Portuguese Economic Journal

, Volume 12, Issue 3, pp 215–250 | Cite as

Foreign direct investment and institutional reform: evidence and an application to Portugal

  • Paulo JúlioEmail author
  • Ricardo Pinheiro–Alves
  • José Tavares
Original Article


We examine the role of geographic, economic, and institutional factors in attracting Foreign Direct Investment (FDI) in Europe, using a cross-section of inward bilateral investments. We estimate and assess the expected benefits, the required reform efforts, and the efficiency of reform options corresponding to a convergence of Portuguese institutions to EU standards. We conclude that improving home institutions is likely to have a quantitatively very significant role in attracting FDI. Geographical and market size factors also play a role. Reforms promoting the independence of financial institutions and a leaner bureaucracy, lowering political risk and corruption, and improving the investment code may significantly affect the amount of bilateral inward FDI that is targeted to Portugal.


Foreign direct investment Institutions Institutional reform Portugal European union 

JEL Classification

F30 H00 



We are extremely grateful to the editor and two anonymous referees for helpful suggestions and recommendations, that led to a significant improvement of this article. We also thank the precious comments of Francisco Veiga and of all participants in the 5th Annual Meeting of the Portuguese Economic Journal (Aveiro, July 2011) and in the 14th INFER Annual Conference (Coimbra, May 2012), and the excellent research assistance provided by Inês Cabo, Marta Campos, and Sara Almeida. José Tavares thanks Nova Forum and the Fundação para a Ciência e Tecnologia for financial support. This article was prepared while Paulo Júlio was employed at the Office for Strategy and Studies of the Portuguese Ministry of Economy and Employment, and the author acknowledges all the support provided therein. The opinions expressed in this article represent the views of the authors and do not necessarily correspond to those of Banco de Portugal or of the Portuguese Ministry of Economy and Employment. A previous version of this article circulated under the title “FDI and Institutional Reform in Portugal.”


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Copyright information

© ISEG 2013

Authors and Affiliations

  • Paulo Júlio
    • 1
    Email author
  • Ricardo Pinheiro–Alves
    • 2
    • 3
  • José Tavares
    • 4
    • 5
  1. 1.Economics and Research DepartmentBanco de PortugalLisbonPortugal
  2. 2.Office for Strategy and StudiesPortuguese Ministry of Economy and EmploymentLisbonPortugal
  3. 3.IADE, Instituto de Artes Visuais, Design e MarketingLisbonPortugal
  4. 4.NOVA School of Business and EconomicsINOVA, Universidade Nova de LisboaLisbonPortugal
  5. 5.Centre for Economic Policy ResearchLondonUK

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