International trade, foreign direct investment and

global value chains

2017 TRADE AND INVESTMENT STATISTICAL NOTE

International trade and foreign direct investment (FDI) are the main defining features and key drivers of global value chains (GVCs). However, despite their strong complementarities, the two flows are typically presented and treated separately in the statistical information system. Drawing on new and improved measures of trade and investment, this country note provides relevant statistical information from OECD databases on trade, investment, the activities of multinational enterprises (MNEs) and global value chains (TiVA). It sheds new light on the trade-investment nexus by highlighting the interrelationships between trade and FDI, their economic impact in the context of GVCs, and the role of MNEs as the main directors of these flows. The data are as of 1 May 2017. More information and country notes are available at www.oecd.org/investment/trade- investment-gvc.htm.

Thirty percent of economic activity (GDP) in Portugal in 2014 depended on foreign markets, towards the lower end of OECD countries but comparable with . Domestic non-MNEs account for nearly half (47%) of goods exports from Portugal, one of the highest shares in Europe, while foreign-owned firms account for almost 40% of goods exports. Portugal’s inward investment (equivalent to 53% of GDP in 2015) was over twice the size of its outward investment (24% of GDP), A broader notion of international orientation, which captures the impact on national income of exports and sales through foreign affiliates, shows that Portugal’s international orientation was equivalent to 28% of GDP in 2014.

Considering both trade and investment through this broader perspective can also shed new light on Portugal’s most important partner countries. For example, while most partner countries supply Portuguese consumers mainly through trade, the United States and also do a substantial amount through sales by foreign affiliates. Furthermore, considering the importance of both trade and investment for partners; the moves ahead of , and Switzerland jumps ahead of Brazil.

The top manufacturing exporting industries in Portugal are textiles (TEX), food and beverages (FOD) and motor vehicles (MTR). Often industries with high export orientation have higher shares of value added produced by foreign-owned firms as foreign owned firms offer a channel for GVC participation; the textiles industry in Portugal is an exception reflecting the strength of the domestic industry. The services content of Portuguese exports at 58% is just above the OECD median, and much of the value added produced by foreign-owned firms takes place in the services industries.

©OECD 2017 www.oecd.org/investment/trade-investment-gvc.htm Trade and Investment in Portugal

Growth in trade has recovered since the global and euro crises

Like many European economies, Portuguese trade contracted significantly at the height of the global crisis and imports dropped again during the euro crisis. Portuguese trade growth followed a similar pattern to the OECD average in the pre-crisis years but rates have diverged since the crisis. In 2016, both export and import growth was just above 4%.

Figure 1 Growth rates of trade and GDP for the OECD and Portugal, 2001-2016 15

10

5 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

-5 Growth Rates Growth -10 -15 Portugal GDP OECD GDP Portugal Exports OECD Exports Portugal Imports OECD Imports Source: OECD SNA 2016

Gross exports amounted to USD 82 billion in 2016 (46% of GDP), and gross imports to USD 80 billion (45% of GDP). Gross trade figures, however, overstate the ‘real’ contribution of trade to the economy. In value-added terms, exports contributed 30% per cent of total GDP in 2014, the highest recorded but below the OECD median (grey diamond). The contribution of direct and indirect imports to domestic final demand was 30 per cent in 2014.

Figure 2. Trade in value added terms, imports and exports, 2001-2014 40% 35% 30% 25% 20% 15% 10% 5% 0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Imports (Foreign value added in domestic final demand) Exports (Domestic value added in foreign final demand) OECD Exports (Domestic value added in foreign final demand- median) Source: OECD-WTO Trade in Value Added Data

Portuguese investment is more inward than outward orientated

Inward FDI stocks have been growing relative to GDP since 2008 and are now equivalent to 53% of GDP, FDI remains inward orientated with outward stocks equivalent to 24% of GDP (Figure 3). In 2015, Portugal’s share of the OECD total inward FDI stock (0.6%) was above its share of GDP (0.4%), but its share in outward stock was 0.2% of the OECD total, lower than its share of GDP (Figure 4).

2 Figure 3. FDI stocks and income as a share of GDP total, Figure 4. FDI stocks and GDP as a 2008-2015 share of OECD total, 2015 0.7% 60 3 0.6%

50 2.5 0.5%

40 2 0.4%

30 1.5 0.3% % GDP % % GDP % 0.2% 20 1 0.1% 10 0.5 0.0% 0 0 GDP Inward Outward 2008 2009 2010 2011 2012 2013 2014 2015

Inward FDI stock Outward FDI Stock Source: OECD FDI Statistics (BMD4) Income payments Income receipts

Source: OECD FDI Statistics (BMD4)

Foreign-owned firms directly sustained 12% of jobs in the private sector in 2013….

Despite the size of inward investment compared to Figure 5. Export and import intensity of domestic other OECD economies, foreign-owned enterprises and foreign-owned enterprises accounted for 12% of jobs in the private sector in 45% 40% 2013 and 21% of private sector value added 35% produced in Portugal, excluding the agriculture and 30% 25% finance sectors. 20% 15% 10% …and are more export intensive than 5% domestically owned firms 0% Portugal OECD Portugal OECD Median Median On average, foreign-owned firms in Portugal are Export Intensity Import Intensity twice as export intensive (share of exports in Domestic-owned firms Foreign-owned firms turnover) as domestically owned firms; however, their export intensity is just below the OECD Source: OECD AMNE and Trade by Enterprise Characteristics (TEC) statistics (2011) median. The import intensity of foreign-owned firms (share of imports in purchases) is also significantly higher for foreign-owned than domestic firms, and greater than the median.

Domestic MNEs provide important channels to penetrate foreign markets via affiliates…

In 2015, Portugal received USD 1.4 billion in income from its outward investment, equivalent to approximately 1% of GDP. Portugal’s rate of return at 3.2% (green bar) on its outward FDI is below the OECD median. On the other side, the return to foreign investors in Portugal was 4.1% in 2015, also towards the lower end of OECD countries.

3 Figure 6. Return on investment, income receipts and payments as a share of inward and outward stocks, 2015 18%

13%

8%

3%

-2%

ISL

IRL

ITA

FIN

EST

BEL

ESP

CZE

NZL

CHL

PRT

SVK

LVA

LUX FRA

POL

CHE

TUR NLD

SVN

GRC

AUS USA

AUT

GBR

DEU

CAN

DNK

SWE

NOR HUN Inward FDI return Outward FDI Return

Source: Source: OECD FDI Statistics (BMD4)

…and via exports Figure 7. Goods Exports by firm type, the role of Portuguese MNEs Relative to other European economies, 100%

Portuguese parent MNEs play a smaller role 80% in GVC integration. However, almost half of all goods exports are by domestic non-MNEs. 60% Almost 40% of goods exports are by foreign- 40%

owned firms, offering another channel for exports Goods % 20%

GVC integration. 0% AUT DNK FIN FRA HUN ITA POL PRT Portugal’s export orientation is low Foreign-owned firms Domestic MNEs Domestic firms relative to similarly sized economies Spotlight Source: OECD TEC statistics (2011) on GVCs Exports (in value added terms) contribute around 30% of Portuguese GDP; this is below the OECD median and other smaller OECD countries but comparable with Finland. It may in part reflect lower levels of inward investment and their export intensity (compared to foreign affiliates operating in other countries). However, their GVC integration as measured by the import content of exports is higher relative to countries with similar export orientations. Export orientation has recovered since the crisis (see insert chart).

Figure 8. Export orientation, foreign affiliates value added and import content of exports, 2014 80% 70% 60% 50%

40%

% GDP % 30% 20% 10% 0% LUX IRL HUN CZE SVK SVN EST LVA NLD BEL POL NOR AUT SWE DEU DNK PRT FIN ESP ITA GBR FRA JPN USA Domestic value added in foreign final demand (% of total domestic value added) Value added produced by foreign controlled enterprsies (share of domestic total) Foreign value aded in exports (% in exports)

Source: OECD-WTO Trade in Value Added Data and OECD AMNE statistics (2014)

Not all of the domestic value added content of exports sticks in the economy

Gross export figures overstate the real economic impacts of trade to the exporting economy, but TiVA estimates can also overstate these impacts as the profits earned by foreign-owned firms through exports are repatriated if they are not reinvested. Figure 9 illustrates the importance of these flows across countries by showing the value added in exports of domestically-owned firms (blue bar), wages paid by foreign-owned

4 firms (green bar), and profits of foreign-owned firms (grey bar), which in practice can be repatriated. Excluding these profits, Portugal’s exports contain 27% of value-added that remains in the economy. So, 10% of Portugal’s exported domestic value added represents profits by foreign-owned firms and 13% represents wages paid by foreign–owned firms. The share of value added that remains in the economy has increased since 2008, (insert chart).

Figure 9. Exports by ownership and their contribution to income, as a share of GDP, 2014 80% 70% 60% 50% 40%

% GDP % 30% 20% 10% 0% LUX SVN CZE EST SVK HUN BEL AUT LVA NLD SWE NOR DEU DNK POL PRT FIN ESP ITA GRC FRA GBR USA

VA that could be repatriated Labour costs of foreign firms Value added by domestic firms

Source: OECD-WTO Trade in Value Added Data and OECD AMNE statistics

Taking a broader view by including the income of foreign affiliates can provide a more complete picture of the international orientation of the Portuguese economy

Firms serve foreign markets by exporting or by selling through their foreign affiliates. Figure 10 takes a broader view of an economy’s international orientation by taking account of both trade and investment. The chart begins with the domestic value added in exports that remains in the economy – exports of value added by domestic firms (blue bar) and wages paid by foreign-owned firms associated with exporting (grey bar) – and adds to it the profits that domestic MNEs receive from the activities of their foreign affiliates as measured by FDI income receipts (light blue bar). The income payments made to foreign parents are presented for information purposes (green bar). For Portugal this broader measure (28% of GDP) is lower than the export orientation measure from TiVA (30%) because Portugal is a net recipient of inward FDI. Portugal remains below the median of OECD countries using this measure; the measure has increased since 2008 due to increased exports of value added (see chart insert).

Figure 10. Supplying markets through trade and investment: a broader perspective, 2014 90%

70%

50%

30% % GDP % 10%

-10% LUX SVN EST NLD CZE SWE HUN SVK BEL DNK AUT LVA NOR DEU PRT POL ESP FIN ITA GRC FRA GBR USA -30% VA repatriated to parent by affiliates Labour costs of foreign firms associated with exports VA by domestic firms that serves foreign final demand VA repatriated to parent

Source: OECD-WTO Trade in Value Added Data, OECD AMNE and OECD FDI (BMD3) statistics

5 This broader perspective can also shed light on how foreign firms serve the Portuguese market

Foreign producers supplied products and services for Portuguese final consumption equivalent to 38% of GDP in 2014, the majority is through trade (foreign value added in Portuguese final demand equals approximately 30% of GDP), but value added generated by foreign affiliates in Portugal for domestic (non-export) sales (Figure 11) accounts for a not insignificant 8% of GDP. Although some of this value added can be repatriated to parents, the share is significantly lower in Portugal than in many other OECD economies (grey bar).

Figure 11. How foreign firms serve your market: a value added perspective, 2014 70% 60% 50% 40% 30% 20% 10% 0% EST LUX HUN LVA SVK SVN AUT POL SWE PRT FIN GBR DNK FRA NLD ITA USA Share of profits in VA of foreign-owned firms (sold domestically) Share of labour costs in VA by foreign-owned firms (sold domestically) Trade: FVA in domestic final demand

Source: OECD-WTO Trade in Value Added Data, OECD AMNE and OECD TEC statistics

Trade and investment by partner country

Trade measured from a value added perspective better reflects the bilateral relationships…

Gross bilateral trade figures can disguise the true nature of trade interdependencies, particularly between final consumers in one country and producers at upstream parts of the value chain. For example the United States moves ahead of the United Kingdom and once value added data of exports are used. For imports, value added data indicate that the United States is a more important partner than China, and is more important than Brazil.

Figure 12. Exports: gross and value added terms, Figure 13. Imports: gross and value added terms, by by partner country, 2014 partner country, 2014

30 30

25 25

20 20

15 15

10 10 Partner share in total % total in share Partner Partner share in total % total in share Partner 5 5

0 0 ESP FRA USA GBR DEU BRA ITA CHN RUS CHE ESP DEU FRA ITA GBR USA CHN NLD RUS BRA Domestic value added exports Gross exports Foreign value added Gross Imports

Source: OECD-WTO TiVA Data Source: OECD-WTO TiVA Data

6 …and interdependencies are further revealed when looking at the broader notion of ‘trade’ Foreign firms can serve an economy though trade or sales by foreign affiliates; bringing the trade and investment perspectives together can shed a different light on who a country's most important partners are (Figure 14). Variation exists across countries in how they supply the Portuguese market. For example, while most partner countries supply Portuguese consumers mainly through trade, the United States and Switzerland also do a substantial amount through sales by foreign affiliates. Furthermore, considering both trade and investment the Netherlands moves ahead of China and Switzerland jumps ahead of Brazil.

Figure 14. Supplying the Portuguese market via trade and investment: Top 10 partner countries, 2014

20000

15000

10000

5000 Millions of USD of Millions

0 ESP DEU FRA USA ITA GBR NLD CHN CHE SWE BRA Sales by foreign affiliates (VA by foreign controlled firms (sold domestically) Trade (Foreign value added in domestic final demand)

Source: OECD-WTO TiVA data and OECD AMNE statistics Note. Data on foreign affiliate presence is not available for the United Kingdom.

Trade and investment by industry

Inward investment helps shape Portugal’s GVC integration

The top manufacturing exporting industries in Portugal are textiles (TEX), food and beverages (FOD) and motor vehicles (MTR). A high import content of exports typically illustrates the role that importing plays in supporting exports and indicating the degree of GVC integration in these industries, but this is less the case for textiles and food products. The role of foreign-owned firms differs substantially across Portuguese industry, in part reflecting Portugal’s own comparative advantages and specialisation of its MNEs and the importance of foreign investment for certain industries.

Figure 15. Top exporting manufacturing industries in Portugal, 2014 20% 100

80 15%

60 10% total 40

5% exports in %

20 Share in manufcaturing manufcaturing in Share 0% 0 TEX FOD MTR PET CHM RBP PAP MEQ FBM MET Exports Imports VA by foreign-owned firms Import content of exports (RHS)

Source: OECD-WTO Trade in Value Added Data and OECD AMNE statistics. See page 10 for a description of industry codes.

7 Exports and imports go hand in hand…

Across most industries there is a strong correlation between higher import content of exports and a higher share of their domestic value added being exported (export orientation) illustrating the strong complementarity of exports and imports (Figure 16).

Figure 16. Import content of exports and export Figure 17. Foreign-owned firms and export orientation, 2014 orientation, 2014 100 MET 90 MTR MTR 90 80 RBP ELQCEQ 80 MEQ CHM 70 CEQ PAP FBM ELQ

TEX 70 NMM 60 TRQ CHMRBP 60 MET OTM 50 50 NMM FOD 40

40 of (share firms owned - OTM MEQ 30 FOD PAP

30 total) domestic 20 demand (% of total) (%of demand TEXFBM 20 10 TRQ 10

0 Domestic industry VA in foreign final final in foreign VA industry Domestic 0 foreign by VA 0 20 40 60 80 100 0 20 40 60 Domestic industry VA in foreign final demand (% Import content of exports % of total)

Source: OECD-WTO TiVA Data and OECD AMNE statistics Source: OECD-WTO TiVA Data and OECD AMNE statistics

...and investment and export orientation can also go hand in hand

At the same time, strong complementarities can exist between inward investment and export orientation (Figure 17). For Portugal, the industries where foreign-owned firms produce more of the value added are also those that have a higher export orientation. The textiles industry is an exception, reflecting the strength of domestic industry. Figure 18 illustrates the trade in goods by firm ownership; foreign-owned enterprises are the main traders for Portugal reflecting the importance of inward investment for Portugal’s GVC integration.

Figure 18. Gross trade in goods by enterprise ownership and industry, as a per cent of GDP 16% 14% 12%

10% 8%

% GDP % 6% 4% 2% 0% MTR CEQ CHM MEQ FOD MTR CEQ PET MEQ CHM Exports Imports Domestic non-MNEs Domestic MNEs Foreign-owned enterprises

Source: OECD TEC Statistics, 2011 (latest data available)

Service industries play an important role in the export orientation of an economy…

Typically, services account for a large share of the value added in the economy but conventional gross trade statistics understate this as they cannot reveal the contribution that the upstream services industry plays in the production of goods exports. Accounting for this contribution, the services content of

8 Portugal’s total exports of goods and services was 58% in 2014 (Figure 19), above the OECD median of 56%. Considering the services content of manufactured goods alone, 40% of manufacturing exports reflects services value added, above the OECD average of 36%.

Figure 19 Services content of gross exports for OECD countries, 2014 100

80

60

40

20

0

ISL

IRL

ISR

ITA

FIN

EST

BEL

ESP

CZE

JPN

NZL

CHL

PRT

SVK

LVA

LUX FRA

POL

CHE

TUR

SVN

GRC

AUS USA

AUT

GBR

DEU

KOR

CAN

DNK

SWE

NOR

MEX HUN Foreign Services VA content in Exports Total Domestic Services VA in Exports Source: OECD-WTO TiVA data, 2014

Figure 20. Share of services industries in foreign- …and so inward FDI in the services sector owned firms’ value added and domestic services can be an important channel for export value added share of gross exports, OECD countries , success 2014 60% GBR FRA GRC Greater foreign investment in the services 50% BEL DNK ESP EST LVA ITA AUT PRT sector is associated with higher services content DEU NLD 40% POL FIN SWE LUX in exports. For Portugal, the share of investment SVN NOR in services is at the higher end for OECD 30% SVK HUN CZE economies which could contribute to the above 20% the median services content in exports. share of gross exports gross of share 10%

added value services Domestic 0% 0% 20% 40% 60% 80% 100%

Share of services industries in foreign-owned firms

value added

Source: OECD-WTO TiVA Data and OECD AMNE statistics

Links and data sources Guide to the trade and investment statistical notes www.oecd.org/investment/Guide-trade-investment-statistical-country-notes.pdf Activity of Multinational Enterprises - AMNE www.oecd.org/sti/ind/amne.htm OECD Benchmark Definition of Foreign Direct Investment - 4th Edition (BMD4) (see Chapter 8 for information on the intersection of AMNE and FDI data) www.oecd.org/investment/fdibenchmarkdefinition.htm Foreign Direct Investment (FDI) Statistics www.oecd.org/investment/statistics.htm Trade by Enterprise Characteristics - TEC www.oecd.org/std/its/trade-by-enterprise-characteristics.htm Trade in Value Added - TiVA www.oecd.org/sti/ind/measuringtradeinvalue-addedanoecd-wtojointinitiative.htm

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Table of industry codes

Industry Type Ind Code Industry Description

AGR Agriculture, hunting, forestry and fishing Primary Industries MIN Mining and quarrying FOD Food products, beverages and tobacco TEX Textiles, textile products, leather and footwear WOD Wood and products of wood and cork PAP Pulp, paper, paper products, printing and publishing PET Coke, refined petroleum products and nuclear fuel CHM Chemicals and chemical products RBP Rubber and plastics products NMM Other non-metallic mineral products Manufacturing MET Basic metals FBM Fabricated metal products except machinery and equipment MEQ Machinery and equipment n.e.c CEQ Computer, electronic and optical products ELQ Electrical machinery and apparatus n.e.c MTR Motor vehicles, trailers and semi-trailers TRQ Other transport equipment OTM Manufacturing n.e.c; recycling EGW Electricity, gas and water supply CON Construction WRT Wholesale and retail trade; repairs HTR Hotels and restaurants TRN Transport and storage PTL Post and telecommunications FIN Finance and insurance REA Real estate activities Services RMQ Renting of machinery and equipment ITS Computer and related activities BZS Research and development & Other Business Activities GOV Public admin. and defence; compulsory social security EDU Education HTH Health and social work OTS Other community, social and personal services PVH Private households with employed persons

© OECD 2017. This note is published under the responsibility of the Secretary-General of the OECD. The opinions expressed and the arguments employed herein do not necessarily reflect the official views of OECD member countries. This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. Please cite this note as: OECD (2017), Portugal: Trade and Investment Statistical Note.

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