The Impact of Regulation on International Investment in Portugal examines how regulatory reforms could help Portugal build a more enabling and competitive environment for investment, in particular foreign direct investment (FDI). The report analyses trends and patterns of FDI activity in Portugal, including its broader economic, social and environmental benefits to Portugal. It gives an overview of the economy-wide and sector-specific regulatory settings in Portugal compared to selected European peer economies and provides an empirical analysis of the potential effects of domestic regulatory reforms on FDI. Foreign investors’ perceptions on Portugal’s business environment complement these findings. The report indicates potential areas for regulatory reforms and proposes policy measures to further improve Portugal’s investment climate and support efforts to attract and retain more FDI while strengthening its contribution to sustainable development in Portugal.
The Impact of Regulation on International Investment in Portugal
Abstract
Executive summary
Alongside an impressive economic rebound, foreign direct investment (FDI) in Portugal has grown rapidly over the last decade, resulting in one of the highest levels of inward FDI stocks among OECD countries. Yet, with overall investment levels remaining relatively low, Portugal would benefit from mobilising further FDI to help respond to long-term structural challenges weighing on productivity growth and to accelerate the country’s digital and green transitions. FDI can also help modernise Portugal’s industrial and services sectors, further integrate the economy into regional and international markets and promote convergence with more advanced European Union (EU) countries. It may also serve as a conduit to progress on several sustainable development goals, in relation to e.g. job quality and skills, gender parity, technology uptake and digitalisation. Strengthening appeal to FDI, including in manufacturing and other high value‑added activities, is thus essential and features prominently in Portugal’s priorities for the next decade (see the Internacionalizar 2030 and the Acordo de Parceria Portugal 2030 programmes).
Strict market entry conditions and other factors of the business environment may at times hold back FDI. While such regulation can serve important public policy objectives, it may unintendedly discourage investment, create barriers to entry or expansion, when excessively strict or burdensome. Alternative, less restrictive policies are sometimes possible and can positively affect FDI activity. The timing is apt to consider alternative policy approaches, as structural reforms envisaged in Portugal’s Recovery and Resilience Plan are being scoped and as the uncertainty of the post-pandemic recovery and Russia’s war of aggression against Ukraine weigh on investors’ confidence and tighten competition for FDI worldwide.
This report assesses how regulatory reforms could help Portugal build a more conducive environment for investment. It evaluates Portugal’s performance in attracting and retaining FDI in comparison to selected European peer economies and benchmarks the Portuguese regulatory framework for investment against those of peer economies. The report also quantifies the expected positive impact that further liberalising reforms could have on FDI flows. Foreign investors’ views complement the assessment. Finally, the report provides policy considerations to further improve Portugal’s investment climate and inform a whole‑of-government approach to their planning and implementation.
Investors benefit from Portugal’s open regulatory framework, with fewer discriminatory statutory restrictions on FDI, more competition-friendly rules and fewer barriers to services trade and investment than OECD average. Regulatory harmonisation within the Single Market has lowered barriers for investors from the European Economic Area (EEA), and simplification efforts have reduced administrative and regulatory burden for firms. Funding opportunities, financial and regulatory incentives are in place to attract FDI and foreign talent. Investors praise Portugal’s skilled labour force and the quality of higher education.
Nonetheless, a few remaining regulatory barriers and broader factors of the business climate may contribute to hold back FDI:
-
Investors perceive business licenses and permits as particularly burdensome, despite recent simplification and consolidation of procedures, e.g. in industrial and environmental licensing.
-
There is room to further advance regulatory impact assessment (RIA) and stakeholder engagement practices in the drafting of business regulation. For instance, RIA documents are not made available online and ex post evaluation of existing rules is not mandatory.
-
Firms spend more time on tax compliance in Portugal than in most peer countries, despite simplification efforts by the tax authority. Foreign investors consider that tax regulation remains too complex, changes too frequently and clarification on new rules is difficult to obtain.
-
Despite improvements in the efficiency of Portuguese courts in recent years, processing times remain long compared to peer countries, particularly in administrative courts.
-
Skilled labour is the leading driver of FDI to Portugal, but skill shortages are increasingly a concern for investors in some sectors. Many investors do not use or are not aware of incentives for skill upgrading. Bottlenecks in the entry of non-EEA talent thwart efforts to recruit workers from abroad.
-
Labour market duality continues to constitute an obstacle for productivity growth and social equity, despite recent measures limiting the excessive use of temporary contracts.
-
Investors find the tax incentive for research and development effective, but certain other funding and incentives might be too complicated to apply for or insufficiently aligned with business needs. Many investors are not aware of existing support for firms’ green and digital transitions.
-
In professional services, ownership restrictions for non-licensed professionals, combined with rules restricting access to the profession for foreign practitioners, currently limit possibilities for FDI. Remaining obstacles in transport and logistics services, such as limitations on maritime cabotage by foreign-flagged vessels and non-competitive award of port service concessions can affect foreign and domestic firms in downstream industries economy-wide.
Regulatory reforms and a more service‑oriented approach in the implementation of business regulation could be considered to improve Portugal’s ability to attract and retain FDI:
-
Further streamline business licenses and equip authorities to issue licenses within statutory time limits and enforce tacit approval to increase predictability for investors.
-
Make broader use of RIA and stakeholder engagement for the development of business regulation.
-
Continue to streamline corporate taxation and strengthen assistance services and digitalisation to reduce tax compliance costs. Provide adequate means for taxpayers to adapt to new obligations.
-
Reduce the length of court proceedings further by increasing digitalisation in courts, strengthening human resources in support functions and making more extensive use of out-of-court mechanisms.
-
Raise investor awareness of government support for employee training and strengthen the alignment of such training with business needs and Portugal’s strategic objectives.
-
Step up efforts to improve the efficiency of the immigration authority and facilitate the hiring of non-EEA talent (e.g. leverage digital tools, allocate more resources to the processing of applications).
-
Continue efforts to lessen labour market duality by further reducing the gap in protection between open ended and temporary contracts and to strike a better balance in labour market rigidity.
-
Assess and streamline the investment incentives offering where possible to ensure that they reach their intended objectives while keeping added complexity to the tax system at a minimum. Promote awareness and take‑up of existing incentives to support firms’ green and digital transitions.
-
Proceed with the implementation of the recently approved reform of regulated professions to open investment in these firms by non-licensed professionals. Consider lifting identified barriers in transport and logistics sectors to boost competitiveness.
