Thursday, 4 March 2010

Attracting FDI to Portugal

Let me continue the discussion initiated by Pedro Pita Barros and Susana Peralta: How can we attract FDI flows into Portugal?
I think Pedro is spot on. We can split the factors driving FDI flows into two main categories: (i) factors affecting the productivity of capital, and (ii) factors affecting the return to foreign investors. In (i) we have the factors both Pedro and Susana mentioned, such as human capital, infrastructure, and possibly agglomeration economies. In (ii) we have, in addition to taxes and subsidies, the fundamental issue of investor protection. That is, the laws that protect outside investors' interests against explicit or implicit expropriation of their returns by firm insiders (e.g. managers), and the enforcement of those laws. Even when the productivity of capital is high, and even when the right government incentives are in place to attract FDI, FDI might not come at all if the institutions are weak. This can happen because the actual return to capital, as perceived by foreign investors once the institutional framework is factored in, may be quite low. My thoughts on this are very influenced by a study on the Portuguese economy I conducted recently with my co-author and good friend Gian Luca Clementi ("The economic effects of improving investor rights in Portugal"; free access here; sorry for the publicity!).
Portugal has made a lot of progress since joining the EU regarding corporate governance and investor protection laws. We still have very poor law enforcement though, particularly the judicial system. Reforming the judicial system must be a top priority if Portugal is to further attract foreign capital.


  1. Following up on Rui, Pedro and Susana's comments on institutional quality and FDI, and riding the wave of self publicity (sorry, Rui...), check here(; those without access to ScienceDirect, please check here for some empirical evidence on the the impact of institutions on the level of flows and on the structure of capital flows. (mostly on a cross-section emerging markets but it also includes larger samples with developed countries). Laura Alfaro and co-authors have a prolific body evidence on this as well.

  2. Great reference André, empirically connecting both type (i) and type (ii) factors to the specific type of international capital flows we were talking about, FDI. Thanks!

  3. Good Article About Attracting FDI to Portugal.

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