entrepreneurship, which prompted a new generation of Spanish investment banks to search for new business opportunities.40 In addition, the withdrawal of French capital from mining, railways, utilities, and- last, but not least- from banking was a response to the disappointing profits of their Spanish subsidiaries between the world wars.41 In any case, prominent firms like Peñarroya, MZA, Saint Gobain, and various insurance companies remained under the control of their founders.42 We also identified many new business operations, both successful and unsuccessful, in technologically complex industries. Interestingly, these operations were promoted by investment banks at their French headquarters, rather than by their Spanish subsidiaries. Between 1917 and 1932, the auto manufacturers Renault, Citröen, and Peugeot established commercial subsidiaries that failed to compete with American models.43 The subsidiaries and joint ventures created by Air Liquide, Gillet-Rhône Poulenc, and Michelin, however, did become successful.44 Several French companies were among the first firms that were created in response to Catalonia's newly discovered potash mines: Minera-Fodina in 1914, Sociedad de Minas de Potasa de Suria in 1920, and Potasas Ibéricas (with Pechiney) in 1932.45 Finally, the French company Sociedad Ibérica de Construcciones Eléctricas (SICE) became successful in the electrical-equipment market as a joint venture with General Electric's Spanish affiliate, General Eléctrica Española.46

Most of these ventures continued to be controlled by their parent companies, but their positions within the Spanish framework differed from nineteenth-century arrangements, as they had to adhere to the more nationalistic Spanish rules, which forced them to adopt Spanish names and share equity with the Spanish banking establishment. Thus, the Spaniards sitting on their boards tended to be more active than their predecessors. The organizational patterns of this generation of French firms remained under the influence of a powerful director-general, but several firms began adopting modern managerial ideas and practices. Interestingly, the venerable French chamber of commerce, led by a new generation of firms and top managers, helped to disseminate the newer concepts.47

French businesses in interwar Spain, however, began to show weaknesses. French firms lost power within the international cartels that ruled most of the science-based industries in which Spanish partners had heretofore played a passive role. They saw their control slipping in the face of the Potash Union, the IG-Farben-Kuhlmann basic agreements, and the AEG-Thomson-Houston-General Electric arrangements.48 This slippage was a source of concern for the French chamber of commerce, which became worried about the rise of German influence in Spain and the French firms' dwindling innovative drive in the technical, commercial, and organizational fields.49

Although there have recently been attempts to shed light on the evolution of French business activity in Spain between 1936 and 1945, the subject is still obscure.50 Our research reveals that French capitalists not only turned to the French government for help, but that they also tried to maintain control of their Spanish assets and form alliances with Franco's faction. Companies like the Société des Potasses Ibériques and Michelin gave financial support to Franco's military putsch.51 Franco-Spanish business entered an era of pragmatism, and a different set of individuals and institutions took the lead. The Paris-based FrancoSpanish chamber of commerce, created in 1938 by senior managers of Spanish subsidiaries, eventually overshadowed the Madrid-based French chamber of commerce. These trends were also evident in the Consortium industriel et commercial pour l'étranger, led by the former French ambassador in Madrid Auguste de Perreti, and in another association that was promoted by the Neuflize Bank.52 Pragmatism was behind the decision, in 1943, by several French firms to establish contacts with the Spanish state-owned industrial holding INI (Insti-tuto Nacional de Industria), created in 1941 to carry out Franco's self-sufficiency program. Their outlook also explains why French firms were better prepared than others to survive the extraordinarily challenging postwar period.53

The Rise of German Economic Influence, 1936-1945

The economic influence of Germany reached its climax between the outbreak of the Spanish civil war and the defeat of the Nazis.54 Beginning in 1936, Hermann Goering incorporated Spain into his plans for war, delegating to it primarily the task of providing Germany with raw materials, minerals in particular. Around 80 percent of the trade between Germany and Spain was supervised by the powerful Johannes Bernhardt through ad hoc bodies. A newcomer to the German business community in Spain, Bernhardt soon became the rival of many of the country's well-established German tradespeople, such as Federico Lipperheide.55 Having fled Weimar Germany in 1921, Lipperheide had set up the mineral trading firm Somimet, in partnership with the local industrial elite in Bilbao.56 Like most German businesspeople operating in Spain, Lipperheide had moved to Seville at the outbreak of the Spanish civil war to continue his dealings. Back in Bilbao, in 1939, Somimet greatly expanded its production to meet Germany's increasing demand for minerals. Despite the fact that Lipperheide had been a member of the Nazi Party since 1934, he was accused by Bernhardt of working for the Allies. The two men finally reached an agreement that allowed Lipperheide to continue his business. Working with his private German partners, he created the second-largest chemical group in postwar Spain- thus becoming one of the Allies' targets after 1945.57 Many other members of the German community adopted Lipperheide's survival strategy.

Regular delivery of Spanish raw materials to Nazi Germany was achieved by creating a productive base compatible with Franco's economic nationalism. Government oversight of the mining business resulted in a diversified Spanish holding, Sofindus (Sociedad Financiera e Industrial Limitada), designed and managed by Bernhardt and linked to the German Ministry of Economy. Over the course of World War II, the firm abandoned its original aim of controlling the entire trade between Spain and Germany and concerned itself with extracting and exporting war minerals, such as wolfram, and preventing smuggling.58 Spain's war debt (480 million DM, according to German estimates) led to a diplomatic conflict between the two countries that would last until 1958.

Economic relations between Nazi Germany and Spain intensified during World War II.59 Germany became Spain's largest provider of industrial goods during the war, and Spain supported Germany's war effort by exporting food, minerals, and other raw materials to the Reich. Thus, for the first time since the establishment of commercial relations between the two countries, Spain had a favorable trade balance with Germany.60 German-Spanish private businesses, which were concentrated in chemicals, electronics, banking, and insurance, grew considerably during the two wars.61 The chemical industry, dominated by IG Farben, was by far the most important. Other chemical firms, such as Behring and Inquiresa, were also created during the war years, but their growth mainly occurred because most of the established companies were expanding, diversifying, and, most critically, beginning to manufacture in Spain. The success of both the chemical and electronics sectors was facilitated by their extraordinarily high profits between 1936 and 1939. The creation of Telefunken was a predictable outcome of the war. AEG bought several Spanish firms and became a diversified manufacturing group. Siemens' business also expanded. The German firms confronted Spain's nationalist drive (kicked off in 1939 by passage of a law restricting the foreign investment and management of all firms to 25 percent) by adopting a strategy similar to one adopted by other foreign companies: they found local partners, which gave them the appearance of a Spanish firm, while they remained in control.

A good example of the many German individuals who managed to obtain Spanish citizenship was Fernando Birk, referred to by the Allies as "IG's man in Spain."62 Born in Germany, Birk had lived in Barcelona since 1926, working as an employee of IG's Spanish branch and, since 1936, as its top manager. He successfully defended himself and IG's assets and interests against the Allies' accusations of war profiteering and cooperation with the Nazis, and he kept the German chamber of commerce going from 1945 to 1950. Eventually, he orchestrated the recovery of the German chemical industry from 1955 until his retirement in 1967.63 Lipperheide was one of Birk's fiercest rivals, both during and after the war. He took advantage of wartime conditions to obtain IG Farben licenses, which were not available to Birk, and was thus able to create a chemical group between 1939 and 1945. After obtaining Spanish citizenship in 1939, Lipperheide played his cards well with Spain's new rulers and industrialists, reaching an agreement with the Instituto Nacional de Industria, which was keen to obtain access to German expertise.

How did Germany's pervasive influence on the Spanish economy combine with Spain's postwar economic policy to affect the traditional arrangements of German-Spanish businesses? One factor was that German firms had to rely on their local managers, whether or not they were German. As commercial activity gave way to manufacturing, new people had to be hired, and management decisions had to be compatible with the new rules of the game.64 Management structures, however, remained the same. Most of the technical departments, in which Spaniards had little say, retained both their people and their power. In some cases, the division of labor between "political" and "technical" leaders became even more pronounced. In others, the "technicians" took over.

The Expropriation and Recovery of German Assets in Spain, 1945-1975

After World War II, Spain accepted the Bretton Woods agreements and became part of the Allies' Safehaven operation, which lasted from 1948 to 1952.65 The purpose of the program was to identify, expropriate, and nationalize German private assets, and it was supervised by the Comisión de expropiación de bienes extranjeros (CEBE), which had been set up within the Ministry of Foreign Affairs.

Time worked against the Allies. Most of the German owners and their Spanish partners managed to hide, either completely or partially, the true proprietary structure of the firms involved. They found ways to keep the companies going and reached agreements with their German parent companies. Spanish diplomats, led by CEBE president Emilio de Navasqüés, did their best to block the dismantling of strategic industries and to exclude key people like Bernhardt, Birk, and Lipperheide from the Allies' blacklist.66 Even more critical to these protective efforts was CEBE's determination to ensure the technical and organizational continuity of the firms, that is, to keep the expropriated firms under the control of their former managers and linked to their parent companies. The outcome was disappointing to those in charge of the Spanish Safehaven program, which managed to recover only 27 percent of the estimated value of the assets.67

Aside from the former German managers, the principal beneficiary of the public auction was Urquijo Bank. An industrial bank historically linked to the Rothschilds and to foreign capital, Urquijo set up Spain's largest private business group after the war, in direct competition with the state-owned holding, INI. The expropriation process enabled Urquijo to create a chemical and pharmaceutical complex with extensive foreign technical assistance and to increase its influence in other fields.68 Moreover, the ability of the bank's directors to deal with the Allied governments raised its international standing, a factor that helps to explain Urquijo's central role in Spanish postwar economic diplomacy. Personal ties were an essential component of its success. Banker and entrepreneur José Maria Gonzalo, whose brother was appointed Spain's first ambassador to the Federal Republic of Germany, became the link between Siemens' headquarters and the Urquijo group after 1950.69 The Marquis of Bolarque, director-general of the Urquijo Bank, became Spain's second ambassador to Germany, where he developed strong relations with the German business community, particularly with the Deutsche Bank director, Hermann Abbs. He also paved the way for an agreement between Spain and Germany regarding expropriations. Another interesting individual who worked for Urquijo was the Austrian aristocrat Franz Josef Seefried; eventually he became Schering's representative in Spain.70

These strategies mitigated the effects of expropriation. In line with the autarkic drive of Franco's early administration, the personnel of the German firms became more Spanish, but control remained with the Germans and their trusted local partners. With few exceptions, business boomed during the 1950s and 1960s, and relations between Spain and the Federal Republic of Germany (FRG), initially strained by expropriation, became smoother.71 In 1958, the two governments signed an agreement that provided a framework for the progressive return of German capital, which spurred Spain's rapid economic growth during the 1960s.72 The fact that Germany's own dynamic growth preceded Spain's probably explains the otherwise remarkable lack of interest shown by German firms in recovering their investments or in receiving at least some compensation. Indeed, most firms preferred to concentrate on opening the door to a full recovery. The chamber of commerce, which had given support to a "demoralized" German community during the postwar period, began eagerly to defend the country's economic interests in Spain.73

The more relaxed relations between Germany and Spain, two countries that were recovering their moral status, opened the door to diplomatic cooperation and new personal connections.74 José Solís, Franco's socially minded labor minister, for example, was on excellent terms with Fritz Berg of the German employers' group BDI (Bundesverband der Deutschen Industrie), who sat on a bilateral commission from 1956 to 1958.75 The highlights of this process were the signing, in June i960, of the first commercial agreement between the two countries since 1926 and the visit to Spain, in 1961, by Ludwig Erhard, the West German minister of economics, who was known as the "father of West Germany's economic miracle." In May 1961, the two nations signed an economic cooperation agreement. Tellingly, the Urquijo Bank arranged the BDI representatives' first visit to Spain, and Erhard lunched at the bank's headquarters.76 Meanwhile, Bonn issued clear guidelines to its diplomats to deliver technical assistance in exchange for the liberalization of FDI, and they were given the green light to participate in large industrial projects.77

However uncoordinated, these efforts bore fruit. In 1975, the FRG became Spain's largest foreign direct investor. German capitalists still relied on historical firms and their traditional fields of expertise.78 (See Appendices.) It also shows that the twenty largest German firms, ranked by annual sales, were controlled by their parent companies. However, German firms no longer dominated. They maintained a mediocre ranking among Spanish businesses, as they had to compete with both Spanish state-owned firms and many foreign multinationals. The relations between German firms and their Spanish partners had not changed substantially. Because Spain, and with it Spanish management, was rapidly developing, German multinationals, which were expanding around the world, were hiring and putting more trust in their Spanish managers. Nevertheless, the division of labor so characteristic of German FDI in Spain remained: decisions were still made by those who owned the technology. Despite the increasing complexity of German subsidiaries in Spain's fast-growing market, managers continued to identify technological leadership with managerial leadership.79

The Structural Transformation of French FDI, 1945-1975

Between 1945 and 1975, there was a new wave of French FDI, driven by newly arriving as well as older business players, networks, and fields of activity, and shaped according to inherited patterns. Available macroeconomic data show that, after World War II, French capital lost ground in Spain in both absolute and relative terms, lagging behind U.S. and Swiss investment and equaling that of Germany.80 Likewise, trade data reveal that France lost its leadership position to the United States and Germany. (See Figure 2.) Losing ground, however, did not mean that France became less active. French investors continued to seek out and effectively exploit new opportunities. In 1972 either most of the largest French firms were relatively old, or else the older firms had ventured into new business areas. (See Appendices.) The focus of French FDI, however, had clearly shifted between the first and second industrial revolutions. The auto industry had reached a top position, and French investment had found its way into the chemical, steel, electrical, and food industries. The position of French firms in the Spanish ranking reveals, however, that Spanish big business and American multinationals had grown faster under the umbrella of Spain's postwar nationalism. Despite this disadvantage, French firms had also managed to increase their control over their Spanish subsidiaries.

French firms were able to do so because they responded quickly to the opportunities created by U.S. support to Spain after 1953.81 This support was a major factor in ending Spain's international isolation and raising confidence in the Spanish economy. The Conseil national du patronat français (CNPF), in cooperation with the Madrid chamber of commerce and Paribas (working closely with Urquijo), set out to gather as much information as possible on industrial projects linked to the American aid program and to involve the French government (which, since the end of the war, had been reluctant to become involved with the Franco government) in their Spanish plans.82 As a result, a 1.55 billionfranc loan to modernize the Spanish railway system was negotiated. Several large projects that required government support and extensive networking, such as Renault's establishment of a manufacturing plant, were also strongly supported by the French government. French banks, notably Crédit Lyonnais and Société générale, increased their operations in Spain as well.83 Amid an emerging international technological market, this new climate facilitated a large transfer of technology from public and private French firms to their Spanish subsidiaries and partners. The accumulated advantages of this trend gave French engineering and consulting concerns a solid foundation for their further development. The state-owned holding INI became one of their best partners.84

More opportunities opened up for French investment and entrepreneurship when a new generation of technocrats took charge of the Spanish economic ministries in the late 1950s. Fascinated by French dirigisme, they both intensified and institutionalized relations between French and Spanish businesses and, from 1964 to 1972, restructured Spain's economic policy along French lines.85 Renault, Citroen, Péchiney, and Saint-Gobain led the way in the new industrial areas of Valladolid, Vigo, Seville, and Burgos. However, because Spain was also attracting the attention of other firms and governments, the French faced a hard fight. They scored a resounding success in 1972, when the Spanish government decided to build its Vandellòs nuclear power plant, using French technology.86 But the French were unable to compete against the Germans and Americans in the fields of color television and oil refining.87

Equally important was a new economic activity, mass tourism, which turned out to be an excellent platform for future FDI in Spain. Tourism required large infrastructures, such as a Mediterranean motorway, and created opportunities not only for public works but also for retail activity, the cornerstone of French investment in twenty-first-century Spain and a learning opportunity for French retailers.88 Although the establishment of French hypermarkets in Spain meant the advent of a new group of business players (family-owned and family-managed firms, such as Carrefour and Auchan), these ventures followed the pattern set by early French investors. Assisted by investment banks, particularly Paribas, they gained access to the Spanish political establishment, which had become far more complex after 1978, due to the federal structure of the new democracy.89 Gaining an understanding of this complexity was crucial to shaping one of the most liberal settings for hypermarkets in the European Union.90

Banks therefore continued to play a central role in Franco-Spanish business throughout this period. While most were publicly owned, making them the instruments of French economic policy, the most influential bank in Spain was Paribas, which remained privately owned and was managed principally by the Margerie family. Notably, the expansion of French retail banking was hindered by Spain's restrictive banking law, although this did not prevent Spanish partners of French banks (notably Urquijo) from introducing innovative financial products, nor did it keep French banks from responding quickly to the new legal freedoms introduced in 1979.91

As a result, the French model underwent a structural transformation, though its fundamental features persisted. The shift had an impact on the leadership role of investment banks, whether nationalized or not, and it also affected French investors' once privileged access to the Spanish political and financial elite, diminishing their ability to shape Spain's institutional framework to their advantage. Another factor was the continuing existence of traditional fields of expertise alongside emerging economic activities. Both the Spanish and French contexts led to greater government involvement in the economy- hence, the importance of the state-owned holding and the innovative development plans that appeared between 1964 and 1975. Because the Spanish legal framework required it, much of postwar French investment was channeled through joint ventures that eventually involved the state. However, this arrangement did not substantially change the patterns of cooperation between French and Spanish firms.

The Impact of the European Union, 1975 to the Present

French and German investment patterns converged after 1959. Propelled by the American assistance program, the French and German governments became more involved in the Spanish economy, contributing to its liberalization, advocating Spain's entry into the European Common Market, and launching new loans, technical assistance programs, and industrial projects to increase French and German FDI in Spain.92 One of our most important research findings was that three long-standing banks- Urquijo, Paribas, and Deutsche Bank- achieved dominant positions in Franco- and German-Spanish businesses, based on their participation in the economy during the preceding period.93 This helps to explain, first, why French and German firms adopted similar growth strategies and organizational structures, and, second, why the structure of French and German FDI came to resemble each other more closely.

Convergence, though, had its limits. Between 1986 and 2007, the Spanish economy grew rapidly and changed dramatically. Foreign investment was crucial to this shift, as were the benefits that Spain derived from gaining full membership in the European Union after 1986. This time European, not American, capital and firms took the lead. The strong support by France and the Federal Republic of Germany for Spain's entry into the European "club" paid off, so much so that the high-speed train AVE (Alta Velocidad Española) that links Madrid and Seville-built by Alsthom and Siemens-has become a symbol of the Spanish boom.94 In any case, technological progress, greater competition, and the structural change to the Spanish economy called for a restructuring of both French and German FDI. In retrospect, it is clear that the two countries have focused on the auto industry, helping to transform Spain into an export platform for small and mid-sized vehicles designed for European customers. This feat was important for the German automobile industry, which failed to set up manufacturing plants in Spain prior to 1985. At the same time, French investors successfully built on accumulated infrastructure advantages, recently developing capabilities in customer-oriented activities that enabled them to continue growing and to consolidate their leadership in Spain. Because German investors have relied to a greater extent on the core capabilities of their historical, mainly industrial, firms, French and German investment patterns still differ greatly. Ownership structures and relations between foreign and local partners, on the other hand, have converged, as would be expected, given the recent framework of European integration and globalization. At the same time, older banks like Paribas and Deutsche Bank, which set trends in the previous period, have seen their power eroded. Two inherited features remain, however: prominent Spaniards, usually former politicians, appear more frequently on French than on German boards; and the organization of many German firms revolves around their technical departments. The new focus of French capital in retailing and services makes this difference clearer still.

By 2004, the auto and petroleum industries, along with retailing, had become the dominant sectors.95 (See Appendices.) The French firms made pioneering investments in the auto industry and in retailing, two activities with close links to market research (pioneered in Spain by the French firms Sofemasa and Demoscopia) and to urbanization. The takeovers of the Compañia Española de Petróleos S.A. by Total, and of Aguas de Barcelona by Suez, as well as the merger of the former French monopoly Société Nationale d'Exploitation Industrielle des Tabacs et Allumetes (SEITA) with the former Spanish monopoly Tabacalera, should be interpreted in the light of European integration and deregulation.96 Most of the largest firms have been operating in Spain for considerable periods of time, supporting our view that French investment has been far more dynamic than is usually acknowledged. Additionally, these firms have dramatically improved their positioning since 1972. A more detailed analysis shows that many of the firms are leaders in their fields. French retail banks, on the other hand, have failed to benefit from the liberalization they so eagerly promoted.97 While the institutional context of the early twenty-first century has allowed French firms to impose more control over their Spanish subsidiaries, many of their historical Spanish partners remain, and most firms have former politicians on their payrolls, a feature that is not only inherent in the political model we are tracing, but is also a factor in the relevance of French consulting in Spain.98

Available data on Spanish foreign trade and inward FDI support the idea that French capital and expertise have regained their leadership in the Spanish economy. Indeed, from the mid-1980s to the late 1990s, France was responsible for 20 percent of Spain's trade and 12 percent of its foreign investment. Thirty percent of Spanish trade with France was in transportation equipment.99

The leading position achieved by the German automobile industry reflects the dramatic effects of European integration.100 (See Appendices.) For two decades, German manufacturers unsuccessfully tried to break into the promising Spanish market and manufacturing sector, largely dominated by French and American firms. Only in 1985 did Volkswagen, openly supported by the German and Spanish governments, acquire and rescue the Spanish semipublic firm SEAT (Sociedad española de automóviles de turismo). With this acquisition, it had the ideal platform for producing low-cost cars in direct competition with Renault, Citroen, and Ford. The move had positive effects on the German auto industry. In addition, the largest German firms are historical players operating in historical industries.101 They have improved their position in Spain, but, unlike the French, have not become leaders. With the exception of their discount retailer LIDL, they have failed to exploit the enormous potential of Spanish retailing. Even their strategy of focusing on the lowest segment of the market has turned out to be problematic, as became apparent in the recent acquisition by Carrefour of Plus, a German discount retailer. Notably, Deutsche Bank and DKV had achieved prominent positions by 2004. Whereas the former was historically a player of considerable skill, as it demonstrated during both the postwar expropriation period and the liberalization of Spanish banking, the latter took advantage of another historical player, Plus Ultra, for its entry into the Spanish insurance market.102

By taking its recent steps toward integration and deregulation, German firms have increased their control over Spanish assets, leaving behind their historical partnerships. Nevertheless, the rise of a generation of global managers in an age of mergers and acquisitions has eroded German managerial models. In Spain, the division of labor between political and technical managers, once so characteristic of the technical model, has faded. The descendants of many Spanish partners, who often have German educational backgrounds in technical fields, today hold top positions in Spanish subsidiaries.103

Spanish trade and FDI data show that German economic influence gathered momentum between 1985 and 1990.104 With 16 percent and 13 percent, respectively, of Spanish imports and exports, Germany became Spain's main trade partner. The traditional pattern of investment evolved from its three-pronged structure of chemicals, machinery, and electronics to a more diversified one under the hegemony of the automobile industry. Spain became the fourth-largest destination for German capital on the eve of German reunification. That event made Spain considerably less interesting to German firms, which explained the subsequent decline of German FDI.

Conclusions

We have demonstrated in this article that international capital flows are strongly influenced by country-specific patterns that can be best understood in historical and comparative perspective. Our longterm analysis of French and German capital in Spain also shows that the core capabilities of foreign firms and their relations with local partners have played a critical role in the development of national models of international investment. Although both models have exhibited a degree of inertia over time, they have also undergone profound changes that our research was designed to clarify.

French capital and firms acquired predominance in nineteenthcentury Spain, forging an investment model that we characterize as political for three main reasons. First, being a prime mover in Spain allowed French capital to shape the legal framework of foreign investment and to create significant ownership and knowledge advantages. Second, French activity was led by investment banks, whose prominence and focus on public finance, infrastructures, and mining gave them privileged access to the Spanish political and financial elite. Third, these arrangements, together with a centralized and hierarchical management structure, ensured that the French parent companies would control Franco-Spanish businesses.

German investors, in contrast, arrived relatively late, facing an increasingly protectionist environment, which forced them to build most of their advantages on their own technical and commercial capabilities. German universal banks were instrumental in helping them to do this, and German firms sought full control of their Spanish subsidiaries through a division of labor among directors, who were either political (often Spanish) or technical (German). This model, which emerged in the early decades of the twentieth century and is characterized here as "technical," had a strong industrial profile that was linked to the sciencebased industries of the second industrial revolution and was sustained by partnerships with domestic industrial firms.

French FDI lost ground in Spain during the internar years, as is apparent in the reduced visibility of French investment banks, the takeover of many historical firms by Spanish partners, the failure of many new business ventures outside the original field of French expertise, and- last but not least- the subordinate role of French firms within most of the international cartels controlling Spanish activities. However, as we have shown, there is evidence of a quest by French firms for new fields of activity, an ambition that sustained French leadership throughout the period and led to changes in the relations between French and Spanish partners.

German FDI, on the other hand, was stimulated by mounting Spanish nationalism after 1917 and by the wars that occurred between 1936 and 1945, when Nazi Germany became Spain's leading trade and technological partner. After World War II, German business assets in Spain were expropriated under the Allies' supervision. Our research reveals, however, that, in most cases, German owners reached agreements with their Spanish partners to retain control of their subsidiaries and joint ventures with the consent of the Spanish government. Likewise, an agreement reached by the German and Spanish governments in 1958 paved the way for the full recovery of the expropriated firms and the reestablishment of German industrial leadership in Spain. Neither the war-fueled boom nor the difficulties associated with the expropriation process challenged the technical model of investment that we have discussed in this article.

The evolution of postwar Spain and the growing influence of competing investors, particularly the Americans, continued to put pressure on French firms. Our research shows that collective action and a pragmatic approach to Spain's authoritarian regime and business structure helped French capital both to influence the institutional framework and to diversify and participate as a strong player in the country's late industrialization. Mass tourism also triggered a structural change in the inherited model of FDI. Investment banks and ongoing efforts to influence the political and financial elite remained crucial, as did the arrival of new business players and the emergence of new areas of expertise. Meanwhile, German firms continued to build on their own traditional model. Their accumulated capabilities and surviving networks helped them to increase their market share considerably. Strategies differed, but, in general, German firms sought full control over their Spanish subsidiaries, both new and old, and continued to integrate them into their European strategies.

We argue that the strong support of France and the Federal Republic of Germany for Spain's entry into the European Union in 1986 correlates with intensified economic and business relations between both countries and Spain. More interesting, though, is the structural transformation of French and German FDI that has occurred in relation to Spain's rapid economic growth and the accumulated advantages of French and German firms and networks. Whereas French investment has reached a successful stage on the basis of new, customer-oriented economic activities, German investment has kept much of its original profile, continuing to rely on firms that are historically grounded in the Spanish market while also being buoyed by the recently established automobile industry.

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