1. Trends and impacts of foreign direct investment in Portugal

The last decade marked the turnaround of the Portuguese economy. After going through a full-scale economic crisis in 2011, which led the government to request assistance from the European Union (EU) and International Monetary Fund (IMF) and implement a series of fiscal, financial and labour market reforms, Portugal underwent a remarkable economic rebound and transformation, restoring investor confidence, improving its economic competitiveness and resilience, and exiting the agreed economic adjustment programme earlier than expected in 2014 (IMF, 2018[1]; Gouveia et al., 2018[2]). Since then, Portugal has been sustaining an impressive economic record, drastically reducing unemployment and bringing previously large fiscal and current account deficits under control (OECD, 2021[3]). The COVID-19 pandemic, however, brought many of these positive developments to a sudden halt. Economic activity contracted by 8.4% in 2020, Portugal’s deepest post-war recession. But the economy rebounded well in 2021 partly thanks to government support measures, which helped weather the economic shock. The outlook, however, remains uncertain as the pandemic and its economic effects may still linger in the near term (OECD, 2021[3]). Russia’s invasion of Ukraine might also weigh on Portugal’s economic prospects due to possible disruptions in global supply chains and increased volatility of commodity prices.

While the pressing attention of authorities remains in navigating the economy through these uncertain times, in the longer term Portugal will need to address some of its long-lasting structural challenges. Particularly, Portugal could mobilise further investment to support long-term productivity growth in view of adverse demographic trends and support its transition to a carbon-neutral economy by 2050 (IMF, 2018[1]; EC, 2020[4]). Overall investment levels in Portugal remain among the lowest in the EU (20.3% of GDP against 22% of GDP in the EU in 2021) despite steady improvement over recent years.

Foreign investment can play an important role in addressing these challenges. Beyond capital and jobs, foreign investors can contribute to develop and transfer knowledge and technology, introduce innovative management methods and help upstream and downstream sectors upgrade their products, through close links that could further support productivity growth, particularly for domestic small and medium-sized enterprises (SMEs) (OECD, 2022[5]). They can also bring other social benefits related to job quality, gender equality, digital transition and carbon neutrality (OECD, 2019[6]). As shown throughout this chapter, existing foreign investors are already contributing to advancements in many of these areas in Portugal and, hence, to setting the country on a more sustainable development path. Efforts to further attract foreign investors and retain existing ones could thus prove to be strategic for addressing Portugal’s productivity challenge and for accelerating its green and digital transition.

Foreign investors may also provide crucial support for the economic recovery following the COVID-19 pandemic.1 Like Portugal, many countries will grapple with recurring outbreaks, but those who manage to remain attractive destinations post-COVID-19 will have an edge in retaining and mobilising new foreign investment. Increasing the level of international investment is already part of Portugal’s strategic priorities for the next decade (the Internacionalizar 2030 programme approved by the Council of Ministers in July 2020 and the Acordo de Parceria Portugal 2030 programme approved by the Council of Ministers in March 2022 in the context of the Multiannual Financial Framework 2021-27 and the European Structural and Investment Funds). This is a critical time to pursue this strategy.

Moreover, foreign investment may help to weather some of the economic challenges posed by Russia’s war against Ukraine. Aside from the regretful human losses and humanitarian damages, the war has steepened pressures on the supply of energy, agriculture and minerals, causing significant moves in commodity prices and prompting many countries to revise their strategic priorities. In March 2022, EU countries adopted the Versailles Declaration reaffirming the EU’s intentions to enhance energy security, strengthen defence capabilities and reduce dependencies on critical resources, such as digital technologies, agricultural products and raw materials.2 As showed in this chapter, Portugal has been advancing in many of these fronts already, including with the support of international investors, and may look towards accelerating the pursuit of such strategies and exploring associated opportunities with their support.

This report examines how regulatory reforms could help Portugal build a more enabling and competitive environment for investment, particularly foreign direct investment (FDI), contributing ultimately towards achieving Portugal’s strategic priorities enshrined in the Acordo de Parceria Portugal 2030 and in its Recovery and Resilience Plan. This chapter assesses trends and patterns of FDI as well as its contribution to sustainable development in Portugal. Section 1.2 reviews Portugal’s overall investment situation in comparison to a group of benchmark European economies to better understand how it could best support long-term productivity growth. Section 1.3 examines trends and patterns of FDI, cross-border mergers and acquisitions (M&A) and greenfield investment in Portugal and in the benchmark countries. It looks at their evolution, capital composition and sectoral distribution and at the origin of investors. It also explores the more detailed sectoral information of M&A and greenfield investment data to examine to what extent foreign investors are contributing to advance Portugal’s low-carbon and digital transition. Lastly, Section 1.4 exploits the richness of Portuguese micro-data to describe the broader effects of FDI on skill development and gender equality, on technology uptake and digitalisation, and on the linkages with domestic firms as well as their integration into global value chains (GVCs). The regional impact of FDI is also considered in this section.

Like many other developed countries, Portugal has a rapidly ageing and decreasing population.3 In the longer term, the resulting declining share of workers to the total population will weigh on labour’s contribution to economic growth. This demographic evolution will also intensify demand for health care, pension and social services and increase the pressure on the public sector (IMF, 2018[1]).

Raising productivity is thus necessary to cope with Portugal’s adverse demographic trends and to continue improving people’s living standards. Productivity has plateaued over the last decade and is no longer converging with the average top 15 most productive European economies (TOP15).4 The productivity gap with the TOP15 stood at about 60% over the period 2011-21 (Figure 1.1 A). While Portugal’s productivity level is still higher than in some countries in the benchmark group, the latter are seeing their productivity levels converge faster to TOP15 levels (Figure 1.1 B).5 Similar trends hold across the manufacturing and business services sectors excluding real estate.

Along with improvements in labour skills and in labour market efficiency and broader efforts to enhance domestic firms’ absorptive capacity, particularly of SMEs (IMF, 2018[1]; Alves, 2017[8]; OECD, 2022[5]), productivity improvements could be achieved with further capital deepening. Total public and private investment – i.e. gross fixed capital formation – has been weak and unable to raise capital stock to levels similar to those of the average TOP15 economy. The ratio of investment to GDP has declined for most of the last decade before starting to recover in 2017. Yet it remains somewhat lower than in most peer economies: 20.3% of GDP in 2021 compared to 22% on average in the benchmark group and 21.7% in the TOP15. When looking at investment by the corporate sector, the gap with TOP15 economies has recently narrowed; however, compared with some peers, corporate investment in Portugal has been considerably lower during the last decade. While the median level of investment to GDP by the corporate sector was 10.7% in Portugal over the period 2011-21, it was 13.7% on average in the benchmark group and 12.4% in the TOP15, about 30% and 15% greater than in Portugal respectively (OECD, 2021[9]).

Portuguese workers would particularly benefit from having at hand better machinery, tools and technology that would enable them to work more efficiently and increase productivity. The level of capital stock per worker remains relatively low and the wedge with the average TOP15 economy has been growing more recently (Figure 1.2 A). This is particularly the case in the manufacturing sector, for which Portugal’s level of capital stock per worker stood at 70% of the TOP15 level in 2017. In turn, many services sectors (e.g. construction, distribution, transportation, among others) present relatively high levels of capital stock per worker, but this may partly reflect the misallocation of capital over the years before the Portuguese crisis when large amounts of credit-fuelled resources were drawn into non-tradable activities (Alves, 2017[8]; OECD, 2014[10]). Also, across sectors, capital invested has been mostly allocated to construction assets as opposed to potentially more productivity-enhancing assets, such as machinery, equipment and intellectual property assets (Figure 1.2 B). This divergence is much more pronounced than in the average TOP15 economy and across the benchmark group, and has strongly accentuated in the manufacturing sector over the last decade.

Portugal’s reputation as an attractive technology and innovation hub is increasing.6 Yet, investment in information and communication technology (ICT) assets in Portugal has still to pick up across industries. Net ICT capital stock per worker is still much lower in Portugal than in the average TOP15 and is also much lower than in most of the benchmark group (Figure 1.3). Moreover, it has been relatively stable over the past decade in Portugal while it has been growing in most benchmarked economies and in the TOP15. The relatively slow uptake in ICT investment thus far can increasingly become a drag for Portugal’s digital transition and a significant barrier to productivity improvements in the long term (Andrews, Criscuolo and Gal, 2016[13]). A shortfall in ICT assets can also hamper the green transition, as digital technologies play a prominent role in improving energy efficiency (IEA, 2019[14]). Low ICT investment can further amplify the existing digital divides between companies reaping the benefits of technological developments and those struggling to update their business models due to limited digital assets (EIB, 2019[15]) (see Section 1.4.3 for detailed information on technology uptake by Portuguese firms). Foreign investment can be an important complement to the measures envisaged in the Portuguese Recovery and Resilience Plan to boost the country’s ICT stock.

Currently, unit labour costs (ULCs) in Portugal remain lower than in the average TOP15 economy and in some of the economies in the benchmark group, which helps to keep Portugal as an attractive location to investors, although many of its peers prove to be quite competitive too (Figure 1.4).7 Portugal has been able to keep unit labour costs relatively under control over the last decade, having one of the slowest growing rates across the benchmark countries.

Maintaining relative cost advantages over time can prove challenging, however, without productivity gains. Total unemployment was 6.6% in 2021, one of the lowest levels since 2004 (World Bank, 2021[16]). Investors are already struggling to find qualified workers for certain positions, particularly those requiring information technology (IT) and digital skills, as demand for talent has been outgrowing supply in some areas. Investors consider supporting high-tech industries and innovation and developing talent as key areas of focus to maintain Portugal’s competitive position in the global economy (Ernst & Young, 2020[17]; Ernst & Young, 2021[18]; INE, 2018[19]).

Foreign investors can and in many ways are already contributing to addressing many of Portugal’s long-term sustainable development challenges (see Section 1.4). International investment can also play a critical role in accelerating the green and digital transition, including to partly address the consequences of the COVID-19 pandemic and the war in Ukraine. Stepping up efforts to attract foreign investors and retain existing ones could thus prove to be strategic for making further progress on these priorities.

Portugal has one of the highest levels of inward FDI stocks across OECD countries and compares favourably against most of the benchmark group (Figure 1.5 A). At end-2021, inward FDI stocks as a share of GDP stood at 71%, having risen slightly below the average of the benchmark group since 2015. However, over the last decade (2011-21), they have grown at an impressive 6% compound annual growth rate. Such growth has not been nearly matched by any of the benchmarked countries during the period. Most of this growth has been driven by equity capital injections. In the shorter period between 2015 and 2021, for which comparable data are available for most benchmark countries, equity capital injections accounted for over 60% of FDI inflows on average. In turn, FDI into most peer economies has been largely associated with reinvested earnings (Figure 1.5 B).

Although higher frequency data on foreign investment, such as cross-border mergers and acquisitions (M&A) deals and greenfield investment projects, are in some ways conceptually different from FDI statistics, they are a great complement to official FDI statistics as they can help to identify broader investment dynamics taking place in recent periods with greater sectoral detail and, thus, contribute to explaining underlying trends in FDI. They also help to inform about investors’ mode of entry. As in other developed economies, cross-border M&As represent an important entry mode for foreign investors in Portugal, correlating highly with FDI equity flows. In turn, the contribution of announced greenfield investment projects tends to be much smaller overall.8

Cross-border M&A activity has been relatively more important in Portugal than in selected economies in recent years (Figure 1.6 A).9 However, the sum of all deal values as a share of Portugal’s GDP has been on a declining trend since 2015, despite some strong upward M&A activity occurring in 2020 and 2021, thanks to several large-scale M&A deals. In contrast, the number of deals completed in Portugal, which had declined sharply during the pandemic, has recovered to a level slightly below the pre-pandemic level. The economic disruptions from the COVID-19 pandemic and possible long-term consequences of Russia’s war against Ukraine might, however, continue to weigh on cross-border M&A activity in Portugal. In 2022, the number of completed cross-border M&A transactions was still about 10% lower than back in 2018 before the pandemic, and in value terms it stood at roughly 50% of the level observed in 2018.

The COVID-19 outbreak also hit greenfield investment projects hard (OECD, 2020[21]; 2021[22]). In 2020, the number of greenfield projects in Portugal fell by 36% compared to 2019, but already in 2021 greenfield investment activity had recovered.10 In 2022, it continued to grow reaching its peak at year-end. Similarly to M&A, however, the uncertainty surrounding the global economic outlook might still pose challenges for investment projects. While greenfield investment has been on the rise over the past few years, with the share of announced and undertaken greenfield investment projects to GDP increasing steadily over the years, the trend has slowed down in 2022 (Figure 1.6 B).11

With the increasing role played by new outward investors in international markets, it could be strategic for Portugal to intensify efforts to diversify further its investor base, which remains predominantly based on traditional European investors, although there are signs of further investor diversification taking place in recent years.

Most cross-border M&As in Portugal come from the intra-EU market (Figure 1.7 A). Although less numerous, M&A transactions by investors located outside the Single Market are often larger: total deal value of extra-EU M&A was nearly 20% higher than that of intra-EU deals over the reported period.

The largest number of M&A deals in Portugal originated in Spain, both on an immediate and ultimate investor basis (Figure 1.7 B). Many cross-border transactions in the last decade were also undertaken by investors from the United States, the United Kingdom and France, all of which were home to more ultimate than immediate investors. In value terms, the People’s Republic of China (hereafter ‘China’) and Brazil are also among the top sources of M&As in Portugal from an ultimate owner point of view.

Intra-EU investors have equally been the main proponents of greenfield projects in Portugal, both in terms of the number and value of announced projects, but extra-EU investors have been catching up in recent years (Figure 1.8 A), as measured on an immediate investor basis.12 From 2015 to 2022, the number of greenfield projects announced both by intra and extra-EU investors gradually increased, reaching its peak in 2022 when several larger projects took place.

Like for M&As, most greenfield investment projects in Portugal originate in Spain, France and the United Kingdom, even on an immediate investor basis – the only one available for these data (Figure 1.8 B). The United States, Germany and Brazil are also home to a great number of greenfield investors in Portugal. These countries are also among the leading investors when looking at the value of announced investment, along with Korea.

The geographical distribution of leading foreign investors in Portugal observed in recent years is broadly in line with the more historical perspective portrayed by the Bank of Portugal’s new statistical series on FDI positions by the ultimate investing country (Figure 1.9), with Spain, France and the United Kingdom also accounting for a substantial share of FDI stocks. The presence of Portugal among the major ultimate investors denotes the existence of “round-tripping” investment, i.e. funds transferred abroad by investors resident in Portugal that are then channelled back to the country in the form of direct investment through intermediary entities abroad, for instance in the Netherlands and Luxembourg (59% and 17% respectively) (Banco de Portugal, 2021[23]).13

Portugal’s manufacturing sector has been historically overlooked by foreign investors. The manufacturing share in total inward FDI stocks is the lowest across the benchmark group. Across the benchmarked economies, only in Portugal and Estonia the manufacturing sector is underrepresented in the stock of inward FDI and the extent of such divergence is greater in Portugal. Recent trends, however, point to rising investment activity in export-oriented manufacturing industries (e.g., mineral and metal products, chemicals, machinery, agro-food, transport material) (OECD, 2022[5]).

Manufacturing accounted for most cross-border M&As in Portugal in the last decade (Figure 1.10 A). The sector’s share in all foreign M&As in Portugal is, however, just 18%, among the smallest in benchmarked economies with only Estonia’s share being lower (16%). The relative number of deals in the manufacturing sector has been steadily declining since 2014, to the point that the share of the sector in the total number of M&A transactions has fallen from 27% in 2014 to 17% in 2022 on a 3-year moving average basis. Likewise, the share of manufacturing in total deal values contracted from 28% in 2014 to 2% in 2022.14

A sizeable portion of greenfield projects into Portugal also went to the manufacturing sector (20%), albeit lower than in the benchmarked countries (Figure 1.10B). Over the years, the share of manufacturing in Portugal’s greenfield activity has been quite stable, accounting for nearly a quarter of all projects and a fifth of total greenfield investment, while the sector is steadily losing its relevance in peer countries.

Manufacturing plays a prominent role in foreign investment supported by AICEP Portugal Global, the country’s investment promotion agency (AICEP, 2022[24]). Over recent years, the sector’s share accounted for 78% of total value of investment contracts, with most projects targeting the automotive industry (26%) and chemicals (17%).

Despite these developments, overall FDI activity continues to be largely concentrated in services sectors, notably in financial and professional services which accounted for the largest shares of total inward FDI stocks as of end-2021, although both sectors have seen their shares decline considerably over the last decade.15 The sectors that have been driving FDI growth in Portugal more recently are energy and utilities, information and communication, accommodation and food services, transportation and storage, and real estate activities.

Energy and utilities, for instance, accounted for 11% of all cross-border M&A deals in Portugal and was the largest sector in terms of investment value (25%) over the period analysed, driven largely by rising activity in the renewable energy sector (see Section 1.3.5). While relatively less pronounced in terms of numbers of projects (5%), energy and utilities activities absorbed the largest share of greenfield investment in value terms (22%) too over the period assessed.

In turn, FDI activity in the ICT sector has been mostly associated with greenfield investment projects. A third of greenfield projects in Portugal target ICT, the second largest share in the benchmark group after Lithuania (34%). While in value terms the sector’s share is smaller (15%), it is still the third largest in the group. This contrasts somewhat with the M&A trend, where the share of cross-border M&A deals in ICT is the lowest among peers (12%) and has changed little over time. In comparison, in Estonia, for instance, the sector’s share went up from 9% in 2014 to 26% in 2022 on a 3-year moving average basis, making it the leading recipient of ICT deals in the group (18% over the period of observation).

Renewable energy has dominated both cross-border M&A and greenfield investment in the energy sector in Portugal in recent years (Figure 1.11A-B). Renewables accounted for 96% of all cross-border M&As in the energy sector (and 5% of all cross-border M&As in Portugal). This is in stark contrast with most peer economies, where transactions in fossil energy dominated, the share of renewables averaging only 37% of all energy sector cross-border M&As. Greenfield projects in fossil energy have been generally less prevalent across countries.

Most foreign investment in the Portuguese renewables sector were in solar energy (Figure 1.12). For instance, in 2020, new projects in solar photovoltaic and storage capacity were announced by Korean investors and Chinese investors. In 2018, a German investor also acquired a solar plant in the Algarve region. Hydropower and marine energy also attract foreign investors. In 2020, for instance, Swedish investors established a subsidiary in Porto to develop wave energy projects. In the same year, a group of French investors acquired six hydropower plants from EDP Energias de Portugal for USD 2.4 billion.

The increasing appetite of foreign investors for renewable energy projects in Portugal resonates with Portugal’s leadership and policy orientation in this matter, being among the first countries in the world to set 2050 carbon neutrality goals and placing great emphasis on the expansion of renewable electricity generation as a means to achieve carbon neutrality, together with increased energy efficiency and broad electrification of energy demand. In its long-term strategy for carbon neutrality (Portugal’s Roadmap for Carbon Neutrality 2050), Portugal has set the goal for renewables to cover 46-47% of final energy consumption by 2030, 71-72% by 2040 and 86-88% of final energy consumption by 2050. In 2020, renewables already covered a significant portion (30%) of the total energy consumption – one of the highest rates among the International Energy Agency (IEA)’s members (IEA, 2021[25]). However, after rising by almost 10 percentage points from 2005 to 2010, the growth in the share of renewables in total energy consumption has been relatively modest in comparison to the benchmarked group (Figure 1.13 A).

Portugal’s energy demand is still largely supplied by imported fossil fuels, which accounted for roughly 73% of Portugal’s total energy supply in 2019 (43% oil, 24% natural gas and 6% coal), driven particularly by demand from transport and industrial sectors (IEA, 2021[25]). All these are imported as Portugal has no domestic oil, natural gas or coal. The remaining part is sourced domestically from Portugal’s domestic energy production sources, which are almost entirely renewable sources, notably bioenergy, wind and hydro. Impressive strides were made in expanding domestic renewable energy production over 2005-12, when it passed from covering 18% of total energy supply to 27%, largely due to growth in wind generation supported by a feed-in tariff scheme. Solar energy has also been trending up slightly more recently (IEA, 2021[25]). But such increments in domestic energy production have slowed down and, together with seasonal variations in the output of Portugal’s hydropower plants, impeded a more pronounced reduction in Portugal’s energy import dependency. As of end-2019, Portugal remained one of the most external energy dependent economies among IEA countries.

Boosting investment in renewable energy generation and energy efficiency is thus critical both to ensure carbon neutrality targets are achieved and to decrease energy import dependency. Adding renewable energy capacity to the grid might also contribute to further curtail electricity prices, which remains an area of concern for investors despite recent improvements (EIB, 2020[26]) (Figure 1.13 B). Over the last decade, the cost of electricity from utility-scale solar plants and onshore wind farms has dropped drastically to levels below those of various fossil fuel-fired options, increasingly undercutting even the cheapest and least sustainable forms of existing coal-fired power plants (IRENA, 2021[27]).16 The war in Ukraine has further underlined the potential benefits of expanding Portugal’s renewable energy production capacity.

The digital economy has attracted a significant share of inward FDI across Portugal and the benchmarked economies, with software and IT services accounting for most investment (Figure 1.14).17 Although Portugal hosts many cross-border M&As in digital sectors, their share in the total number of foreign deals was the second lowest in the benchmark group (16%). Greenfield projects into the digital economy were relatively more numerous, amounting to 37% of all greenfield investment announced in Portugal, surpassed only by Estonia (39%) and Lithuania (37%). Portugal is also attracting foreign investment in business services centres (BSC), particularly IT-related services. According to a recent survey, IT stands for over 40% of functions performed by BSCs in Portugal (AICEP and IDC Portugal, 2019[30]).

Most foreign investment into the Portuguese digital economy targets software and IT services (Figure 1.15 A). However, in value terms, software and IT services account for only half of all announced greenfield investment, whereas a substantial share of capital comes from projects in telecommunications (44%). The telecommunications sector clearly dominates in the value of foreign M&A activity (97%) (Figure 1.15 B).

Beyond the direct investment into digital technologies and infrastructure, foreign investors can also play an important role in Portugal’s digital transition by providing funding for the start-up ecosystem. In 2020, the top 25 Portuguese technological start-ups raised 60% of their funding from foreign sources, with the United States (32%) and Singapore (17%) being the leading contributors, followed by other EU economies (EIT Digital, 2020[31]). The vibrant development of Portugal’s start-up ecosystem, fuelled by the growing number of business incubators and accelerator programmes, strengthens the country’s image as an attractive destination for foreign capital (Portugal Ventures, 2022[32]).18

Investment is central to growth and sustainable development. It can support the expansion of an economy’s productive capacity in a sustainable manner and drive job creation and income growth. Most investment is undertaken by domestic firms, but FDI can provide additional advantages beyond its contribution to the capital stock and as an additional source of tax revenues. It can directly contribute to progressing on several areas of the Sustainable Development Goals (SDGs) (e.g. productivity and innovation, job quality and skills, gender equality and carbon emissions) by stimulating allocative efficiencies across and within sectors (e.g. when concentrated in more sustainable activities and when outperforming the average firm in its sector in respect to sustainable outcomes). It can also indirectly serve as a conduit for the local diffusion of technology and expertise and improved access to foreign markets, and potentially for other sustainable development outcomes, if its competitive pressure and linkages to the domestic economy pushes customers and firms throughout the value chain to improve their sustainable performance (OECD, 2021[33]). Several of these potential FDI contributions to sustainable development are assessed below, exploiting the richness of Portugal’s micro-level statistics on firms and employees.

In 2020, foreign-owned firms19 represented only 2% of all firms in Portugal but contributed substantially to the Portuguese economy: they employed 18% of the domestic workforce, accounted for 28.4% of total value added and 24.6% of business-funded research and development (R&D). Aside from the direct contribution to economic activity, foreign multinational enterprises (MNEs) are also found to bring broader benefits to Portugal. As shown below, they contribute to the development of Portugal’s skills base and to job quality improvements, in terms of wage and gender parity. They are equally contributing to speed up the country’s rate of digitalisation and, by purchasing inputs from local businesses and selling to international markets, are also supporting Portugal’s integration into GVCs.

Micro-level evidence shows that most foreign-owned businesses in Portugal are micro-enterprises (49%) or SMEs (46%), with only 4% being large-sized (Table 1.1). Most foreign firms are in the services sector, although many large foreign enterprises operate in manufacturing. For every size group, foreign companies are larger, more productive and generate more sales than their Portuguese peers. They are also more integrated in GVCs, as shown by their higher export intensities and larger volumes of domestic purchases. They hire more skilled workers and pay higher wages. On average, foreign micro-enterprises and SMEs invest more in R&D than their domestic counterparts. Foreign-owned SMEs employ slightly more women than their domestic peers, while shares of female employment are very similar in foreign and domestic companies of the other size groups.

Foreign enterprises tend to hire more high-skilled workers than domestic firms, possibly because their business operations might involve more advanced technologies or more complex tasks, which increases the demand for skilled labour and can raise the host country’s skill intensity (OECD, 2019[6]). Moreover, foreign MNEs tend to pay higher wages to their employees, especially to highly qualified ones (Hijzen et al., 2013[34]; Setzler and Tintelnot, 2021[35]). Foreign businesses can increase the supply of skills by training their own employees and employees of partner firms, but also by inducing domestic firms to invest in skill development to stay competitive. Upskilling of the domestic workforce can also take place through mobility of labour from foreign to local firms.

In Portugal, foreign affiliates employ more high-skilled workers than domestic businesses in most sectors of the economy (Figure 1.16). Discrepancies in skill intensity in some sectors, such as construction and manufacturing, reflect the differences in the industrial specialisation with foreign enterprises operating in more technology-intensive activities. In other sectors, such as ICT and electricity, foreign-owned businesses employ more high-skilled workers than their domestic counterparts even within narrowly defined economic activities, likely because they perform more technologically advanced tasks. Skill intensity in foreign firms is higher even when looking only at workers in managerial positions.20 Additional estimates show that foreign enterprises are more skill-intensive even when compared to domestic firms with the same characteristics.21

Foreign-owned firms pay higher wages than domestic firms. The wage premium holds even when comparing employees and firms with similar characteristics.22 Furthermore, the premium exists for all skill groups (Figure 1.17). It is estimated that wages paid by foreign firms to employees in high-skilled occupations are 7.3% higher than in domestic firms, whereas the estimated wage premiums for medium and low-skilled occupations are 4% and 4.5%, respectively.23

The foreign wage premium exists even after accounting for the differences in observable firm and worker characteristics, suggesting that other factors might explain why foreign firms reward their workers more generously. For instance, foreign wage premium might reflect greater complexity of tasks that employees of foreign firms perform (Nilsson Hakkala, Heyman and Sjöholm, 2014[36]) or better management practices, possibly adopted from headquarters (Bloom et al., 2021[37]; Hjort, Li and Sarsons, 2020[38]). It is also plausible that employees of foreign companies systematically differ from workers of domestic firms in ways that cannot be captured by the data but are important for wage setting (e.g. fluency in foreign languages).

Foreign businesses can contribute to upskilling workers through training. One indication that foreign companies actively invest in employee training comes from the Portuguese ICT use survey (IUTICE): nearly two-thirds of surveyed foreign firms (62%) reported providing training to their employees to develop their ICT skills, whereas only around a third of domestic firms (36%) did so. Among foreign companies, training was offered extensively by both large firms (76%) and SMEs (53%), whereas employees of domestic companies were substantially more likely to access training if they worked in large firms (63% offered ICT training), than those working for domestic SMEs (30%).

FDI can also support skill upgrading in the host economy through labour mobility. Micro-level evidence shows that from 2009 to 2020, nearly 979 000 workers in Portugal had experience working in a foreign-owned firm, that is 24% of all the working population in Portugal. Over time, around 259 000 of these employees, representing nearly 6.5% of all workers, left foreign MNEs and started working in domestic companies.24 This labour mobility translates into a growing share of domestic businesses employing workers with experience from foreign MNEs. In 2020, 18% of domestic firms employed one or more workers with recent experience from foreign-owned enterprises, against 5% in 2012. On average, workers moving from foreign to domestic enterprises experienced a 2% increase in real hourly wages.25

Experience acquired in foreign MNEs might be seen as especially valuable to their domestic competitors if, for instance, employees of foreign multinationals gain insights about international markets, embrace superior management practices or learn to use advanced technologies (Balsvik, 2011[39]). A recent study finds that Portuguese employers value experience accumulated in firms with international operations, as seen from the wage premium that workers coming from these firms get (Mion, Opromolla and Ottaviano, 2020[40]). This result is consistent with the notion that employees of foreign affiliates are bringing new knowledge and skills when changing their jobs to start working in domestic companies.

Through their demand for female workers, foreign affiliates can affect employment and wage gaps. Their corporate practices, such as hiring and promotion, can influence women’s opportunities for career progression, including their ability to reach leadership positions. More demanding international and national standards, including responsible business conduct principles, may prompt foreign firms to include gender equality considerations in their corporate strategy. Foreign-owned businesses can also enhance women’s labour market prospects in local enterprises, if domestic companies adopt more gender-inclusive employment policies to imitate successful foreign firms (OECD, 2019[6]).

As in other OECD countries, female employment in Portugal is concentrated in low value-added services sectors, such as education, health and social work activities, which typically offer lower pay (OECD, 2019[6]). Domestic firms employ relatively more women in these sectors than foreign affiliates (Figure 1.18 A). Female participation is very similar between foreign and domestic companies in other economic activities, although foreign firms have noticeably higher shares of women working in wholesale and retail trade and in transport and storage.26

In many sectors, women are less likely to reach the top levels of management. The share of female executives is over one half only in sectors traditionally dominated by women (education, arts, health and social work). However, foreign firms employ more women in senior positions than their domestic counterparts in many sectors, including ICT, transport and storage, accommodation and food services (Figure 1.18 B).

Foreign-owned companies pay higher wages to female employees than domestic firms. In 2020, the median monthly wage of women working in foreign firms was EUR 972 and EUR 796 in domestic firms (for comparison, men’s median wages were EUR 1 144 in foreign and 856 in domestic enterprises).

A slightly higher gender pay gap is observed in foreign firms than in domestic ones, when accounting for employees’ education, experience and occupation, as well as the differences in firm characteristics (size, productivity and export intensity; see Annex Table 1.A.3).27 However, the estimated wage penalty in foreign firms disappears completely for women in high-skilled occupations and in top management positions.28

The absence of foreign wage penalty for women in highly skilled and top management positions is in line with the finding that wage discrepancies tend to be smaller for highly skilled workers. The gender wage gaps may also vary considerably across industries due to the differences in investors’ sectoral specialisation and technological profiles.29

Foreign MNEs can support the host country’s digital transition by investing in digital technologies and infrastructure (see Section 1.3.6), and by transferring ICT solutions across borders. Some studies find that the development of key digital technologies is highly concentrated in a few source countries, hence, foreign investors can play an important role in technology diffusion by sharing new tools and practices with their affiliates, but also with partners and customers in the host economy (OECD, 2019[41]).

Although Portugal enjoys high levels of Internet penetration, with 60% of businesses connected to high-speed broadband, technology uptake by Portuguese firms remains well below best performing OECD and EU countries, especially among SMEs (OECD, 2021[3]; EC, 2021[42]). For instance, Portuguese SMEs lag substantially behind in the adoption of cloud computing, which can help firms scale up without incurring costly investment into IT infrastructure.

Foreign firms in Portugal extensively use digital technologies,30 thus actively exploiting opportunities to strengthen innovation capacity and optimise costs. Overall, foreign affiliates’ uptake of key digital technologies is 1.1 to 2 times higher than of domestic enterprises, and compared to domestic SMEs, foreign-owned ones are more likely to use most of the selected technologies (Figure 1.19). Domestic large companies use cloud technologies more extensively than their foreign counterparts do, although higher shares of foreign businesses adopt industrial robots, 3D printing and artificial intelligence technologies.31 For many firms in Portugal, online sales are an important source of revenue, as reflected in the country’s relatively high e-commerce uptake compared to other EU economies (EC, 2021[42]). Among SMEs selling online, both domestic and foreign-owned ones generated over a fifth of their turnover online (Figure 1.20). The share of web sales in large firms is generally lower, partly reflecting the fact that larger enterprises tend to depend on a mix of electronic and more traditional sales channels (OECD, 2019[43]). In general, for a given firm size, firms with higher labour productivity and export intensity tend to generate a larger share of their revenue from online sales (Annex Table 1.A.4).32

Various firm characteristics influence the decision to sell online, but other factors can be important too.33 Micro-data evidence from the Portuguese ICT use survey suggests that many firms in Portugal abstain from online sales because their goods or services are not fit for electronic transactions (43% domestic firms, 44% foreign; Figure 1.21 A).34 Costs of introducing sales on the web, logistics related to the transport of goods and services and difficulties with the legal framework are also cited among the key obstacles, with the latter being reported slightly more often by foreign firms, particularly those from outside the European Economic Area (EEA).35 When asked about the difficulties for web sales within the EU, 18% of domestic and 15% foreign e-sellers indicated high costs of delivery and return as the main challenge (Figure 1.21 B).

In terms of destination markets, most online sales by firms in Portugal target domestic consumers. In 2020, web sales within Portugal accounted for 88% of all electronic orders received by foreign MNEs and 86% by domestic enterprises. Foreign markets make up a slightly higher share of online sales of domestic businesses than for foreign firms, possibly because many foreign firms enter Portugal with the intention to serve the Portuguese consumer.

Foreign firms can be important buyers of domestically produced goods and services. Backward linkages of foreign MNEs help domestic businesses access new markets and improve the competitiveness of their products. These linkages can also stimulate knowledge transfers if foreign firms demand higher-quality inputs from local suppliers and are willing to share their technology or corporate practices (OECD, 2019[6]). Furthermore, foreign affiliates can enhance the host country’s export performance by selling their own outputs abroad and also by incorporating inputs from domestic companies in products destined for export.

These features can be particularly critical for a country like Portugal whose level of trade is relatively low for a small open economy. Despite impressive strides over the past decade, with exports of goods and services rising rapidly as a share of GDP, partly supported by structural reforms that followed from the economic adjustment programme, Portugal’s level of trade to GDP ratio still stood at 86% of GDP in 2021, while it averaged 137% across the benchmarked countries. This low level is particularly marked with respect to merchandise trade, but also holds true for services trade, albeit to a much lower extent. In comparison to the benchmarked countries, and despite improvements in the last decade, Portugal’s export basket is also still dominated by relatively lower complexity goods and services (i.e. involving less sophisticated productive know-how), which can be a constraint for long-term income growth (Hausmann, Hwang and Rodrik, 2006[44]).36

In 2020, foreign-owned enterprises located in Portugal purchased most of their inputs from Portuguese businesses (77% of services, 53% of goods).37 Intermediate inputs sourced domestically accounted for nearly half of foreign firms’ output (47%), indicating that foreign-owned investors incorporate a substantial amount of domestic value added in their production. Industries where foreign firms rely heavily on domestic goods include wholesale and retail trade (43% of turnover) and manufacturing (25%). Domestically sourced services accounted for more than half of foreign firms’ turnover in professional services (50%) and transport and warehousing (46%).

Apart from its capital contribution, FDI plays an important role in Portugal’s export performance. While representing only a small fraction of the entire business population, foreign firms were responsible for 46% of total exports by Portugal (39% of services exports and 53% of merchandise exports) in 2020, a share that has been growing over time (38% in 2010). Their contribution is especially important in key exporting industries: in 2020, foreign MNEs accounted for nearly 55% of Portugal’s overall international sales in ICT, 52% in manufacturing and 32% in wholesale and retail trade (Figure 1.22).

Foreign firms are more likely to export than domestic companies. In 2020, more than half of all foreign-owned firms sold their goods or services in international markets, whereas only 17% of domestic enterprises did so. Among the businesses that exported, foreign-owned enterprises sold a larger share (48% of total sales of a median firm) of their turnover on international markets than their domestic counterparts (14% of total sales of a median domestic company).

Over the past decade, export intensity of foreign firms has been steadily increasing, mostly driven by accommodation and food services, professional services, wholesale and retail trade (Figure 1.23).38

In 2020, domestic purchases by foreign-owned firms in Portugal accounted for slightly over a quarter of all domestic purchases in Portugal (25% of services and 26% of goods). By incorporating local goods and services into production, part of which is exported abroad, foreign companies promote greater integration of Portuguese firms in global value chains.

Similarly, a greater use of imported inputs by both domestic and foreign exporters is an indication of increasing integration into GVCs. Figure 1.24 shows that around a third of Portuguese gross exports reflects value added from imported inputs and the share climbed up from 28% in 2010 to 31% in 2018. The share of foreign content is substantially larger in the Czech Republic (42%) and the Slovak Republic (48%), reflecting greater reliance of these economies on inputs sourced from abroad. This suggests that there is room for enhancing Portugal’s level of GVC integration and export performance.

Exported products embody a substantial share of services inputs. When all those intermediate services that went into producing goods (and services) are accounted for, their contribution amounts to more than half (57%) of the value added exported by Portugal (Figure 1.25). The largest share of the service content embedded in gross exports in Portugal is produced domestically (43% in 2018). In contrast, the Czech Republic and the Slovak Republic rely on foreign services inputs more extensively (19% and 20% respectively). Thus, although foreign services contribute substantially to Portugal’s exports, there is even further potential for Portugal to strengthen its integration into global production networks, including through more foreign investment into services.

The strength of supplier linkages between foreign and domestic firms tends to be critical for the ability of host economies to benefit from activities of foreign MNEs (Görg and Greenaway, 2004[46]). For instance, a recent study argues that knowledge spillovers from FDI into the Portuguese textiles sector in the 1970s were limited, as foreign investors generated few linkages with local producers (Lopes and Simões, 2017[47]). In contrast, in the 1980s, local producers of automotive parts managed to substantially upgrade their capabilities thanks to their extensive interactions with Renault’s manufacturing facility, which allowed many of these firms to become suppliers of Renault plants outside Portugal. In the 2000s, Siemens set up a number of new training centres in Portugal, strengthening linkages with local universities, which in turn attracted highly skilled individuals and spurred business creation (Lopes and Simões, 2017[47]).

A recent OECD report assesses the extent to which different FDI diffusion channels are at play in Portugal, focusing on the linkages between FDI and domestic SMEs (OECD, 2022[5]). The report concludes that although foreign MNEs appear better integrated into Portugal’s economy than in comparable countries, strengthening capabilities of firms in high-tech sectors and advancing the innovation potential of domestic SMEs would facilitate linkages with foreign investors in Portugal. The study also proposes several policy options that could enhance the impact of FDI for SMEs. Several other studies have also pinpointed key factors that influence the strength of positive effects of FDI on the Portuguese economy. For instance, Teixeira and Tavares-Lehmann (2014[48]) find that knowledge sharing between foreign MNEs and Portuguese businesses is stronger for more R&D-intensive local firms. Crespo, Fontoura and Proença (2009[49]) show that geographical proximity between foreign and domestic enterprises in Portugal also facilitates the occurrence of FDI spillovers. Benefits of FDI may also fail to materialise when the host economy lacks absorptive capacity or experiences low labour mobility (OECD, 2019[6]).

Beyond factors that might hinder the accrual of potential positive FDI spillovers, there is also the need to have appropriate policies and institutions to address any potential adverse impact that may directly or indirectly result from the presence of foreign firms (e.g. potential crowding out of local firms, wider wage inequality and regional disparity, greater pressures on existing infrastructures and natural resources, etc.) (OECD, 2021[33]).

Foreign-owned businesses are largely concentrated around Lisbon (Figure 1.26). Compared to domestic companies, the concentration of foreign micro-firms and SMEs is twice as high. Large foreign enterprises are also significantly overrepresented in the capital region, which might partially reflect that the Lisboa region hosts many head offices of foreign companies, even if they operate in other regions as well.39 Many foreign-owned companies locate in the Norte region, although to a lesser extent than domestic ones. The Centro region also hosts a substantial share of foreign-owned businesses, but disproportionately fewer micro-enterprises and SMEs compared to domestic peers. Foreign presence in other regions is much lower, but similar to the distribution of domestic firms.

Characteristics and performance of foreign affiliates vary considerably across regions, reflecting differences both in the industrial structure of the regions themselves and in the specialisation profiles of foreign investors (Table 1.2). Most productive and skill-intensive firms are located in the Lisboa region. Although only a relatively small number of companies operate in Madeira, the region hosts foreign firms that are among the most productive and skill-intensive, driven largely by businesses performing data hosting and processing. Most export-intensive foreign firms are located in the Norte and Centro regions. Both regions host many manufacturing exporters, whereas Norte also enjoys a large presence of ICT firms that extensively sell their services abroad. Foreign companies in Algarve employ on average more women, particularly in accommodation and food services. The share of women is also among the largest in foreign companies operating in Norte, mostly reflecting the high female participation in manufacturing of food, clothing and leather products.

Portugal needs to mobilise further investment to support long-term productivity growth in view of adverse demographic trends and to accelerate the transition to a carbon-neutral economy by 2050, the latter becoming increasingly strategic in view of Portugal’s external energy dependency and current rampant energy prices. Despite recent improvements, overall investment levels remain relatively low, particularly with respect to productivity-enhancing assets, such as machinery, equipment and intellectual property assets. Increased investment in ICT assets more broadly across industries and firms could also enable further productivity improvements and help to strengthen Portugal’s reputation as a technology and innovation hub.

Foreign investors can be important partners to address these challenges. Indeed, as shown in this chapter, FDI can play a valuable role in addressing Portugal’s productivity challenge as well as serve as a conduit to progress on many other SDGs. Evidence from the micro-data analysis shows that foreign affiliates in Portugal support skill development, contribute to more gender-inclusive corporate practices, speed up the host country’s digital transformation and provide new channels to integrate domestic businesses into global production networks. Foreign investment is also actively contributing to accelerate Portugal’s green and digital transition, with significant amounts of investment flowing into renewable energy projects, digital technologies and infrastructure in recent years.

Portugal has long turned to FDI as a vehicle for capital renewal and innovation, taking several steps to promote and further open the economy to foreign investors over time. Currently, Portugal holds one of the highest levels of inward FDI stocks to GDP ratio across OECD member countries. Yet, there are still several areas where FDI could be further leveraged. Portugal’s investor base, for instance, remains largely concentrated in traditional European partners. In addition to greater resilience, further diversification could broaden Portugal’s economic opportunities by strengthening its ties with other world leading outward investing economies and more dynamic regions. Relatively little FDI has also gone into the manufacturing sector, although there are signs of foreign investment activity picking up in the sector more recently. Further FDI could help to modernise the capital base of tradable activities more broadly and ensure that Portugal’s recent trade expansion and gains in competitiveness are sustained over the long run.

Economic uncertainty brought up by the COVID-19 pandemic and Russia’s war against Ukraine will also likely have near and long-term consequences for global FDI flows, and for Portugal as a recipient country. Besides the economic shock and other disruptions associated with such events, recent shifts in economic and political priorities at the EU level towards reducing economic dependencies, strengthening defence capabilities and bolstering the green and digital transition might also bring new investment opportunities and give a boost to existing ones. Portugal may benefit from its recent track record in attracting increasing amounts of FDI, notably in the renewable energy and digital sectors, including to facilitate foreign investment more broadly and take advantage of any arising opportunity.

The next chapter assesses Portugal’s investment and trade regulatory environment to identify possible inefficiencies that may be holding back foreign investment from reaching its full potential. It provides a comparative overview of regulation and laws affecting the entry and operation of foreign businesses in Portugal and in the benchmark countries, as well as of other behind-the-border rules impacting business operations more widely (e.g. labour market regulation, non-competitive practices and red-tape).


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The analysis draws on data from Quadros de Pessoal (QP), from which an employer-employee dataset covering all firms in Portugal with at least one employee can be obtained.40 The sample is restricted to wage earners between 18 and 65 years of age and working full time. Additional firm-level data come from the Sistema de Contas Integradas das Empresas (SCIE), which covers all economic activities excluding agriculture, fisheries and the financial sector. Firms are defined as foreign if the ultimate controlling investor as reported in SCIE is outside Portugal. In addition, a given firm is considered foreign if foreign capital is at least 50% as reported in QP. Survey data from Inquérito à Utilização Tecnologias Informação nas Empresas (IUTICE) provides information on the use of digital technologies by firms. All monetary values are in 2020 prices.

The effects of foreign ownership are estimated by augmenting the worker-level Mincer equation with an indicator variable for the firm’s ownership (Mincer, 1974[50]). The wage regression takes the following form:

ln w i j s t = β 1 F o r o w n j t +   X i t ' γ + Z j t ' δ + α s t + θ r + ε i j s t

where w i j s t is the hourly base wage of individual i employed by firm j operating in industry s in year t. F o r o w n j t is a binary variable taking value 1 for foreign firms and 0 for domestic. X i t ' is a vector of observable individual characteristics (education, working experience and experience squared). Z j t ' is a vector of observable firm characteristics. In the preferred specification, it includes firm headcount, labour productivity and export intensity. Some specifications also include intangible assets intensity and the share of R&D employees, but since these variables are missing for many firms, the results from these models are seen as complementary to the main analysis based on the preferred specification. Industry-year fixed effects α s t and regional effects θ r   capture systematic variation in wages across industries over time and regions.

The effects of foreign ownership on gender wage gap are estimated by adding a female dummy and its interaction with an indicator variable for the firm’s ownership, building on Bøler, Javorcik and Ulltveit-Moe (2018[51]). Occupational fixed effects ( ϑ o ) are added to control for systematic variation across occupations:

ln w i j s t = β 1 f e m i + β 2   F o r o w n j t + β 3 f e m i *   F o r o w n j t +   X i t ' γ + Z j t ' δ + α s t + θ r + ϑ o + ε i j s t

In this specification, β 1 represents the gender pay gap, assuming that the other variables adequately account for differences in employee qualifications; β 2 is the difference between wages in foreign and domestic firms; β 3 shows how the gender pay gap differs between foreign and domestic firms (a negative statistically significant coefficient would suggest that the gender pay gap is larger in foreign companies).


← 1. Foreign affiliates tend to be more resilient in times of crises due to their linkages and access to their parent companies financial resources (Alfaro and Chen, 2012[60]) (Desai, Foley and Forbes, 2008[61]).

← 2. On 10 and 11 March 2022, EU leaders adopted the Versailles declaration on the Russian aggression against Ukraine, as well as on bolstering defence capabilities, reducing energy dependencies and building a more robust economic base.

← 3. For the most part of the last decade, population growth has been negative; before, from 2000 to 2010, it grew at below unit and declining rates. The share of the population above 65 years old now represents roughly 23% of the total population, versus 16% back in 2000 (World Bank, 2021[59])).

← 4. The top 15 most productive European economies (TOP15) includes Austria, Belgium, Denmark, Finland, France, Germany, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Sweden, Switzerland and the United Kingdom.

← 5. The selected benchmark group is formed of the following countries: the Czech Republic, Estonia, Lithuania, Poland, the Slovak Republic and Spain. These countries either share some economic similarities with Portugal (in terms of the structure of manufacturing exports and services sectors value added), or are found to frequently compete with Portugal as destinations for foreign investment projects in priority sectors (according to Portugal’s Investment Promotion Agency, AICEP Portugal Global).

← 6. Portugal hosts Europe’s largest technological event since 2016, the Web Summit, and is home to a buoyant start-up ecosystem with 13% more start-ups per capita than the average in Europe and largely driven by technology-based start-ups, fintechs and health-based ventures (IDC Portugal, 2021[57]). Portugal also featured among the group of Strong Innovators in the annual European Innovation Scoreboard 2020, an indicator which compares research and innovation performance in Europe (EC, 2020[66]). In 2021, however, it was downgraded to the group of Moderate Innovators (EC, 2021[67]).

← 7. The sectoral perspective reveals where Portugal’s competitive edge is more at stake. In manufacturing, ULCs in Portugal were already at par with the average top EUR15 economy at end-2018. In services, ULCs still remain below the average top EUR15 economy but the wedge has been shrinking since 2014.

← 8. FDI equity capital flows encompass four types of transactions: purchase or sale of equity in the form of M&As (typically the largest component in developed economies), greenfield investment, extension of capital and financial restructuring. The gaps between FDI equity flows and value of M&A transactions might be driven by any of the other components. In addition, deal values that are not reported in Refinitiv might contribute to the difference between the two data series.

← 9. The evidence reported in this sub-section is based on completed M&A deals over the period from 2012 to 2022. Although a bit less than three-quarters of the sample have undisclosed deal values, the total deal value is a meaningful measure, as values of larger deals tend to be reported.

← 10. This is partly the result of a number of large projects announced, such as investment projects in the solar energy sector by Hanwha Q Cells (Korea) and Shanghai Electric (China).

← 11. Caution is needed in the interpretation of greenfield investment data. In addition to undertaken greenfield investment projects, the data include projects that are announced in a given year, as reported by the Financial Times fDi Markets database. Announced projects might be realised at a later stage or, in some cases, withdrawn. Moreover, capital investment as reported in the data source should be interpreted with caution, as many values are estimates based on information available from other greenfield projects in the same country, sector and business function (e.g. sales office, R&D facility, etc.). Another possible limitation of the database is that it might be missing projects not covered in the sources used to collect the underlying data. Although, due to these shortcomings, there might be some discrepancy between the reported data and the realised investment, the trends observed in the data are still informative about the countries’ ability to attract greenfield investment.

← 12. The geographic distribution of the ultimate investors is likely to be different, notably because some greenfield projects seem to originate in countries that are often used as conduit for FDI. According to the fDi market data, 7% of greenfield investment in Portugal came from Luxembourg, 3% from the Netherlands, whereas Bermuda, Panama and Macau together accounted for about 2% of the invested capital. These are all economies used by ultimate investors to transit funds elsewhere.

← 13. A variety of reasons can be associated with round-tripping, including the method used to allocate FDI to the ultimate investing economy, tax optimization, property rights protection, risk diversification and access to better financial services (OECD, 2009[65]).

← 14. The decline of M&A activity in Portugal’s manufacturing can be observed also before the COVID-19 outbreak: by 2019, the share of deal numbers went down to 16.9% and the share of deal values to 4.4% on a three-year moving average basis.

← 15. Professional services, however, continue to attract a relatively significant number of investors, particularly greenfield ones. From 2015 to 2022, 12% of all greenfield projects occurred in the sector. This is much more than in the benchmark group.

← 16. The global weighted-average levelised costs of electricity from new capacity additions of utility-scale solar photovoltaics and onshore wind, for instance, are estimated to have declined by 85% and 56%, respectively, between 2010 and 2020, bringing them to a level roughly 27% and 22% lower than that of the cheapest fossil-fuel competitor, namely coal-fired plants (IRENA, 2021[27]). The levelised cost of electricity represents the net present cost of electricity generation for a generating plant over its lifetime.

← 17. The classification of M&A deals and greenfield projects into the subsectors of the digital economy builds on the activity classification in the source data. The activities are identified as belonging to the digital economy based on the classification in OECD (2019[41]), where sectors are defined as digital if they produce digitally ordered and/or digitally delivered goods and services or if they enable this production.

← 18. Strengthening its reputation as a country committed to promote start-up growth, in 2021, the Portuguese Government established the European Startup Nations Alliance in partnership with 26 EU countries, Iceland, and the European Commission (EC, 2021[56]).

← 19. Firms are defined as foreign (or foreign-owned) if the ultimate controlling investor is outside Portugal as reported in the SCIE dataset. In addition, a given firm is considered foreign if reported foreign capital is at least 50% as reported in the QP data. The data sources are described in Annex A.

← 20. Skill intensity of managers was measured in terms of the years in education. Managerial positions are defined as “Senior Executives” based on the classification of employees into hierarchical levels available in the micro-level data (the levels are defined according to Portuguese Decree-Law No. 121/78 of 2 July 1978). Managerial positions include occupations responsible for the main strategic decisions of the firm, such as the organisation of the firm’s resources and strategic planning.

← 21. Foreign enterprises are more skill-intensive than domestic firms even after correcting for differences in firm size, labour productivity, export intensity, industry-year and regional specificities; estimation results are reported in Annex Table 1.A.1.

← 22. In the main specification, employee-level control variables include education and experience. Firm-level characteristics are firm size, labour productivity, export intensity, and industry-year and regional effects. The wage premium holds even when additional control variables are included, i.e. intangible assets intensity and the share of R&D workers. The estimation results are reported in Annex Table 1.A.2, while Annex 1.A details the estimation approach.

← 23. These estimates (please see Annex Table 1.A.2) are in line with the existing literature. The average wage premium in foreign-owned firms in advanced economies tends to range from about 2% to 12% (Heyman, Sjöholm and Tingvall, 2007[52]; Hijzen et al., 2013[34]; Setzler and Tintelnot, 2021[35]). Foreign wage premium for low and medium-skilled occupations and the small difference in the premium between these two groups are consistent with the notion that foreign firms pay higher wages because they engage in more complex tasks (Nilsson Hakkala, Heyman and Sjöholm, 2014[36]).

← 24. This labour mobility is substantially larger than the one observed in Portugal in the 1990s (Martins, 2005[53]). Yet, it appears lower than in some countries where comparable data are available, for instance Norway (Balsvik, 2011[39]) and Sweden (Falck, 2016[54]).

← 25. The change in wages after the move from foreign to domestic firms varies substantially across workers. It can depend on a multitude of factors, including workers’ qualifications, as well as the characteristics of new and former employers (e.g. industry, region, etc.).

← 26. The higher share of female employees in transportation and storage in foreign-owned businesses is mostly driven by the presence of foreign firms in warehousing and support activities for transportation (employing nearly a half of total employment), where foreign firms have a higher share of female employees (36%) than domestic businesses (30%). In this sub-sector, nearly two-thirds of women work as clerks (68% in foreign and 60% in domestic firms). In wholesale and retail trade, foreign firms employ more women as service and sales workers, but fewer in clerical occupations than domestic businesses.

← 27. The gender wage gap is measured as the difference between median earnings of men and women relative to median earnings of men. The preferred specification controls for individual and firm characteristics to ensure that the comparison of wages paid by foreign and domestic firms is based on individuals of similar qualifications (see results in Annex Table 1.A.3). This approach does not address sorting of women and men across these qualifications, which would be more relevant in the analysis of the drivers of gender wage gaps (e.g. the extent to which social norms influence women’s ability to get into certain occupations or industries).

← 28. This result might also be related to the finding that the relationship between firms’ productivity and wages in Portugal is much stronger for high skilled than low skilled workers and it is stronger for women than men (OECD, 2021[63]). Given that foreign firms tend to be more productive (see Table 1.1), this suggests that foreign employers might translate a greater share of their productivity gains with their female employees than domestic companies do.

← 29. For instance, lower wage discrepancy in foreign ICT firms than in domestic ones seems to be associated with the higher skill intensity of foreign employers. Higher pay gaps in foreign companies operating in accommodation and food services might come from their specialisation in low-cost segments of the sector.

← 30. These digital technologies were selected for their potential to increase firm productivity (Andrews, Nicoletti and Timiliotis, 2018[62]). Accelerated adoption of most of these technologies features explicitly in the objectives formulated under Portugal’s Industry 4.0 Strategy, which aims at promoting a fast and inclusive uptake of digital technologies by Portuguese businesses.

← 31. In the IUTICE survey, Artificial Intelligence refers to systems that rely on computer vision, speech recognition, natural language processing, machine or deep learning to collect and/or use data to make predictions, recommendations or decisions with certain level of autonomy.

← 32. In addition, the estimates show that foreign ownership is positively and significantly correlated with the share of online sales once firm characteristics are controlled for, likely reflecting the greater exposure of foreign MNEs to international markets.

← 33. For instance, businesses with greater headcount are more likely to sell on the web (see estimation results in Annex Table 1.A.4), whereas firm ownership, labour productivity, intangible assets intensity or the share of R&D employees have no effect on the probability of selling online, suggesting that other factors might affect e-commerce participation.

← 34. The survey does not provide any details about why some firms report that their goods and services are not fit for online sales. Possible reasons might include perishability of goods (fruits and vegetables), legal constraints (e.g. tobacco) and the need in physical proximity for the transaction (dental care).

← 35. Given that the latest available data for this survey question refer to 2016, it is possible that the relative significance of various obstacles to e-commerce has changed in the recent years. Other factors, not covered by the survey, might also be important (e.g. digital security, privacy and consumer protection).

← 36. This is reflected in Portugal’s performance in the Economic Complexity Index published in the Atlas of Economic Complexity by Harvard’s Growth Lab, which measures how diversified and complex a country’s export basket is in terms of the level of sophistication of productive know-how embedded in its exports (Hidalgo and Hausmann, 2009[55]). The complexity of a country’s exports is found to strongly predict income levels and where complexity exceeds expectations for a country’s income level, the country is predicted to experience faster growth in the future (Hidalgo and Hausmann, 2009[55]).

← 37. Although these statistics are not available for peer economies, the OECD Activity of Multinational Enterprises (AMNE) database provides a comparison. According to AMNE statistics, in 2016, foreign affiliates in Portugal sourced 62.2% of their inputs locally, less than in Spain (73%) and Poland (65%), suggesting that there is a room for more extensive integration of foreign firms into domestic value chains. Yet, the share of local sourcing by foreign affiliates in Portugal is well above the share observed in other small open economies (57% in Lithuania, 55% in the Czech Republic, 53% in Estonia and 52% in the Slovak Republic), where affiliates rely on imported inputs more extensively (OECD, 2017[58]).

← 38. The increasing services exports intensity of foreign firms might be partly attributed by intra-firms trade in service, i.e. flows of services between parent companies and their affiliates or among the affiliates, which typically include management and consulting services, R&D services, etc. (Lanz and Miroudot, 2011[64]).

← 39. The micro-level data only report one location for every firm.

← 40. The QP survey is conducted by the Strategy and Planning Office of the Ministry of Labour, Solidarity and Social Security (GEP-MTSSS). Further information can be obtained at their website or via the National Statistics Institute (INE) website.

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