What causes economic growth in Portugal: exports or inward FDI?

The purpose of this paper is to analyze possible causal relationships between exports, inward foreign investment and economic growth in Portugal and identify their direction.

The paper uses a three‐stage procedure based on unit root, cointegration and causality tests applied to annual data from 1977 to 2004.

The paper reveals that exports and FDI foster growth in the long‐run while in the short‐run there is a bi‐directional causal relationship between FDI and growth and a univariate causal relationship running from FDI to exports. FDI is viewed as a major determinant of economic growth, both directly and indirectly, via exports for both long and short‐run cases.

The results provide important corollaries in terms of policy implications and their relevance is far from being parochial. Some lessons in terms of domestic policies can be drawn by many countries that are now becoming EU members with economic structures and problems similar to those presented by the Portuguese economy in the 1980s.

This paper is the first of its kind to analyze the role of both FDI and exports in the Portuguese economy during the 1977‐2004 period, over which many efforts were developed in order to increase the external competition of the economy, in particular in the context of community structural frameworks. In order to reinforce the inflows of FDI, authorities should continue the progressive reduction of barriers to FDI and the reforms of the labour market which started in the early 2000s.