Last update: 14 September, 2003

Managing globalization from the periphery

a business Panel on Portugal included in the

27th European Regional Meeting of The Trilateral Commission

Porto, 25 October 2003

Summary: Five questions to five young entrepreneurs

1. Did your firm face specific obstacles related to your location and, if so, which ones?

2. Did the process of international reputation building benefit from the actions of the state?

3. Did the state’s effort at attracting foreign direct investment help your attempts to invest abroad?

4. Have the efforts to rebuild the image of an attractive investment location been successful?

5. Do you feel there has been discrimination against domestic investment?

The organizer

Forum Portugal Global (FPG) is an association of Portuguese enterprises providing role models for business modernization and internationalization, which appraises the activities of the Trilateral Commission (TC) from that perspective. FPG supported the candidacy presented at the 24^th European Regional Meeting, held in Milan, to have another European Regional Meeting in Portugal, this time in Porto.

The topic of the business panel, managing globalization from the periphery, was chosen at the 2002 general assembly of FPG and further developed at the 2003 general assembly, with initial interventions by members of the Portuguese government, respectively Luis Valente de Oliveira and Frankin Alves.

The select number of entrepreneurs in banking, insurance, wine, construction, legal services, telecommunications, environment and energy who decided to establish FPG on 30 July 1996 wanted to promote Portuguese awareness of the challenges of economic and financial globalization.

The willingness of these enterprises to help and foster public debate on the issues of international interdependence among the three major democratic industrialized regions of the world can be seen as a means towards the end of a more globally competitive Portuguese economy and society.

The topic

Under globalization, one is told, there is no center and no periphery. If that assertion were true, managing globalization from the periphery would amount to “business as usual”.

Yet the Portuguese firms that were selected for this panel (including both members of FPG like Sogrape and Portucel and non-members like Logoplaste and Corticeira Amorim) have seen anything but “business as usual” under the leadership of the panelists. Their active participation in global markets followed different export oriented strategies, appropriate to commodities, services and brands.

The reason for this apparent paradox is that there is not a center and a periphery under globalization because there are several centers and peripheries which no longer depend on geographical location but rather on the ability to sell in competitive global markets.

To be sure, firms located farther away from their customers face higher transport and management costs than similar firms located closer to these same customers. But, through innovation and the search for new customers, peripheral firms can overcome external and internal barriers, thereby becoming more central in the network relevant to their particular product or service.

The panelists show how this can be done in four specific instances and which lessons can be drawn for Portugal´s economic and social prospects over the medium term.

The conclusion will try to bring out of lessons of general interest for other so-called peripheral locations, based on the experience of Europe’s so-called “blue banana”.

Europe’s “blue banana”

Time and distance traveled vary greatly depending on the transport network, especially if there are inter-modal links. The legitimacy of, and the need for, coordination naturally follows from the inter-modality of modern transport. Different means of transport are associated with different definitions of periphery and different coordination responses. The question then becomes: periphery for what?

In Europe, centrality has been defined by the so called "blue banana" (London-Milan via Germany). The concentration of economic activity, which originated in the medieval fairs, has the shape of a banana and has also been called the “golden triangle” (London-Dusseldorf-Milan).

Yet Ireland managed to overcome its peripheral status, rejecting the fatalism of geography and there is an emerging "banana" going from Southern France to Catalonia.

The point about concentration of economic activity is that time of travel or distance to particular places can be measured but their relevance for management is constantly changing, e.g. with telecommunications.

This is why under globalization the concept of periphery has become more relative and even cultural than it was when barriers where mostly due to geographic obstacles.

The panelists

Estela Barbot, TC Member (co-chair)
António Amorim, Chairman and CEO of Amorim
Filipe de Botton, CEO of Logoplaste
Jorge Armindo, Chairman and CEO of Portucel
Salvador Guedes, CEO of Sogrape

The four CEOs will summarise how they led their companies´ export strategies. They will point to the specific implications of the answers provided to the following points which will have been used in the co-chair's introduction on "doing business in Portugal".

1. Is it the case that “you are as peripheral as you feel”, or did your firm face specific obstacles related to your location and, if so, which ones?
2. Did your firm become part of the relevant international market network by building reputation in the eyes of a larger partner, e.g. through some form of subcontracting? If so, did the process of reputation building benefit from the actions of the state or any of its agencies?
3. Did the state’s effort at attracting foreign direct investment help your attempts to invest abroad, or do you feel that these are separate policy areas, i.e. financial globalization is not a two-way street?
4. After Portugal began privatizing and investors recovered financial freedom at home and abroad, the combination of a recession and excessive public spending during the subsequent recovery has led to a painful budgetary adjustment. How successful do you feel that the efforts to rebuild the image of an attractive investment location have been?
5. Often, government efforts to attract foreign investment imply discrimination against domestic investment, especially in what concerns new ventures. As a young entrepreneur, how strong do you feel this discrimination has been? Can you point to specific instances in your own experience of managing globalization from the periphery?

Lessons for Portugal

Before Portugal joined the European Community in 1985 - and thanks to EFTA membership since 1960 - textile exports soared and, together with tomato paste and paper pulp, gradually replaced the traditional exports of wine, cork and sardines to the point that the country was dubbed a “pajama republic”. Foreign investment in machinery began in the late 1960s and has profoundly transformed the trade and industrial structure, which now includes also a significant portion of trade in similar products (textile, machinery and transport equipment) but not enough high-tech goods.

Output per man hour remains very low by EU standards, which translates into a competitiveness ranking in the low 30s (like Greece, when Spain is in the low 20s and Ireland in the teens). Information technology remains a very low percentage of gross domestic product, and computer use is well below the EU average but internet access has increased so fast in the last few years that it was above Spain and Greece in 2002.

Among the four cases presented in the panel, the two more traditional industries of wine and cork products have witnessed a substantial international diversification, the latter with a high tech spin-off (Amorim Industrial Solutions). In the pulp and paper industry, state intervention has been as intense as the participation in international markets. As for packaging, it is relevant for both trade and investment inflows and outflows. The bulk of foreign trade is, however, accounted for by textiles and machinery, often through relatively small firms while transport equipment is more recent and more concentrated.

Small firm size could mean more flexibility and faster reaction on the part of public and private agents, but this does not seem to have happened, at least in comparison with best European practices. There is nevertheless progress in the internationalization process, which could become self-sustained if Portugal reputation as a place to do business rises.

Yet Spain has become a market for Portuguese products to such a degree that the economy may now be more closed than when export and import markets were more diversified. In 2002, it overtook Germany as the top destination, with over one fifth of the total.

In terms of expected industrial landscape in twenty years, account must be taken of the fact that Portugal is at the border of Europe and therefore sensitive to developments at further borders, like the Mediterranean and, with Azores and Madeira, the Atlantic. If Africa (especially Angola) and Latin America become significant markets for Portugal, managers located here would cease to feel peripheral.

The problem to find better managers than at the center is the small size of the domestic market (1% of EU) and the fact that firms and government do not yet think enough of the external market (via transhipment). When they do, there is not enough effort to ensure quality and brand names.

Finally, managing globalization from the periphery means creating a sense of common purpose between science and industry. The government has attempted to reform public administration and to take a “whole of government” view in spreading information technology, namely through initiatives on broad band access, electronic procurement and virtual campuses. In spite of the efforts, implementation has been slow and uneven. For example, in Lisbon there are successful scientific and industrial ventures but not in Porto, because there has not been enough coordination to achieve the same objective, in part because of disputes in the academic world.

Portuguese scientists who are working abroad still say that they do not return because they have no one to talk to here. Without a greater appeal to the diaspora and to young productive people everywhere, Portugal cannot leapfrog, and be put on the map like Ireland or Catalonia.

PS This background note tries to reflect the lively discussions held during the 2002 and 2003 general assemblies of FPG, and during the lunch at Logoplaste on 9/10, but none of its members is responsible for any errors or shortcomings, for which the chair of the business panel is solely accountable.