Foreign firm entry in an open economy: the case of Portugal 

Abstract

The purpose of this paper is to analyse the entry process of foreign direct investment (FDI) in Portuguese industrial sectors. Portugal presents an interesting case where firms enter to take advantage of export opportunities. The results suggest that foreign firms possess the ability to overcome existing entry barriers that affect domestic firms. Apparently, foreign firms have different expectations about profitability than domestic firms, possibly due to foreign firms’ export-orientation to the rest of the European Union (EU). They appear to desire industries where other foreign firms have clustered. Above all, it appears that these foreign firms enter industries to exploit Portugal's chief location advantage in Western Europe: low wages. Portugal's FDI experience is relevant to other countries that have opened their economies to greater trade and investment and attracted export-oriented firms.

Notes

§ The research underlying this paper was supported in part by the Center for International Business Education and Research (CIBER), University of South Carolina.

¹ Chappell et al., (1990) used ‘net entry' but they acknowledge that ‘gross entry’ is a more desirable measure of entry.

² These are broadly equivalent to the US Standard Industrial Classification (SIC) codes.

³ Some industrial sectors were excluded for lack of data.

⁴ When a Poisson model is fitted to overdispersed data it results in ‘inflated' t-statistics. The magnitude of the t-values shown in the Poisson regression of Chappell et al. (1990) suggest the presence of overdispersion.

⁵ In this case it would be more appropriate to use a Zero Inflated Poisson or Hurdle model. These models are also able to accommodate violations of the equidispersion assumption.

⁶ The predictions were computed based on the distribution computed for each sector (see Winkelmann, 1997). The specifications used are the ones with time-effects.