Public Policies, Innovation and Convergence

Since the mid-twentieth century, the Portuguese economy converged vis-à-vis with the EU average, due to backwardness advantages. At the same time, the dynamic effects of Foreign Direct Investment allowed for a structural shift in exports towards technology-intensive activities. However, in the new millennium, several factors, largely triggered by the global financial crisis, led to a drop in industrial output along with a reduction in FDI attraction. This paper assesses the efficacy of the Investment Promoting policies to stimulate innovation and promote the absorptive capacity at national level, by analysing the relationship between FDI inward flows and a set of innovation and absorptive capacity indicators. Results show that the gap between Portugal and the EU-28 average is far from being closed. Rather than being an automatic process triggered by foreign presence, we suggest that the convergence based on the productivity, can be assisted by a reinforcement of supply-side measures, and the coordination between the industrial policy and the instruments of the Investment Promotion Policy, in strategic industries.