The Portuguese Motor Vehicle Industry: An Impossible Dream?

Portugal policy makers consider the motor vehicle industry to be critical to the country’s economy because of its potential to offer highly skilled job opportunities and incentives for innovation and research, technology transfer, and investment, although the industry remains small by international standards. Little empirical research exists on the Portuguese motor vehicle industry, and we attempt to partially fill this void by estimating an industry cost function. We find strong evidence of scale economies, an expected result given the low industry volume. An unexpected finding is that capital and labor are complements since much of the international literature regarding the industry finds evidence they are substitutes. An exception is the German industry, and the findings here may be related to the fact that the largest Portuguese motor vehicle producer is Volkswagen AutoEuropa. The significance of this finding is that a lower price for either of these inputs would increase the quantity demanded of both of them. The future appears highly uncertain for the motor vehicle assemblers unless they can achieve sufficient synergies with component suppliers and other global motor vehicle manufacturers to become internationally competitive. The component suppliers may be able to enlarge their international markets, particularly that of Spain, because of its proximity to Portugal.