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Foreign Direct Investment in the European Periphery Foreign Direct Investm ent in the European P eriphery T h e competitiveness o f P o r t u g a l F r a n c is c o B. Ca s t r o Submitted in accordance with the requirements for the degree of PhD The University of Leeds Leeds University Business School July 2000 The candidate confirms that the work submitted is his own and that appropriate credit has been given where reference has been made to the work of others To Isabel and Tiago A cknowledgements Only the support of many people and institutions made possible the completion of this thesis. Above all, however, I must thank my wife, Isabel, for her encouragement to start this project and for her overwhelming support during the course of the PhD, and my son, Tiago, whose appearance during this journey gave a new sense to my life and was a constant source of joy and discovery (yes, I have already forgiven you all those sleepless nights...). My parents, sisters and in-laws, who have always been there for me, also deserve a special mention. The importance of their support is impossible to acknowledge properly. I would like to express my sincere gratitude to my supervisor, Prof. Peter Buckley, for his permanent encouragement and guidance, essential to the completion of this work. His professional skills will remain a major source of inspiration in my academic career. I extend my appreciation to all members of staff at CIBUL and to those working in Leeds University Business School. A special thanks goes to Dr. Jeremy Clegg who was always available for an academic (and not so academic) chat, and to Ms. Sheila Fordham for her assistance even when going beyond her official duties. My thanks also go to the many friends, both in Leeds and in Portugal, who made these last years most rewarding in many ways. Knowing that it will be unfair to many, I would still like to name Flavio I Iegenberg, Alex Roy, I Ianif Akhtar, Chris horde, Rafa Aguilar, and Robert Wright. Robert and Alex had the additional ordeal of proof-reading this work. To Ana l'eresa lavares and Leonor Sopas I have to thank not only their friendship but also the academic discussions and suggestions made at many points of this research. This is extended to Fernando Ubeda whose advice with the factor analysis was most important, and to Paulo Sousa who deducted the analytical expression used in section 4.6. Ana Teresa and Leonor also made important suggestions in the elaboration of the questionnaire, as did Vitor Corado Simoes of ISEG, Universidade Tecnica de Lisboa, Vasco Rodrigues of Universidade Catolica do Porto, and [ulio Martins of Faculdade de Economia do Porto. From Madalena Araujo of Universidade Catolica do Porto I obtained the formats used in the questionnaire. I also want to express my appreciation to all the managers that generously accepted to take part in this research. Without their disinterested participation neither the interviews nor the questionnaire survey were possible. I would also like to acknowledge the assistance of Ms. Rita Araujo, of ICEP, and several members of the staff at Banco de Portugal in making available relevant non published data. I am grateful to the editors and referees of Transnational Corporations, where an earlier version of section 4.6 was published under the title ‘The Investment Development Path: The case of Portugal’ (vol. 7, no. 1, April 1998: pp. 1-15.). Their comments and suggestions were most valued. My gratitude goes also to the organisers, referees and participants of several conferences where I had the chance to present some of the earlier results: 25th Annual Conference of the Academy o f International Business (Vienna, Austria, October 1998, ‘A Time-Series Analysis of the Locational Determinants of FDI in Portugal’); 4" Encontro de Nows Investigadons de Andlise Economica (Santiago de Compostela, Spain, July 1998, ‘The Locational determinants of FDI in the European Periphery’); the same article was also presented at the 24th Annual Conference of the European International Business Academy (Jerusalem, Israel, December 1998); 25th Annual Conference of the European International Business Academy (Manchester, UK, December 1999, ‘Outward FDI in Manufacturing from Portugal: Internationalisation strategies from a new foreign investor’; 27lh Annual Conference of the I K Chapter of the Academy oj International Business (University of Strathclyde, Glasgow, April 2000, ‘A Survey Based Investigation of Inward FDI in Portugal’). Finally, this work was not possible without the financial support of Faculdade de Economia do Porto and Fundacjao para a Ciencia e Tecnologia. At Faculdade de Economia do Porto, Prof. Freire de Sousa was especially supportive at the earlier stages of this project and continued being so despite his new duties. Special thanks go as well to Prof. Ana Paula Africano who accompanied my progress with constant encouragement. A bstract This thesis analyses the evolution and characteristics of Portugal’s inward and outward foreign direct investment (FDI) in recent years and how they reflect changes in the country’s competitiveness. Inward FDI was investigated using regression analysis and a postal questionnaire. For outward FDI, semi-structured interviews were conducted at locally owned firms with productive capacity abroad. The investment development path (IDP) was the framework used to integrate the results obtained with the analysis of national competitiveness. The thesis also suggests a novel functional relationship for the IDP in order to reconcile the empirical tests with the underlying theory. Inward FDI flows into Portugal have declined sharply in recent years, which was shown to be incommensurate with Portugal’s size and level of development. The questionnaire survey suggested that efficiency seeking investment was especially affected. This points to the geopolitical changes that have occurred in Europe as a major reason for Portugal’s lower attractiveness as a location for FDI. Bureaucracy and a shortage of skilled workers were other important obstacles to foreign investment. Both correspond to institutional failures: the failure to promote an efficient legal environment, and the failure to create advanced assets that compensate for rising production costs as locational determinants of FDI. Outward FDI was found to be more in line with Portugal’s level of development. It is growing fast but requires consolidation. Investment is concentrated in few locations, and cultural proximity (particularly language) plays a major role. I Iowever, more than exploiting existing ownership advantages, the firms surveyed were internationalising in order to build new ownership advantages. To reach an efficient size, which is not possible at home when the market is small, or to consolidate the relationship with important clients in oligopsonistic industries were the dominant motivations for internationalisation amongst the firms surveyed. IV T able o f c o n ten ts Acknowledgements........................................................................................................................ i Abstract............................................................................................................................................. iu Table of Contents........................................................................................................................... iv List of Figures.................................................................................................................................. vii List of Tables................................................................................................................................... ix Abbreviations................................................................................................................................... xii Chapter 1. Introduction 1.1 Foreign direct investment and the Portuguese economy ................................ 1 1.2 The research project..................................................................................................... 5 Chapter 2. Foreign Direct Investment and the Multinational Corporation 2.1 Introduction.................................................................................................................... 7 2.2 The determinants of foreign direct investment .................................................. 9 2.2.1 Capital theory......................................................................................................... 9 2.2.2 The international trade tradition....................................................................... 11 2.2.2.1 Mundell and the I Iechscher-Ohlin model............................................. 11 2.2.2.2 Kojima’s ‘Macroeconomic Approach’ .................................................... 11 2.2.2.3 The product cycle model........................................................................... 13 2.3 Market imperfections and industrial organisation................................................. 14 2.3.1 The Flymer-Kindleberger hypothesis.............................................................. 15 2.3.2 The internalisation approach.............................................................................. 16 2.3.3 The eclectic paradigm.......................................................................................... 20 2.3.4 OLI versus internalisation..................................................................................... 21 2.3.5 Motives for Foreign Production........................................................................
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