The investment development path hypothesis: Evidence from Portugal, 1990-2011

Looking at the transformations that took place in the world economy in the last quarter of the 20th century, as a result of liberalization, deregulation and market opening process, one of the most striking features was the emergence of multinational enterprises in all sectors and countries of the world. Consequently, the Foreign Direct Investment(FDI)  flows promoted by these firms have grown significantly, even faster than world trade and world output, in the same period.

In this context, our analysis is based on the Investment Development Path (IDP) hypothesis, introduced by Dunning (1981) and (1986) and developed by Dunning and Narula (1996). According to this theory, a country faces different stages, from an initial one – where it is a net inward receiver of FDI – to a matured one - where the country becomes a net outward investor, expressing a dynamic and intertemporal relationship between an economy’s level of development and the country's inward and outward investment position.

The main purpose of this paper is to estimate this hypothesis for Portugal – a small open economy in the extreme west of Europe – and other 28 countries in different stages of development, in the period 1990-2011 at an aggregate level. We use fixed-effects panel data models and generally our research´s results provide support to the IDP theory, although it is impossible to capture all the stages predicted theoretically, given the lack of heterogeneity between the most countries of our sample and also the relatively short time period considered.

Keywords: Multinational Enterprises, Foreign Direct Investment, Investment Development Path, Portugal