Headline foreign investment flows to Portugal decreased to $4.9bn in 2018, its lowest since 2014, according to Unctad. However, greenfield foreign investment – tangible ‘ground-up’ investment which by its nature always creates jobs and physical facilities – has never been higher to the country and its capital Lisbon. 

In fact, the city was western Europe’s fastest growing capital for greenfield foreign investment in 2018, attracting 42 projects valued at $1.1bn, marking a 61.5% increase in project numbers compared with 2017, according to greenfield investment monitor fDi Markets. 

This investment was primarily directed into Lisbon’s software and IT sector, followed by business services, real estate and tourism. And this stellar performance was not a one-off. Greenfield foreign investment into Lisbon has grown consistently since 2015, in both capital and project numbers, and is set to grow further according to fDi Markets. 

The first seven months of 2019 have already seen more foreign investment projects than total annual amounts for every year between 2003 and 2017.

High on FDI

Portugal is home to roughly 10 million inhabitants, and attracting foreign investment has been a priority for the government over the past decade, due to the aftermath of the 2008 financial crisis, as well as the constraints of its relatively small domestic market.

In this regard, the country has enjoyed unequivocal success. In 2018, it witnessed the highest number of greenfield foreign investment projects since fDi Markets started recording FDI activity in 2003, a high proportion of which went into software and IT services. Meanwhile, the total stock of headline FDI stood at $135.8bn in 2018, about 62.4% of Portugal’s GDP, according to Unctad.

These figures reflect the fact that the number of greenfield investment projects to Portugal has been growing steadily since 2014, with 2018 seeing about 34% more investment than 2017, according to fDi Markets. The country is set for another strong performance, given that the first half of 2019 has already witnessed an unprecedented number of investments.

This boom in foreign investment is a byproduct of Portugal’s successful and ongoing economic recovery. Only 10 years ago, the country was stuck in a deep financial crisis. Unable to repay its government debt, it received a Ä78bn bail-out package, which it successfully exited in mid-2014.

Portugal’s economic bounce-back has outshone fellow crisis victims Greece and Spain, largely due to its booming tourism and tech industries, as well as a fiscal policy that has boosted business confidence, made investment easier, and accelerated growth in exports, especially in services.

A working recovery

Portugal’s job market has significantly improved, with the unemployment rate falling to 6.7% in June 2018, the lowest it has been since 2004 and a big improvement on 2013’s all-time high of 17.5%, according to research company Trading Economics. Meanwhile, GDP hit 1.9% annual growth in 2016 with a 2.1% budget deficit, the lowest in the country since 1974, according to BBVA Research. In 2017, the country hit its highest GDP growth rate since 2000, at 2.8%, while in 2018 the figure was 2.1%.

Moreover, export volumes accounted for 44% of Portugal’s GDP in 2018, following exponential growth in recent years due largely to service exports, especially in tech, according to Aicep, the Portuguese government’s trade and investment promotion agency.  

Another confidence boost lies in Portugal’s credit rating. Pegged as BB+ by Standard & Poor’s since 2012, Portugal was upgraded
to BBB- in 2017, and to BBB early in 2019. 

Bumps on the road

The country’s recovery, however, is still a work in progress. The public debt-to-GDP ratio remained at about 121% in 2018, one of the highest among developed economies. This ratio has decreased in recent years, but at the cost of public investment in key areas such as transport and infrastructure, a sector many consider to be in urgent need of attention.

Moreover, the country’s banking sector is still host to a significant, albeit contracting, number of non-performing loans – 9.4% of total loan portfolios in 2018 – while its household savings remain low by European standards, according to the IMF.

Portugal also risks relying too much on its booming tourism industry, which can be unreliable. Tourism has grown eight years in a row, thanks partly to political or security instability elsewhere in the Mediterranean. While the country hosted a record 21 million tourists in 2018, this was just a 0.4% annual increase on 2017, and way off the 12% jump seen between 2016 and 2017.

In recent years, Lisbon alone has received 4 million annual tourists, according to Invest Lisboa, the city’s investment promotion and service agency, thereby putting the capital’s infrastructure, quality of life and house prices to the test. The growing influx of foreign investors, workers and residents has compounded this bittersweet issue.

Gloom to boom

The blossoming start-up economy in Portugal can be traced back to the financial crisis, according to Alexandre Vaz, managing
director of Mercedes-Benz.io, a tech arm of Mercedes-Benz that is based in Lisbon. “There weren’t enough jobs, so people started to test out new ideas and companies. The push from the government worked quite well too, creating a system for seed capital, and then private players jumped in,” he says. 

The country’s tourism boom and Lisbon’s successful bid to host Web Summit, replacing Dublin in 2015, were also very influential in boosting Portugal’s economy and international profile. As one of the biggest tech conferences in the world, Web Summit attracts more than 80,000 attendees from some 170 countries. Impressed by the capital’s digital infrastructure, ecosystem and more, Web Summit recently agreed to stay in Lisbon for another 10 years.

In the longer term, Portugal’s tech expertise has emerged out of several decades of high-quality education and strategic government funding in traditional and modern engineering to produce a talented workforce.

European hub

Portugal is now in the throes of a tech boom. Ecosystems are blossoming across the country, especially in the cities of Lisbon, Porto, Braga and Aveiro. However, the capital – ‘the warm Berlin’ as some have coined it – is the epicentre of activity. The EU Startup Monitor 2018 says Lisbon stands alongside London, Berlin, Paris and Copenhagen as the biggest hubs for start-ups in Europe. The sector contributed 1.1% to Portugal’s GDP in 2018, according to Startup Portugal.

Sauntering around Lisbon’s latest co-working spaces, and speaking to the numerous companies in slick mixed-used ‘offices’, the buzz is tangible. The past decade has seen a rapid rise in the number of Portuguese tech start-ups, such as Farfetch, Talkdesk, Uniplaces and Unbabel. Farfetch, now publicly listed and  headquartered in London, was the first Portuguese tech unicorn (a company valued at more than $1bn), and is now joined by Talkdesk and Outsystems. It is an impressive achievement for a country the size of Portugal. 

Another mark of growth is that the number of people employed in Portugal’s start-up sector grew by 60% between 2016 and 2018, according to Startup Portugal. 

Portugal’s popularity

The ascension of Portuguese tech is reflected, and supported, by the growth in foreign investment in the country. Over the past two years, there has been a 15% increase in foreign tech companies active there, according to Aicep. 

Big names have moved in. Google, for example, has opened a support centre on the outskirts of Lisbon, creating 500 tech jobs. Add to this Amazon, Huawei, Cisco, BMW, Mercedes, Volkswagen, BNP Paribas, Natixis, Bosch, Siemens and Euronext in recent years, among many others. 

In 2018, Portugal was Europe’s ninth top destination for greenfield foreign investment in software and IT in terms of capital, according to fDi Markets. The country has witnessed four years of uninterrupted growth in such investment, with 2018 setting historic highs. This year is gearing up to be another record breaking year, fDi Markets predicts.

Faber Ventures, one of the main institutional investors seeding Portuguese start-ups, sees 75% to 80% of its investment coming from abroad, according to Carlos Silva, an executive at the company. “From an investor’s perspective, Portugal is one of the fastest growing ecosystems in Europe, but we still have to reach maturity. So things tend to be undervalued, which means there’s some very interesting investing opportunities under the radar,”
he says.

Rising VC

Lisbon’s venture capital (VC) market is moderate in size by EU standards, and dwarfed by Silicon Valley standards (a Europe-wide problem). Nonetheless, it is growing. Portuguese start-ups raised more than Ä485m in 2018, while the volume of transactions increased fourfold compared with 2017, according to a recent report called Venture Capital in Portugal 2018-S12019. Meanwhile, the number of private equity firms in Portugal has doubled over the past eight years, and private equity investment more than tripled to $8.6bn between 2015 and 2018, according to industry consultant TTR.

Lisbon saw the opening of its largest VC fund, Indico Capital Partners, early in 2019. “It’s far and away the first sizeable, independent and private early-stage, tech-focused fund to be based in Lisbon,” says US online publisher TechCrunch.

Backed by the European Investment Fund and 20 other institutional and individual investors, Indico will fund early-stage start-ups across Portugal and Spain in business-to-business, software-as-a-service, AI, fintech, cyber-security, marketplaces and business-to-consumer platforms. The fund is a milestone for the Portuguese ecosystem – and another vote of confidence for foreign investment.