The Investment Development Path Hypothesis: a Panel Data Approach to the Portuguese Case

Looking at the transformations that took place in the world economy after Second World War, as a result of liberalization, deregulation and market opening process, one of the most striking features was the significant expansion of Foreign Direct Investment. So, the main purpose of this paper is to discuss the positioning of Portugal – a small open economy in the extreme west of Europe - in this context. Our analysis is based on the Investment Development Path (IDP) theory, according to which the inward and outward investment position of a country is tied with its economic development. In the present research, this hypothesis is estimated empirically for Portugal and other 24 countries in different stages of development, between 1990 and 2006, using fixed-effects panel data models. Generally, our results find support for IDP paradigm, although it is impossible to capture all the stages predicted theoretically, given the lack of heterogeneity between the most countries of our sample and the relatively short time period considered.