Thursday 4 March 2010

What brings foreign direct investment to a country?

   I was asked a couple of days a question to which I have no good answer: what are the major factors to bring more foreign direct investment to Portugal?
   The problem in answering is that education, human capital, infra-structure, incentives (that is, money given by the Government to the foreign investor), all of that is actually offered by most countries anyway, so what is really distinctive is hard to state.
   However, going on the negative side, what could keep investors away, I get two simple answers: Government bureaucracy and rule of law (courts and justice in geral are very slow, and uncertain), but then we are back to "old" problems of the Portuguese society.
   Anyway out?


  1. According to the chapter by Natalia Barbosa in the book (see also her other work at, in the peak FDI 1985-1995 years, decisions to invest in Portugal had much to do with wage levels, location, and the existence of other foreign owned firms, i.e., location, location, location. That is even harder to change than bureaucracy and the rule of law. Maybe with better infrastructures?

  2. "Maybe with better infrastructures?"

    What about lower tax rates?

  3. Pedro, good point, but my fear is that 1995 was 15 years ago, and since then many of these motives have been matched by other European regions, namely in Eastern Europe.

    PR: lower tax rates are probably not fundamental here, tax holidays are usually part of benefits package offered to foreign direct investment.

  4. PPB,
    Some time ago I listened to Mr. Aznar answering that question.
    What brings FDI - Credibility.
    Negative - Lack of credibility.
    Portugal, right now, is not a credible country for investors.

  5. In fact, most of the foreign firms operating in Portugal in the 80s and 90s search for efficiency gains. In that case, location matters significantly. However, we must say that a considerable number of those foreign firms are now out of Portugal as they found similar or even better conditions in other locations. The new foreign firms in Portugal are driven by very different strategic motives. Understanding these motives could be an important starting point to answer Pedro Pita Barros’s question.