In a world with increasingly fragmented production lines, multinational firms do not just choose countries, they select regions. Business activity and performance are also unevenly distributed within countries. As such, policies to strengthen productivity and innovation spillovers from international investments on domestic firms cannot be space blind. The regions of Alentejo and Norte are used as examples to point out how much variation can be found within a country and what can be done when developing polices and institutional frameworks to support such spillovers, including the role of subnational governments.
Strengthening FDI and SME Linkages in Portugal
6. Applying a regional lens
Abstract
6.1. Summary of findings and recommendations
The productivity and innovation of local small and medium-sized enterprises (SMEs) can be enhanced through spillovers from investments and activities by foreign firms. There are several enabling factors that influence how successfully knowledge could diffuse, as well as a number of diffusion channels are at play. These enabling factors are the potential for FDI spillovers and arise from the types, motivation and origin of FDI received, the absorptive capacity of domestic SMEs to turn new knowledge into value within their operations, and the characteristics of the wider economic and geographical environment in which the firms function.
Regions can differ greatly within a country, whether because of fixed factors (such as the availability of natural resources) or policies (that affect for instance the quality of the transport network, the education system, or local governments and institutions) that in turn determine population, density of services and business activities. To this extent, the firms within regions also differ, as do trade and investment opportunities. Multinational enterprises (MNEs) increasingly consider regional rather than country-specific factors when choosing where to invest. Policies to improve spillovers from FDI to domestic SMEs are therefore more likely to be effective when these regional factors are taken into account.
This chapter focuses on these particular regional aspects factors, using the two examples of Norte and Alentejo. The two regions are distinctively different: Norte is a larger, demographically younger, more industrialised region, while Alentejo is a more remote, traditionally agricultural location, in close proximity to the capital Lisbon. This chapter explores their regional structural and economic differences, including in the types of SMEs and MNEs present. It looks into the performance of FDI-SME diffusion channels and how local policy and institutions intend to create the right economic and geographical environment for FDI‑SME innovation linkages, in particular through better tailored industrial clustering and increased agglomeration benefits (Table 6.1).
Table 6.1. Findings and Recommendations Alentejo and Norte
6.2. The differing characteristics of Norte and Alentejo
Both Portuguese regions differ substantially in their geographic characteristics, demographic structure, and level of development, economic structure and specialisation (Table 6.2). Norte is the most populous territory in Portugal and contributes almost half of all country’s manufacturing activities. The southwest of the region (Área Metropolitana do Porto, Ave, Cávado) is highly industrialised, Alto Minho (Northeast) has a mixed specialisation, and Alto Tâmega and Terras de Trás-os-Montes are largely rural. Norte shows intraregional imbalances as a high proportion of its population, investment and public and private services are concentrated in the region of Porto. Alentejo has a sparsely distributed population. Its land covers around one-third of the country’s territory with no metropolitan areas, though the west borders the Lisbon area. Using the OECD alternative territorial typology the TL2 region of Alentejo has over 50% of its 700 000 population with no access to any functional urban areas within a 60-minute drive (Fadic et al., 2019[1]). The region faces challenges of ageing population and rural exodus. Its endowment with vast amounts of coastland, rich soils and plenty of minerals and natural resources, facilitates agriculture, Alentejo being known as the “breadbasket of Portugal”, and livestock farming, more specifically in the northern part.
Table 6.2. Summary table of regional characteristics
Note: Population, Employment – 2019, Productivity, GDP and Industrial specialisation – 2018, Internet access – 2016, Education – 2015,
Source: OECD (2020), OECD Regional Statistics (database) https://doi.org/10.1787/region-data-en, (PORDATA, 2021[2]), Ookla® Global Fixed and Mobile Network Performance.
Economic and industrial structure and performance
Norte’s economy is dominated by manufacturing and industry sectors (excluding energy) (Figure 6.1, Panel A). Industrial production represented half of the region’s gross value added (GVA) in 2018. More than one third of total employment in the region is in manufacturing and the share of jobs in industry increased by over 30 000 between 2010 and 2019. In 2020, in the context of the COVID-19 crisis, jobs fell by over 14 500, in part because of the substantial export orientation of Norte’s industrial production. Manufactured products include textile and footwear, cork agglomerates, automotive parts and accessories, dairy products and wine. This reflects the diversity of the region; the southwest of the region (Porto and Braga districts) is highly industrialised, the Viana do Castelo district (Northeast) has a mixed specialisation, and the Vila Real and Bragança districts are largely rural (Figure 6.1, Panel B). Between 2004 and 2018, the sectoral composition of Norte has remained overall relatively stable, with Porto losing a number of sectors, particularly construction (Figure 6.2).
The Norte’s Smart Specialisation Strategy (2014-20) focuses on improving manufacturing capabilities through increased technological adoption and human capital, and on providing specialised services (Box 6.1). It also aims to the sustainability of food, agri-environments and maritime resources, and to promote culture and creativity through tourism services. There is also a strong interest in health and life sciences.
Manufacturing in Alentejo remains limited, with 1 in every 8 people working in the sector, which is largely associated with agri-foods (e.g., cheese, wine, smoked meats) in central and inner regions of Alentejo, and a growing chemicals, transport or electronic components industry in Alentejo Litoral that hosts the petrochemical complex of Sines. Alentejo is also the largest cork-producing area in the world. Tourism plays also an important role in the region and the services represent the majority of employment – close to 60% –, although the COVID-19 has significantly affected the sector, with 16 400 fewer service jobs over 2020, particularly in hotels and restaurants (4 800 fewer) and vehicle trade and repair (2 700 fewer). At the same time fewer than 30% of jobs in the region were amenable to remote working. Between 2004 and 2018, the sectoral composition of Alentejo has changed more significantly than in Norte (Figure 6.1, Panel C) with a generalised shift in location away from Leziria de Tejo and a relocation in Baixo Alentejo, or Alto Alentejo in the case of information and communication services (Figure 6.2, Panel B).
Alentejo’s strategy aims to sustainably promoting its economies related to food, forestry, minerals and other natural resources though there is a growing automotive and electronic industry –driven by the petrochemical complex of Sines in Alentejo litoral. It also aims to boost critical technologies, energy and smart mobility. Heritage, cultural and creative industries and tourism services receive particular attention, as well as specialised services of the social economy.
Norte was the region (TL2) with the lowest productivity level in 2018 in Portugal (Figure 6.3). However, GDP per capita in the metropolitan area of Porto has grown faster than in Lisbon in the most recent years. Alentejo’s productivity has declined since 2015.
Box 6.1. Cluster policies and Smart Specialisation Strategy
By promoting “smart specialisation” strategies, national governments and regional authorities are attempting to enhance the competitiveness of firms and clusters. Clusters are a geographic concentration of firms, higher education and research institutions, and other public and private entities that facilitate collaboration on complementary economic activities. The main rationale for public policies to promote clusters is to increase knowledge spillovers among actors in clusters and generate a collective pool of knowledge (OECD, 2014[3]).
Smart specialisation serves an evidence-based policy framework that uses indicators, technology foresight and other priority-setting tools to help entrepreneurs and firms strengthen existing scientific, technological and industrial specialisation patterns while identifying and encouraging the emergence of new domains of economic and technological activity (OECD, 2014[3]) (OECD, 2013[4]).
The genesis of the concept can be traced back to an EU expert group who advanced that governments should focus their knowledge investments in activities – not in sectors per se – that reflect areas where a region or country has some comparative advantage (specialisation) or emerging areas where entrepreneurs could develop new activities (diversification) (Foray, David and Hall, 2009[5]). This connection between specialisation and technological diversification in the context of regional development has been highly influential and demonstrated that the smart specialisation as policy framework is well suited for dealing with the problems of place-based growth (McCann and Ortega-Argilés, 2013[6]).
The smart specialisation concept has been promoted at EU level through the establishment of the S³ Platform to assist regions and member states to develop regional strategies and identify the high value-added activities that offer the best chances of strengthening their competitiveness. The principles behind smart specialisation became a central element of the Europe 2020 Strategy and smart specialisation strategies have been incorporated as an ex ante condition to access the European Fund for Regional Development (ERDF) (OECD, 2013[4]). The same principles are also an enabling condition to be fulfilled by regions for mobilising the resources of the 2021-27 Cohesion Policy.
Key policies to support smart specialisation strategies include (OECD, 2013[4]) (OECD, 2020[7]):
Policies for entrepreneurial discovery: e.g. incentives for entrepreneurs, inter-regional linkages, new mechanisms to detect novel ideas and encourage experimentation (“self‑discovery” process), and educational programmes. Smart specialisation calls for an “entrepreneurial selection” of market opportunities through a bottom-up approach.
Promoting general-purpose technology platforms and networks: e.g. technology platforms involving public and private actors, as well as standard-setting organisations.
Policy intelligence and monitoring and evaluation system: e.g. diagnostic tools, strategic analysis, mutual learning practices, or participatory foresight, and a sound monitoring and evaluation infrastructure behind, which could also involve external expertise and pilot exercises.
Strategic governance for smart specialisation: e.g. the development of local capabilities to identify local strengths and bring the results obtained from the “self-discovery” process into prioritisation; align policy actions with objectives; achieve strategic coordination, develop a vision and implementing action.
Source: (OECD, 2020[7]) Rural Wellbeing; (OECD, 2014[3]); (OECD, 2013[4]), (Foray, David and Hall, 2009[5]), (McCann and Ortega-Argilés, 2013[6]).
Figure 6.1. Regional Sectoral Concentration
Note: Deviations are read as values e.g. in Portugal Manufacturing (C) makes up 14% of GVA (fig A), in Alto it makes up 24% i.e. 10% more than in Portugal (Fig B). A= agriculture, forestry and fishing, C= manufacturing, B-E = industry including energy, F= construction, G-I= distributive trade, repairs, transport, accommodation, food serv. Activities, J= Information and communication, K = financial and insurance activities, L = real estate activities, M-N = prof., scientific, techn. activities, admin., support service activities, O-Q= public admin., compulsory s.s., education, human health, R-U= other services.
Source: OECD (2020), OECD Regional Statistics (database), http://dx.doi.org/10.1787/region-data-en.
Figure 6.2. Change in sectoral composition over time
Note: Classification based on OECD TL3 regional typology. Changes are read as values e.g. in figure A, Porto’s GVA contribution/share to Norte fell by 2% between 2004-2018 driven by an 11% decrease in GVA share in construction (F). A= agriculture, forestry and fishing, C= manufacturing, B-E = industry including energy, F= construction, G-I= distributive trade, repairs, transport, accommodation, food serv. Activities, J= Information and communication, K = financial and insurance activities, L = real estate activities, M-N = prof., scientific, techn. activities, admin., support service activities, O-Q= public admin., compulsory s.s., education, human health, R-U= other services.
Source: OECD (2020), OECD Regional Statistics (database), http://dx.doi.org/10.1787/region-data-en
Figure 6.3. Norte has the lowest productivity level in Portugal although declines in other regions are closing the regional gap
Source: “Regional Productivity”, OECD (2020), OECD Regional Statistics (database), http://dx.doi.org/10.1787/region-data-en
Population, skills and labour markets
If Norte is more metropolitan than Alentejo, both regions face issues related to declining and ageing populations. Alentejo, home of 6.8% of Portugal’s population, has seen its population decline by almost 7% over the last 10 years (CENSOS, 2021[8]). In comparison, Norte’s population has declined by 2.7% between 2011 and 2021 (CENSOS, 2021[8]), although the population has increased in Porto’s metropolitan area since 2000. In 2019, there was two elderly for every five persons of working-age in Alentejo (OECD, 2020[9]) and less than 10% aged over 75 years old in Norte (EuroStats, 2021[10]). These longer-term trends signal an ongoing decline in the pool of talents available for businesses.
Over the years, Portugal has invested heavily in education and its younger population is amongst the most educated in Europe, with a quarter of the population having attained tertiary education. However across the overall population, Portugal still shows low educational attainment, with the highest EU share at primary education level (Norte 50.8%, Alentejo 47.1%, against the EU 27 average of 20.8% in 2020). However, Norte has the highest share of students enrolled in vocational training in Portugal and ranks among one of the EU regions with the highest share of 25-64 year olds (24.9%) at tertiary education level. Alentejo’s education levels are currently below the Portuguese average.
International migration is a source of talents in Portugal. Figure 6.4 illustrates that in Norte migrants were almost twice as likely to have attained higher educational qualification as a native, which is slightly more than in Portugal as a whole. Foreign-born workers were also more likely to be employed in the service sector.
Across Portugal, shortages and surpluses in a number of occupations have been identified. The European Centre for the Development of Vocational Training (Skills Panorama, 2016[11]) points to shortages in:
Healthcare professionals – related to an increased demand from an ageing population and low wages/long hours leading to migration particularly of nurses. Travel links between residences and hospitals make this additionally challenging in Alentejo.
ICT professionals – demand has been outstripping supply, while in both regions the number of higher education graduates in ICT is increasing. As it takes around five years to complete such a cursus, there is little room for plugging the immediate gap.
Technicians – These occupations were seen as less important/prestigious and new workers in the field have been limited. In Norte, these are physical and engineering science technicians and in Alentejo process control technicians.
Legal, social and engineering professionals – particularly in the public sector due to low wages and lack of public and private investment. Surveys indicate a perception of low prestige of the profession.
Surplus are also observed in other professions, including mining professionals; workers in textile, clothing and leather industries (except in the shoe industry); construct iron workers; blacksmiths, toolmakers and related trade workers; and keyboard operators. Many of these professions are facing the effects of technological change or the consequences of offshoring production in lower wage locations.
Figure 6.4. Percentage of foreign born and natives with higher education by employment sector
Source: “Regional demography”, OECD (2020), OECD Regional Statistics (database), http://dx.doi.org/10.1787/a8f15243-en
Infrastructure and connectivity
The physical and digital connectivity of regions, producers and consumers, is vital to the functioning of regional and global value chains. The development of accessibility infrastructure is crucial for attracting international investment. It is also critical for local SMEs to operate, access markets and strategic resources (OECD, 2019[12]).
Portugal has a peripheral location in Europe and depends on Spanish transport infrastructure to reach the rest of Europe on land. The location is, however, an advantage regarding sea transport in and out of Europe. Portugal ranks high on roads and falls in the middle of pack of OECD countries for railroad infrastructure. (OECD, 2020[13]) The ESPON accessibility index (ESPN, 2021[14]) is calculated as being highest in and around the regions with the busiest airports, i.e. Lisbon, Porto and Faro. The accessibility index in other regions including Alentejo falls into the low category, like other regions in northern Scandinavia and on the eastern and southern edges of Europe.
For Alentejo’ regional development, the transport infrastructure has been particularly important. The development of intra-urban and suburban transport networks has helped integrate the rural regions of Alentejo into the local labour market of western Alentejo and Lisboa, thereby creating a greater variety of job opportunities and raising living standards. In addition, the port of Sines is the closest European deep water port to the Panama Canal, placing it in an ideal position for euro-Atlantic logistics. This infrastructure is a key driver for the Sines Complex success.
The digital infrastructure, and connection to the Internet, is another enabler of agglomeration benefits. Whilst in Lisbon almost all buildings have access to fibre optic networks, less than half in Alentejo do (Dijkstra, Poelman and Veneri, 2019[15]). In Norte this is around two-thirds. In Norte, 28% of the population did not use the Internet or did not have a computer in 2019, the highest share in the country and twice more than in Lisbon metropolitan area (OECD, 2020[9]). In addition, digital skills in Portugal are amongst the lowest in Europe, with only 44% of the population having at least a basic level of ICT skills in 2019 (EU average 58%) (EuroStat, 2021[16]).
Access to health and education services and wellbeing
The local availability of quality education and health services, as well as other factors related to lifestyle and wellbeing, could also matter for attracting FDI, a creative class and innovative activities. For Norte and Alentejo, challenges arise from a lack of health service capacity. Alentejo has the lowest number of hospital beds per 1 000 inhabitants in 2018 despite its large elderly population, and half the number of physicians of Norte (2.8 per 1 000 inhabitants in 2019 as compared to 5 in Norte). In Norte a key wellbeing challenge is also the cost of housing. The percentage of household disposable income spent on housing costs is 16.2% in 2018 compared to 15.7% in Alentejo (2017 data).
6.3. FDI-SME linkages and spillovers in Norte and Alentejo
FDI spillovers are possible if significant FDI flow into the region/country, if there is different capacity levels between foreign and domestic firms, i.e. productivity premia in foreign firms, and if the type of investments allow embed FDI in local economy (OECD, 2022[17]).
Potential for FDI spillovers
Portugal is a large receiver of FDI in comparison to other EU countries (see also Chapter 2). FDI inflows are however mainly concentrated in the Lisboa Metropolitan Area and Norte, limiting spillover potential in other regions (Figure 6.5).
Figure 6.5. FDI by region, type of investment and sectoral groups
Note: Percentages are based on total capital investment (greenfield FDI) and total M&A deal values over 2003-20. Note that investments into energy and other infrastructure sectors are not included in this analysis.
Source: OECD (2020), OECD Regional Statistics (database), http://dx.doi.org/10.1787/region-data-en, OECD based on Financial Times fDi Markets database and Refinitiv.
Based on the Financial Times fDi Markets database, since 2003, almost 50% of all greenfield FDI and 75% of all foreign acquisitions of domestic firm assets have gone to Lisboa (Figure 6.5, Panel A). Norte received about 20% of greenfield FDI, while Alentejo and Centro received 15% each. Besides Lisboa, only Norte has benefited from some cross-border mergers and acquisitions (M&As) since 2003. Other regions (Acores, Madeira, Algarve) have received only marginal amounts of FDI. It could also be noted that the Lisboa Metropolitan Area is home to many (foreign) companies that have their head office in the capital, even if they operate in other regions as well.
The distribution of greenfield investment by economic activities illustrates that not all regions attract productivity-enhancing FDI (Figure 6.5, Panel B). Most greenfield investments in Alentejo, and to a lesser extent Centro, are made in high-tech manufacturing, while most investments in Lisbon and Norte are made in low-tech services (including mostly logistics, finance and insurance).
The degree of FDI embeddedness also differs across regions, as measured by the percentage of jobs created from foreign investment by sector (Figure 6.6). In Norte, the pattern of investment and related job creation are similar as for the rest of Portugal. Most FDI-driven job creation takes place in post-production services (49%), as defined in this report as including marketing, sales and logistics. High-tech manufacturing (19%) and construction (14%) also attract substantial shares of international investments. The profile of Alentejo differs slightly: more jobs are created as a result of MNE strategies in high-tech manufacturing (36%), infrastructure (18%) and low- and medium-tech manufacturing (16%).
Figure 6.6. Percentage of jobs created from FDI inflows, by sector
Note: Estimates provided by firms during the investment announcement. See chapters 1 and 2 for definition on pre-production and post-production services.
Source: OECD based on Financial Times fDi Markets database and Refinitiv.
The integration of Norte and Alentejo in FDI flows could also be placed into an European perspective. While the two regions do not seem to compete for the same type of FDI, they do compete with other regions in Europe presenting similar industry structures or specialisation profiles. For example Arnsberg in Germany has a similar business population to Norte and similar dominant industries. So too does the region of Greater Poland. Between 2003 and 2006, Arnsberg saw at most 6 investment projects per thousand inhabitants, at the same time Norte saw up to triple this, whilst Greater Poland saw over 10 times Arnsburg. The same methodology (Castellani and Pieri, 2010[18]) finds Malta has a similar industrial dominance and population size to Alentejo but Malta recorded up to 7 times more projects.
The country where FDI originate also matters for seizing the potential of productivity spillovers (OECD, 2022[17]). Figure 6.7 considers the distribution of FDI into the regions of Norte and Alentejo by country of origin. Spain and France are the two main investors for both regions. Germany, the UK and the US also play a major role in the case of Norte, these top 5 investing countries making up around 70% of total inward investments in the region. On the other hand, Korea, Switzerland and Japan are the next three main investors in Alentejo, making up almost a third of all FDI into the region.
Figure 6.7. Source of FDI to Alentejo, Norte and Portugal, by country of origin
Note: Based on company announcements.
Source: OECD based on Financial Times fDi Markets database and Refinitiv.
Productivity spillovers from international investments are more likely to occur if foreign firms perform better than domestic firms (OECD, 2022[17]). Overall in Portugal, the productivity premium of foreign firms is higher than in other EU peer countries (Figure 6.8). This is a relatively constant feature across regions. However, productivity gaps tend to be lower in metropolitan regions, for instance in Portugal, this gap is the lowest in the Lisbon Metropolitan Area. Similar results exist in Greece, Latvia, Lithuania and the Slovak Republic, where gaps are lower in more developed agglomerations, often close to the capital. Norte and Alentejo that have managed to attract some FDI report the highest differences in productivity between foreign and domestic firms.
Figure 6.8. Performance differences between foreign and domestic firms across regions, selected EU countries, 2019
Note: See methodology in OECD (2019[19]).
Source: OECD FDI Qualities Indicators based on World Bank Enterprise Surveys.
SME absorptive capacity
SMEs make a very large part of the business fabric in Portugal - in 2018, 99.9% of businesses in the country counted less than 250 employees (OECD, 2021[20]). This broader point holds across regions. However at greater levels of disaggregation, some variations can be seen: Alentejo as a whole has almost 5 times fewer businesses and SMEs than Norte (around 86 000 compared to around 430 000 in Norte in 2018) (INE. Instituto Nacional de Estadística, 2018[21]). Alentejo has also fewer sole proprietors than other regions of Portugal (Management Association, 2020[22]). In Norte, 12.6% of the microenterprises are in the Greater Porto area, contrasting with other areas in the region, such as the Douro, with only counts 1.7% of the total number of micro enterprises in the region. This testifies to the heterogeneity of the business fabric even within regions (Marques and Couto, 2017[23]).
The large representation of micro and small firms represents a barrier to scaling up local innovation performance, and in turn SME absorptive capacities. Much of Portugal’s innovation capacity is concentrated in the metropolitan area of Lisbon. 46.6% of regional employment is in knowledge-intensive services (KIS), as compared to 36% in the country overall (2019) (Table 6.3). The region spends 1.63% of its GDP on R&D (2018), which compares still low vis-à-vis OECD and EU27 averages (2.4% and 2.1% respectively (OECD, 2021[24])). 84% of regional patent applications are filed in cooperation, of which almost 60% with inventors located in foreign regions. If Norte has fewer employees in KIS (which can be explained by its industrial orientation), the region is very active in R&D (1.53% of GDP), second performing region after the capital, and as well integrated in international patent cooperation networks. In fact, Norte experienced a fast rise in patenting activities over recent years (Figure 6.9). Alentejo shows different capacity, with a larger KIS sector but half less R&D expenditure and weaker connections in global knowledge networks. Both regions have however experienced an increase in innovation performance between 2011 and 2017, whilst the remaining five, most significantly in the Algarve, decreased (EC, 2021[25])
Table 6.3. Intensity of innovation activities by region in Portugal
Employment in knowledge-intensive services (KIS), as a percentage of total employment, 2019, intensity of R&D expenditure, as a share of GDP, 2018 and share of co-patenting in total PCT patent applications and co-patenting with foreign regions in total PCT co-patent applications, 2015.
Source: OECD (2021), Regional innovation database, http://stats.oecd.org/Index.aspx?DataSetCode=REGION_INNOVATION.
Figure 6.9. Patent applications in Norte and Alentejo, 2001-015
Source: ‘’Patents’’, OECD (2020), OECD Regional Statistics (database), http://dx.doi.org/10.1787/region-data-en
6.4. Regional and local policy initiatives for FDI-SME linkages and spillovers
Using the broad policy areas discussed in chapters 4 and 5, this section focuses on improving regional specific actions to make the most of FDI at local level (see Box 6.2 for an overview of governance arrangements in Norte and Alentejo).
Attracting productivity-enhancing FDI
Portugal Global, the Trade and Investment Agency (Agência para o Investimento e Comércio Externo de Portugal, AICEP) and the SME Competitiveness and Innovation Agency (Agência para a Competitividade e Inovação, IAPMEI) have different subnational footprint (see Chapter 4). The largest AICEP regional footprints are in Centro and Norte, with limited presence in Alentejo and other regions. The absence of an official branch of AICEP in Alentejo may provide challenges for FDI attraction and embeddedness.
Invest Porto and Invest Braga are the two main public agencies for investment promotion and attraction in the Norte region. They work with representatives from AICEP but are not directly a part of them. Invest Porto was established in 2015 by the Porto City Council as an operational division of the city’s Economy Department. The agency’s mission is to contribute to a favourable and competitive business environment in the city of Porto and support investment, innovation and local development. Similarly, Invest Braga was created in 2014, to act as the economic wing of the Braga municipality, with the mission of promoting the economic development of Braga and attracting investment and entrepreneurs to the region. Its strengths lie in closer ties with local governments and other public bodies with decentralised powers leading to a stronger capability to address investors’ operational concerns.
Other European economies have mixed IPA models. For example Italy has some regions that have their own IPAs; in Sweden subnational IPAs cover different types of geographies, some being responsible for large territories such as regions, while some only focus on individual cities - in a similar manner to Portugal; and, in Spain, Germany and Poland all administrative regions have their own IPA. In the Polish case, regional IPAs were established simultaneously in 2011 thanks to the financial support of the European Cohesion Policy.
Policy approaches to the attraction of FDI extend beyond financial incentives. Subnational agencies such as IPAs have an essential role in reducing the information asymmetries firms face when searching for a location and simultaneously use this knowledge of firm preferences to promote their regions. Governments’ one-stop-shops and digital platforms are instrumental in promoting locations.
Invest Braga and Invest Porto highlight the benefits of national measures through the promotion of the government Simplex website (www.simplex.gov.pt), an information repository containing all measures taken to reduce bureaucracy. They also promote the Empresa na Hora initiative (a company in one hour) (https://justica.gov.pt/Servicos/Empresa-na-Hora), which allows companies to incorporate in less than an hour.
Through the European Social Fund and Alentejo 2020 programme, a dedicated website (https://invest.alentejo.pt/) and staff based in Evora have been set up to focus on promoting international investment in the Alentejo region. Alentejo’s website has a strong focus on wider environmental features such as infrastructure and quality of life, essential for effective promotion.
The national IPA (AICEP) is the major shareholder of AICEP Global Parques, an entity that manages three industrial parks in Portugal and that has developed a Site Selection Service platform for FDI. The regions that host the business parks are responsible to provide to AICEP Global Parques site location options to include in this Platform, in collaboration with a private business Global Parques, who also run several industrial parks. The Platform is a business locations procurement tool for investment projects in Portugal. It provides information for projects regarding industry, logistics and services. It uses multi-criteria analysis, to choose, easily and effectively, a site in Portugal that best fits a business project´s requirement; to get to know about available sites by browsing the map or searching by geographic region; to identify the best solutions that fit the investment project - size; site type; proximity to relevant infrastructures, among others. AICEP provides site selections’ support to investors: it presents different site proposals according to project specifications and help setting up direct contacts with local entities.
Having a shared understanding of the wider regional and national investment promotion agenda can ensure regional authorities avoid competition amongst themselves. At the same time national FDI attraction policies and instruments (such as eased administrative and licensing regimes, investment tax incentives) can consider how each region is unique in the way it competes in global investment networks.
Box 6.2. Governance arrangements in Norte and Alentejo
The Portuguese governance system is quite centralised as compared with other European and OECD countries (see chapter 4). General public services spending share for subnational governments is much larger than the OECD average. The OECD World Observatory of Subnational Government Finance and Investment (SNGWOFI, 2021[26]) notes for Portugal some of the lowest levels of subnational government expenditure in the OECD area (Figure 6.10).
Figure 6.10. Subnational government expenditure, 2018
Source: (OECD, 2020[9]), Regions and Cities at a Glance 2020, p. 111, https://doi.org/10.1787/959d5ba0-en.
Portugal has not established a regional government level, unlike many other EU countries. Instead, there are five regional planning and co-ordination entities, the Comissão de Coordenação e Desenvolvimento Regional (CCDR), one for each of the five NUTS 2 regions of mainland Portugal, i.e. one for Norte and Alentejo also. The CCDRs are decentralised branches of the government and carry out tasks in the areas of the environment, land and town planning, and regional development. The CCDRs are responsible for the territorial co-ordination of central government services in each region. One of their main missions is to manage regional operational programmes of the European structural and investment funds.
There are currently 308 municipalities with an average municipal size of 33 524 inhabitants. They have assignments that span several areas such as housing and civil protection, energy and local development, social assistance, urban planning, transport, education and health amongst others. Portugal has attempted to enhance inter-municipal co-operation by establishing 23 Inter-Municipal Councils (IMCs), which correspond to the TL3 regional level, in order to leverage benefits that go beyond the borders of single municipalities. Alentejo holds 5 of these and Norte 8. Portugal also created metropolitan areas for Lisbon and Porto.
However, the role of inter-municipal co-operation remains limited as most powers are in the hands of municipalities and central government. While membership in an IMC is not compulsory, all municipalities are currently members, as municipalities are steered to join by upper-level incentives associated with the management of the EU Structural and Investment Funds. Although, they can take on the functions and tasks assigned by law to the municipalities, IMCs can only provide services that are assigned to them by the municipalities that make up their membership.
Embedding FDI in the local economy
Invest Braga and Invest Porto agencies act beyond attraction and facilitation (e.g. tackling any practical problems such as bureaucratic difficulties) to also consider matchmaking with local firms. The national Portuguese Suppliers Directory identifies Portuguese producers by sector/market/product/service. The extent to which this is proactively advertised and monitored is unclear though. The literature points out greenfield investors will actively seek out means to build links with domestic producers whilst M&As will not as such (Creszenzi, 2018[27]), thus without active matchmaking there are likely to be missed opportunities.
AICEP in its Internationalise 2030 acknowledges the importance of building intelligence though creating a specific axis on business and market intelligence. This information could be used by both regional agencies and businesses for informed decision making on building, embedding and reshaping GVCs. Such information is contained in the Smart Specialisation Strategies however one of the most recent reports of its implementation in Portugal (EC, 2020[28]) identifies that at regional level, the management teams of the strategy need to be substantially reinforced. The new powers allocated to CIMS may help this.
An example of where this has been done relatively successfully is Scotland(OECD, 2014[29]). The Output Monitoring Framework (OMF) was developed by Scottish Enterprise, the national economic development body for Scotland to meet the needs of a federated network of regional bodies known as Local Enterprise Companies. These had to work in close co-operation and partnership with Locate in Scotland (Scotland’s one-stop shop for inward investors), Scottish Enterprise, and regional authorities. The OMF developed a common framework of monitoring and evaluation of network activity, including inward investor support, across a regionally federated structure. This aided understanding of all inward investment, domestic business competitiveness and the establishment of new businesses. In addition, information on skills and knowledge, physical business infrastructure and environment and access to opportunity were also collected. The latter forms of information proved essential for successful embedding.
Evidence from Costa Rica shows mapping and matching is not the end. (Crespi, Fernández-Arias and Stein, 2014[30]) found that 80% of SMEs matched with MNEs did not end up successfully integrating into the value chain. Thus, other activities such as reinforcing SME absorptive capacity and local infrastructure and environment are equally important.
Further coordination with IAPMEI or other government agencies can improve FDI embeddedness, further ensuring that attraction is even better targeted to local capability. For example, the Esposende municipality in Braga has created Start Esposende, an investment funding agency and business incubator, which provides a range of services to support local entrepreneurs and investors that aim to establish themselves in the municipality. Working with Invest Braga can ensure conversations are a two way street. Invest Braga can share more information of MNEs’ customers and objectives and Start Esposende can share further information on the sorts of businesses coming through its doors – to establish connections immediately e.g. removing potential supply chain bottlenecks from the start.
Improving domestic SME absorptive capacity
There is a vast amount of regional policies aimed at SMEs. Officials in both Alentejo and Norte have a good record of the number of SMEs signed up to programmes, but information on the share of eligible businesses involved and why those eligible do not sign up is difficult to gather. Often SMEs may need assistance to understand the value of the programme, particularly if the investment is resource intensive.
One implicit way both regions do this is by reducing the transaction costs of participation in the programme or removing disincentives. For example, Norte’s regional agency policy on intellectual property rights protection encourages firms to see the long-term benefits of their collaboration. Over the last 3 years, this policy has benefitted over 50 firms. Financial incentives are the key method for all regions of Portugal to support local SMEs, including nationally implemented tax breaks or subsidies. There are also policies implemented at the regional level, for example, the CCDR Alentejo provides financial support to encourage innovation. As part of the EU funds’ Operational Programme, assistance can be received by those projects that contribute to innovative and qualified activities, to their progression in the value chain or to tradable and international production.
The EUR 200 million Fund, financed by the regional OPs from the mainland, carries out equity and quasi-equity investment operations in SMEs under a co-investment regime with the objective of:
encouraging the establishment or capitalisation of companies, as a priority, in the start-up phases (seed, start-up, later stage venture) and;
mobilising specialised national and international venture capital entities that - besides the financial investment - enable companies to acquire knowledge and technical, commercial and financial experience.
However, despite substantial backing – the Fund results from a protocol between AD&C, IP and Banco de Fomento and a relatively healthy EUR 6 million annual budget – the fund has so far only aided a limited number of firms. The low success rate could be rectified through an increased awareness of co-investment and risk-sharing policy by the agencies. As mentioned in the section above and via the example of Costa Rica, mapping is key to improve targeting.
Most recently, public funding has been related to COVID-19 recovery. The OCDE-CoR survey (OECD, 2020[31]) points out to substantial funding provided at the regional level but with the limited ability of regional governments to effectively help. Comunidade Intermunicipal do Alto Minho in Norte for example notes that the notices for SMEs to apply for support had to be longer because firms struggled and thus took more time to gather all relevant information and submit applications.
In addition, considering all funds together will allow for a greater understanding of the possible debt burdens on SMEs or the benefits they face e.g., Annual Investment Allowance, R&D tax credits, COVID support schemes, and wider business taxes.
Responses to the EC/OECD Survey on Policies enabling FDI spillovers to domestic SMEs suggest that while regional authorities in Norte and Alentejo have been successful in improving SME absorptive capacity, greater investment in management capacity would allow better monitoring of project implementation and eventual break even rates, with a view to better understanding the risks associated with the projects implemented. Regional governments can help simplify procedures directly and build links with civil society organisations and other firms, which typically includes associations, cooperatives, foundations and social enterprises, if they have the capacity to do so.
Enabling strategic partnerships and knowledge exchange
Many initiatives in Norte and Alentejo do not directly target SMEs and FDI firms simultaneously. A successful example of potential methods of working can be derived from Ireland. The Irish National Linkages Programme had two key components. One working to account for firm heterogeneity and the other SME upgrading. Through targeting both MNEs and local firms the programme both found links and helped build capacity. This targeting process also looked at SMEs and their ability to improve or upgrade their capabilities (Crespi et al., 2014). The successful programme has now evolved into a wider initiative working at incorporating Irish companies into GVCs.
In Portugal, many programmes from the national level run informally, making regional monitoring and evaluation more challenging. For example, ANI (the national innovation agency) hosts a range of policies including Co-development R&D Centre for SMEs and larger firms to form informal relationships. The success of these relationships can only be seen for those who apply for formal grants for participating in European R&D programmes. Further programmes are implemented by CIMs and CCDRs, as discussed in chapter 5.
Chapter 5 notes that knowledge transfer infrastructures, such as Technological Interface Centers and Collaborative Laboratories, are less widespread in the region of Alentejo. The incorporation of cutting-edge thinking, University start-ups and accelerators should see two-way benefits, at MNE and regional level. At the same time, the partnerships between universities can work as a further channel for information sharing, and partnerships are more likely to occur if MNEs are directly integrated into these programmes.
A successful example can be seen as part of the EU innovation Hub network. The EIT Digital Innovation Hub in Italy, headquartered at the Povo Scientific and Technological Centre in Trento, focuses on leveraging digital technologies to help improve quality of life. Italy can be taken as an example of successful innovation hub governance. Located at the core of the Trentino Region, an area rich in communications infrastructures and bristling with innovative companies, the centre unites the leading digital players in Italy. Its core partners are Engineering, Telecom Italia and TrentoRISE, while affiliated partners have activities all over Italy (CNR-National Research Council) and have labs, connected to the Innovation Hub, in Lombardy (Politecnico of Milan), Piedmont (Politecnico of Turin), Emilia Romagna (Alma Mater Studiorum – Università di Bologna) and Tuscany (Scuola Superiore Sant’Anna). Affiliated industrial partners include CFR (FIAT Research Centre), Cooperazione Trentina, PosteItaliane, Reply and ST Microelectronics. (European Institute of Innovation and Technology, 2021[32])
Promoting clustering
Portugal has about 20 clusters of competitiveness that are recognised by IAPMEI since 2017 (Table 6.4).
The Sines complex in Alentejo is one of the leaders of green energy production in the country. Various sectors including manufacturing, petrochemicals and energy work in tandem to boost the region’s economy. Its new technology park (Sines TECH – Innovation & Data Center Hub) provides a space for information exchange with logistical constraints of conference centres, warehouses and office blocks all covered in the complex. There are spaces for special courses to upgrade skills on technology, industry and welding. However Sines is relatively detached from the rest of Alentejo and therefore its linkages with firms outside of the complex but within Alentejo are limited. Even its brochures relate to linking investors with “land for tourism and real estate across the municipalities”. Therefore the dual objective of economic growth and regional development may struggle to be achieved if connectivity across the region is limited.
Portugal has been particularly active in developing cluster policies through active engagement: 14% of national policies identified in the EC/OECD mapping on policies strengthening FDI-SME spillovers aim to develop clusters, including the IAPMEI coordinating the recognition and establishment of 18 industrial clusters (EU/OECD, 2021). At the same time, the subnational regions continue to implement their own cluster policies. In Norte the Norte Regional Operational Programme 2014-20 include a number of initiatives in favour of clusters, such as the Sistemas de Incentivos à Internacionalização by CCDR Norte. These initiatives focus on Smart Specialisation industries, as the choice of a large number of domains does not favour the concentration of resources in projects and activities that would generate spillovers(European Commission Smart Specialisation, 2019[33]). At the same time a top-down imposed formation of a cluster is less likely to succeed in the long term.
The recent signing of sectoral pacts1 can help coordinate action between private and public sectors, but the method proposed for monitoring and evaluating cluster policies at the regional level is unclear.
Table 6.4. Clusters in Portugal, IAPMEI labelled, 2019
Note: Data on employment, turnover, exports and GVA not available for the Smart Cities Cluster, the Tourism Cluster.
Source: IAPMEI (2021[34]).
For Norte and Alentejo, the effectiveness of cluster strategies depends on their ability to make clusters evolve with global value chains. Portugal has in place a system to periodically evaluate the success of its strategy which can be beneficial for all levels of government to learn from. The Portugal 2020 Global Evaluation Plan (PGA PT2020) is a guiding document of the Portugal 2020 Evaluation. It enables the design and implementation of policies and programmes to benefit from quality assessments, supported by evidence on the effectiveness, efficiency and impact of interventions. It means there is room for policies to evolve as the environment changes around them. The most recent evaluation is from January 2021 which can provide a basis for future strategies.
Consolidating agglomeration benefits
Transport infrastructure
Good transport links to Central Europe are a key part of Portugal’s historical success. Projects with the European commission to extend rail links across Europe have included substantial participation from Portuguese regions. However, in Alentejo, the within-region transport system is more limited. The Alentejo Platform was created in 2018 by leaders of business organisations, public and private entities and citizens movements and “civically committed” citizens, to require the Government to carry out projects in the areas of accessibility and road and rail transport which they consider fundamental for the sustainable development of the region. As such, the government commissioned Infrastructures de Portugal to conduct studies on ways to improve the regional connectivity.
Labour markets
Norte’s mission 2020 has the ambition to increase the number of workers and employers that are able to adopt new techniques, technologies and organisational methods to improve their employability. Specifically, in partnership with businesses, including MNEs, they aim to increase the hiring of highly skilled human resources, thereby contributing to increase entrepreneurial skills in R&D&I and intensify interactions between companies and regional entities. Given the population density of Norte, this may be easier to achieve should the skills gap be small enough (in a similar concept to SME absorptive capacity).
There are several universities in Norte which help increase the capability of the local labour market. Between 2008-2018 one of the highest increases in student attainment across OECD countries was noted. However as the working age population remained below average, Norte’s 2018 smart specialisation report (Interreg Europe, 2018[35]) points to policies investing in education, training and vocational training for skills and lifelong learning. Across Portugal, the OECD finds within the education sector, Portugal faces the challenge of ensuring that only effective programmes or initiatives are scaled up or systematised. In addition, to improve implementation, the OECD advises that different parties should be involved in design processes and receive practical support. (OECD, 2019[36])
These programmes aim to ensure the skills developed match the current and future demands of the region. Thus to counteract high unemployment rates, it is imperative to improve the matching between workers and firms.
Such infrastructure can improve local skills, but in the short term it may be difficult to attract the right people to the region. Alentejo’s foreign born population is just 4% (Portugal average 6.8%, OECD average 10%). The population within Alentejo over the last 50 years has been seen to favour most coastal regions of the territory than the interiors (OECD forthcoming, 2022). National government programmes such as specialised visas discussed in chapter 3, can help attract foreign labour. In this case attraction and preservation would need to ensure salaries are globally comparable, unless the non-financial benefits can compensate for this (access to world class businesses, knowledge, technologies). However, the distance from urban areas with a greater variety of skills can pose a challenge to attract local labour e.g. from Lisbon for Alentejo and from Porto to inner parts of Norte.
Regional skills can be strengthened by improving collaboration between public authorities, local businesses, and not-for-profit organisations to ensure local education and training match the current and future needs of rural firms and harness digital technologies to support lifelong learning for youth and experienced workers. In theory the role of remote working may prove a challenge, particularly for value chain functions that can be conducted in such a way. For the majority of occupations in Alentejo and Norte, it is likely there is still a large need for in person employment.
Quality of Life
Invest Alentejo websites host a dedicated section relating to the lifestyle benefits for investors – e.g., tourism, affordable housing. Improving healthcare services and education would likely lead to more settlements for investors and their families. Invest in Sines brochures includes sections on tourism and quality of life. Both of which point to the acknowledgement of the importance of portraying and creating a good quality of life for building intrinsic human links to the region, thereby increasing embeddedness. This includes access to essential services such as health and education.
Improving FDI-SME policy co-ordination at regional level
The national strategic references for regional planning are the Portugal 2030 Strategy and the National Spatial Planning Policy Programme (PNPOT), although the responsibility is spread across ministries. The Ministry of Planning looks after strategy of economic and social development, namely convergence and cohesion policy; the Ministry of Territorial Cohesion looks after regional development and inner areas; the Ministry of Environment and Climate Action looks after spatial planning and forestry; and then there are other sectoral ministries responsible for the provision of public and collective services and other territorial interventions.
At a subnationalal level, as well as the CCDR, a number of institutions represent each of the key regions on the mainland. The regional directorates implement agricultural policy, including those addressing rural development measures. They provide analysis, approval, monitoring, and validation of projects supported by public funds in their respective regions. Yet their links with integration with local FDI which would accelerate development and exportability is unclear. Taking the example of one programme, the Mainland Rural Development Programme (PDR 2020) supported by European funds (EAFRD) is operational in Alentejo. It supports the tradable goods sector and farmers directly involved in adding value through agro-forestry activities through a wide range of policies including building conditions for economic and social dynamism. Explicit co-ordination with local foreign investors is not evident.
Box 6.3. The alternative TL3 typology
This OECD methodology classifies TL3 regions into metropolitan and non-metropolitan according to the following criteria:
Metropolitan TL3 region, if more than 50% of its population live in a functional urban area (FUA) of at least 250 000 inhabitants. Metropolitan regions are further classified into:
Large metropolitan TL3 regions, if more than 50% of its population lives in an FUA of at least 1.5 million inhabitants.
Metropolitan TL3 regions, if the TL3 region is not a large metropolitan region and 50% of its population lives in an FUA of at least 250 000 inhabitants.
Non-metropolitan TL3 region, if less than 50% of its population live in an FUA. These regions re further classified according to their level of access to FUAs of different sizes into regions:
With access to (near) a metropolitan TL3 region, if more than 50% of its population lives within a 60-minute drive from a metropolitan area (an FUA with more than 250 000 people); or if the TL3 region contains more than 80% of the area of an FUA of at least 250 000 inhabitants.
With access to (near) a small/medium city TL3 region, if the TL3 region does not have access to a metropolitan area and 50% of its population has access to a small or medium city (an FUA of more than 50 000 and less than 250 000 inhabitants) within a 60-minute drive; or if the TL3 region contains more than 80% of the area of a small or medium city.
Remote TL3 region, if the TL3 region is not classified as NMR-M or NMR-S, i.e., if 50% of its population does not have access to any FUA within a 60-minute drive.
Source: (Fadic et al., 2019[1]),“Classifying small (TL3) regions based on metropolitan population, low density and remoteness” https://dx.doi.org/10.1787/b902cc00-en.
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Note
← 1. In 2019 the AEC Cluster – Architecture, Engineering and Construction, managed by the Portuguese Technological Platform for Construction (PTPC), signed a Sectoral Pact for Competitiveness and Internationalisation with the Ministry of the Economy.