Bureaucracy in Portugal: the Challenges for Foreign Investors
In a conversation with Paulo Marmé from Forbes Portugal, our CEO Pedro Henriques explains what are the roadblocks in the Portuguese economy preventing the country from being more attractive to disruptive foreign companies. Original article in Portuguese here.
Photo by Kaitlyn Baker on Unsplash
Pedro Henriques is the founder and CEO of BRIDGE IN, a Portuguese startup that helps foreign companies establish operations and recruit in the country.
In an exclusive interview with FORBES, Pedro Henriques addresses the strengths that make the country attractive to foreigners, but also the weaknesses of the Portuguese economy that prevent more foreign investment from coming to Portugal.
IS PORTUGAL AN ATTRACTIVE DESTINATION FOR FOREIGN INVESTORS?
Pedro Henriques (PH): It depends on the investment perspective, but, in general, yes. Portugal is highly rated in terms of the quality of its universities and, therefore, of the professionals it trains, whether within the area of technology, the predominant area in which BRIDGE IN works, or even in other areas. But the fact that we belong to the European Union also gives us some confidence from a regulatory point of view, even though there is much room for improvement in local legislation.
On the other hand, the size of the local economy means that Portugal is not a preferred destination market for launching solutions or products. A good example of this paradigm is the case of the company Design Pickle, which BRIDGE IN helped bring to Portugal. Design Pickle has a subsidiary in Portugal and employs highly qualified professionals, but, at the moment, it does not offer its products and services with a focus on our country. This is not a unique case. We have many technological solutions being developed in Portugal that users in Portugal cannot take advantage of.
IS IT EASY TO “SELL PORTUGAL” TO FOREIGN COMPANIES?
PH: From a talent recruitment point of view, yes, it is relatively easy to sell the Portugal product. Foreign companies looking for highly qualified employees have a fantastic opportunity in Portugal. The country benefits from being a tourist destination of excellence where people want to return. For instance, one of BRIDGE IN's first customers told us that he liked coming to visit the team in Portugal much more than in other locations.
Portugal is also a country without major enmities, we have good diplomatic relations with most countries and we have had Portuguese nationals in important international positions, obviously starting with the UN secretary-general.
So, all in all, Portugal is a very friendly country and a location that is particularly pleasant to visit. The next step is becoming the number one destination for people to work and invest.
WHAT ARE THE ARGUMENTS THAT PLAY MOST IN FAVOUR OF OUR COUNTRY, IN THE EYES OF FOREIGN INVESTORS?
PH: The fact that Portugal belongs to the European Union and the Eurozone immediately contributes to a basis of trust in community regulations and strong currency. For countries that are in the Euro Zone, there is also the advantage of a common currency.
The quality and availability of talent, with a good cultural alignment with the rest of the Western world, at a very affordable salary for Western Europe.
Another point that, although not often recognized a priori, is a good surprise is the proficiency of the majority of the population not only in English but sometimes in a third language, such as Spanish or French.
Finally, the stability of the country. Whether you like the current government and its policies or not, the truth is that it has an absolute majority and is far from the populist extremes of other countries, which allows it to have some guarantees of stability, which is much appreciated by investors.
WHAT ARE THE MOST NEGATIVE ASPECTS WHEN INVESTING IN PORTUGAL?
PH: Unfortunately, the answer is simple, recurrent, but without an obvious short-term resolution: bureaucracy and taxes. We constantly hear these reasons when we at BRIDGE IN speak with foreign companies. Our mission at BRIDGE IN is exactly to help mitigate bureaucracy by increasing predictability and automating processes, however, we can do little in relation to taxes.
Labour taxes are very significant in Portugal and constitute a competitiveness problem in attracting foreign investment. Of course, some of the other western European countries also have high taxes, but a problem that is not often mentioned is that since average salaries in Portugal are among the lowest in Europe, the IRS levels are aligned with lower salary levels, meaning that a highly qualified professional with a good salary quickly reaches the upper levels of the IRS tiers.
Let's look at the case of a senior software engineer with 10 years of experience with a gross annual salary of €60,000: with simple calculations, only taking into account insurance and mandatory contributions, the cost of this position on the side of the company is up to €75,000, not counting work tools and other perks. For the sake of this example, let’s assume the worker is single without children and we end up with a net salary of €35,000 per year. That is, more than half of the salary cost is withheld. I am well aware that contributions to social security are intended, among other things, to ensure a retirement pension, but a foreign investor in Portugal doesn't care much about that, he observes that more than half of his capital is delivered to the State.
HAS THERE BEEN ANY CHANGE IN THE PERCEPTION OF PORTUGAL BY FOREIGN INVESTORS, IN THE PAST FEW YEARS? IF SO, WHAT ARE THE REASONS?
PH: Yes, I think there has been a clear evolution of investment prospects. From the point of view of international technology companies, Portugal has become much more present in the range of options in the last five years. There is an obvious correlation, although it is difficult to demonstrate causality, between the coming of the Web Summit to Portugal and the opening of operations of technology companies in Portugal. When we talk to foreign entrepreneurs and executives at BRIDGE IN, they already know perfectly well where Portugal is. This is the development of the Portugal brand. Evidently, there is a lot of promotion work done by various institutions, of which I would highlight AICEP and Startup Portugal.
From a financial investment perspective, the growth of the national ecosystem - although it is still in need of more successful cases of start-ups and so-called exits, with an entry on the stock exchange or acquisition for stratospheric values - is making headlines internationally while foreign venture capitalists are increasingly participating in local start-up funding rounds.
WHAT ARE THE MAIN SECTORS OF ACTIVITY OF COMPANIES INVESTING IN PORTUGAL?
PH: It will no longer be news to anyone that the technological sector, mainly software development, finds great opportunities in the domestic market. But also shared services centres or call centres for large multinational companies.
Other sectors of activity that are still little established, but with excellent conditions in Portugal, are the remaining scientific and engineering areas, such as biotechnology and health tech. It is worth mentioning here the interesting work of HealthTech Lisboa, an initiative by LISPOLIS in collaboration with Startup Lisboa and ANJE. This is also one of BRIDGE IN's focus areas. We are currently in talks with a US biotechnology company that is considering opening operations in Portugal from a talent recruitment perspective.
It should be emphasized that the quality of education in Portugal in the STEM areas (Science, Technology, Engineering and Mathematics) is quite good, but opportunities in the industry for its professionals, well, that is a different story. If, on the one hand, a Software Engineer can gain some experience before finishing his course, a Biochemistry Engineer has very few job opportunities in the area, and many are those who end up leaving the country or retraining for the IT area. It should be a national plan to capture foreign investment in these high-tech areas for which so many professionals are trained every year.
WHICH COUNTRIES ARE MOST WILLING TO DEVELOP THEIR BUSINESSES IN THE PORTUGUESE MARKET?
PH: Data from the Bank of Portugal indicate that the European Union represents +75% of foreign direct investment in Portugal, so, not surprisingly, at BRIDGE IN we have also seen a lot of interest in Portugal from other European countries. Then, taking into account our Atlantic origins and the Portuguese diaspora, there is also familiarity and interest coming from the American continent, especially from Brazil and the USA.
If Portugal is a relevant destination in terms of talent recruitment, markets where the cost of labour is higher than in Portugal look at our market with increased interest in price arbitrage. So, on the European continent, we see much more significant interest from the Nordic countries, the Netherlands, Ireland, the United Kingdom and Switzerland. Interestingly, these countries, together with the USA and Canada, do not even seek to hire talent at a low cost, as they often offer salaries not very different from the country of origin, the big difference is that in Portugal, these values attract the best professionals, surpassing any offer that local companies are able to make.
HAS THE PANDEMIC BROUGHT ANY CHANGES TO THE WAY FOREIGN INVESTORS LOOK AT PORTUGAL AS A POTENTIAL MARKET TO INVEST IN?
PH: Absolutely. Not only the pandemic, but actually the war in Ukraine is also having a significant impact. Unfortunately for Ukrainians and all peoples in the east, the conflict has driven investors away from their countries. Looking west across the European continent, these investors find Portugal.
Portugal is a stable country. We may not have an economy with exuberant growth, but it is actually quite predictable, it may be insufficient growth for the ambitions of the Portuguese, but constant and reliable growth for foreign investors, especially after the positive outcome following the intervention of the troika. The pandemic and the war have also had another effect, the displacement to Portugal of many highly qualified professionals and investors or individuals with high net worth or financial capacity. This happens because when suddenly the entire population started telecommuting, it became irrelevant whether this telecommuting is performed from a small apartment near the office in rainy London or in an apartment in a sunnier country with a lower cost of living like Portugal.
The invasion of Ukraine confirmed this trend, moving people not from North to South, but from East to West in Europe. At BRIDGE IN, we also see intense demand from US citizens looking to escape social unrest in the US, from racial tensions with the death of George Floyd, the attack on the Capitol, and the reversal of Roe v. Wade concerning abortion. Each new controversy has been followed by an increase in requests for information on visas and relocation of professionals on our digital channels.
When people move, their ideas and capital follow. The most visible immediate impact is the rise in house prices in the main cities, while a more desirable impact will be the investment in local companies by these immigrant investors.
PORTUGAL HAS PROVED TO BE FERTILE GROUND FOR THE BIRTH OF START-UPS. HOW WOULD YOU EXPLAIN THE PHENOMENON?
PH: I believe that entrepreneurship is part of the Portuguese DNA. It is true that there are more and more expatriates in Portugal and many of them are founding members in local start-ups, however, the spirit of the Portuguese “disenrascanço” is proof that we can find solutions to existing problems, and that we can be creative. The big challenge is to turn that “desenrascanço”, that resourcefulness into a standardized solution, viable to repeat at scale, and capable of building a successful business model. History shows that technically we are as good as the best, that we manage to discover new paths, but we were not always the best in creating successful commercial models (see the case of the Dutch East India Company, which ended up dominating the spice market in Europe).
Another important factor is political discourse. Just look at the national network of incubators: according to a government source, there are more than 150 in Portugal. There must be no county capital in Portugal that does not have at least one incubator. Now, even admitting that some of these incubators are very incipient, it cannot be denied that there is a political will, from the central government and the local authorities, in promoting the ideation and incubation of ideas. The big challenge is to gain scale not in quantity, but in quality. Creating a company is relatively easy, statistics become pleasant for political power as an indirect metric of the dynamism of the business fabric. But perhaps the indicators should look not only at the number of companies created, but also at the number of people employed, volume of turnover, and perhaps more importantly, at the contribution to the trade balance – that does create real value in the economy.
HOW CAN THE COUNTRY ENSURE THAT THESE START-UPS DO NOT END UP ABANDONING THEIR INVESTMENT IN PORTUGAL?
PH: Many good companies are born in Portugal. The problem is ensuring that they also grow in Portugal, keeping the organization's headquarters in the country. We like to say that there are 7 Portuguese startups with unicorn status in Portugal, or with Portuguese DNA, but let's face it, this metric is fallacious, to say the least. How many of these unicorns have the structure's headquarters in Portugal and pay taxes on the group's profits here?
Currently, with the tax complexity and bureaucracy, the country is not a friend of scale-ups, especially companies that operate globally and therefore necessarily have entities in other countries. What happens is that, for example in an expansion to the USA, instead of the North American entity being a subsidiary of the original company created in Portugal, almost always the entity in Portugal becomes a subsidiary of the new company in the USA, which in turns ends up controlling the whole corporate structure.
The motivation behind leaving Portugal in most cases is not even to seek to reduce taxes through tax planning, it is to be able to operate in a country with modern corporate legislation that supports the needs of startups, and mainly to be in a jurisdiction that the most sophisticated investors accept.
Without more pro-business legislation, Portugal will just be a cost centre for any company with a multinational dimension.
Even so, being a cost centre does not mean that hundreds of highly specialized jobs are not created, leaving money in the local economy. Fortunately, the quality of our professionals ends up retaining part of the investment and commitment.
FROM YOUR OWN EXPERIENCE AND FROM THE CONTACTS YOU HAD WITH OTHER ENTREPRENEURS, IS THIS CHALLENGE REAL?
PH: It's not a challenge, it's a fact. Can anyone think of a Portuguese company – that is, with the group's origin and headquarters in Portugal – that has a global dimension!? But let's not get depressed, we are not unique. Even Israel, known as a startup nation, sees its startups move the group's headquarters abroad.
Assuming that Portugal is not going to follow Ireland's example and become a fiscal oasis for companies, it will be very difficult to reverse this trend. We can still have more simplified and predictable legislation, with operators in the most effective public institutions. With that, we may continue to see growth in the number of subsidiaries of global companies and scale-ups in Portugal.
IN TERMS OF ATTRACTING FOREIGN INVESTMENT, AS A SPECIALIST IN THE FIELD, HOW DO YOU ESTIMATE THE COMING MONTHS AND THE YEAR 2023 TO BE?
PH: We live in times of uncertainty. Despite the uncertainty being harmful to investor confidence, Portugal has some favourable conditions in the global market. a) Portugal belongs to one of the largest economic blocks in the world; b) it has a globally recognized strong currency; c) within the Eurozone it is the most distant country physically and economically independent of the conflict in Ukraine and energy crisis; d) it is a safe haven and destination for many expatriates who choose to live here in times of uncertainty; e) to the detriment of the Portuguese and despite high taxes, the cost of professionals in Portugal is among the lowest in western Europe; f) Portugal has a stable government with a governing majority.
Certainly, 2023 will not be the best year of our lives; unfortunately, it will be really dramatic for many companies and citizens exposed only to the local economy, but from an international point of view, Portugal has the conditions to perform better in attracting foreign investment than many other countries. I have little doubt that this investment will continue to grow.
