Portugal, Corticeria Amorim, and the R&D Dilemma
By Lulwa Taqi
The Portuguese Business Environment
Portugal, a founding member of the North Atlantic Treaty Organisation (NATO) and a member of the European Union (EU), was once a global force during the 15th and 16th centuries. However, the country lost most of its wealth and status because it didn't have the foresight to invest its wealth domestically. Retrospectively, had they had their vision intact, they could have developed and designed a more robust infrastructure.
After its accession into the EU, the Portuguese economy benefited from large inflows of private capital and direct investment. However, after the euro-zone debt crisis of 2009, the Portuguese economy suffered for a prolonged period because of the conservative measures that the government took. More recently, it seemed like Portugal has finally started to learn from its mistakes.
Last year, its Gross Domestic Product (GDP) grew above the Eurozone mean, and it started 2020 on the right track. In 2019, for the first time in 45 years, the government declared a budget surplus. As an open economy heavily dependent on exports and tourism, Portugal has been working to diversify its economy. They did so by increasing activities in information technology and science. It has gradually started introducing and implementing ambitious plans to encourage R&D and support local businesses looking to expand globally. Corticeira Amorim is one of the country's biggest success stories.
Corticeira Amorim’s Origins & Growth
The origins of Corticeira Amorim dates back to 1870; this year, they marked their 150th anniversary. According to their website, they are the leading producers and suppliers of cork stoppers worldwide. By 2018, the company has sold 5.7 billion units of cork stoppers, which accounts for 44% of the product's worldwide market.
They started their business in 1870 by specialising in the production of cork stoppers, and have since expanded their product line. Portugal produces almost half the world's output of commercial cork. Its exports over recent years have accounted for around 70% of world trade. The company initiated a vertical integration strategy in 1935, which changed them completely.
They eliminated the upstream suppliers by purchasing the raw materials needed themselves and transforming the materials into usable cork. They have diversified, and now the company is divided into five different business units. These include Raw Materials, Cork Stoppers, Floor and Wall Coverings, Composite Cork, and the Insulation of Cork.
The company actively purchases and stores cork. It also produces and supplies various types of bottle caps, specifically serving the wine industry. More recently, the company has started to innovate and differentiate its operations by integrating the pure values of cork as a material with advanced technologies. This has helped them to produce a range of high-quality and versatile floor and wall covering solutions.
Corticeira Amorim's business unit for Floor and Wall Coverings operates in more than 80 countries. Its Composite Cork business unit is the company's most technologically advanced area. The business unit employs surplus cork to redesign everyday essentials sustainably. The department has developed an impressive portfolio of incredibly intelligent materials for various industries. Its Insulation Cork segment gives construction companies and designers worldwide an alternative, as cork has proven to be a better insulator and lasts longer than the industry standard.
Many have attributed Corticeira Amorim's success to three main factors: its fostering of an innovation culture, its sustainable competitive advantage, and Portugal's business environment. According to its 2018 Sustainability Report, Corticeira Amorim spends about €7.5 million in what they call Research, development, and innovation (R&D+I) per year. R&D+I is central to Corticeira Amorim's business development and value creation. Each of Corticeira Amorim's business units has its own R&D+I departments to solve their exclusive problems and develop new products.
Corticeira Amorim, through internationalization, has vertically integrated its value chain, allowing them to reduce transportation costs, improve supply chain coordination. This provides them with more opportunities to differentiate because they now have increased control over inputs. Corticeira Amorim operates 12 industrial plants worldwide devoted to raw materials, 23 worldwide industrial plants devoted to cork solutions, 52 distribution companies, 10 joint ventures, and 254 main agents. This kind of diversification gives them an advantage in terms of placement.
Innovation & Regional Development
In the last three decades, innovation has become a prerequisite for regional development. As we understood it before, innovation seemed to encompass the product, process, and, to some extent, organizational innovation as it relates to the firm itself. But today, the definition is much broader; it includes social and institutional innovation at the industry and national level. Since its ascension into the EU in 1986, Portugal has received a substantial amount from the EU. This fund was aimed at helping, modernizing, and investing in undeveloped and neglected areas.
It's important to note that the enlargement waves in the 1980s of Greece, Portugal, and Spain, added poorer and more agriculturally oriented countries to the diverse group. Eventually, these policies led to the creation of the Structural and Cohesion Fund (ESCP). The ESCP, eventually, became increasingly dependent on wealthier members' support. In each enlargement phase, the EU has found itself needing to create new institutions to accommodate the integration of more diverse member countries.
Portugal’s Innovation Policies
The Portuguese government has understood that innovation is a critical factor in the competitiveness of firms and the region. It has always tried to develop an integrated policy for innovation systems (science, technology, and innovation). Regardless of the policies implemented, Portugal has struggled to create a coherent and harmonized system. In recent years, its policy framework in terms of R&D expenditure and innovation seems to be heading in the right direction.
The Digital Portugal Agenda (APD) is a strategic tool for promoting the digital economy and is aligned with the priorities laid out in the Digital Agenda for Europe and the Europe 2020 strategy. Two out of the six areas of priorities outlined in the agenda are:
1) Investment in research and development (R&D) and innovation
2) Entrepreneurship, and internationalization of the ICT sector
Portugal's innovation policies seem to focus on sustainable growth, especially related to the production of tradeable and internationalized goods and services. The Operational Competitiveness Program (COMPETE) introduced by the Portuguese government aims to further improve the Portuguese economy's competitiveness in the global arena. Like the APD, COMPETE encompasses areas such as innovation, scientific and technological development, internationalization, and entrepreneurship. One of the most relevant aspects of the program focuses on promoting increasing exports through the direct support for the internationalization of Small and Medium-sized Enterprise (SME), through the employment of aggressive promotion initiatives. These initiatives ensure the successful penetration of SMEs into the global market, the use of digital channels and the favouring of nontraditional markets and segments.
The economist Robert Solow published a paper in 1956 titled, "A Contribution to the Theory of Economic Growth." The Solow growth model stated that innovation and R&D are critical for economic growth. Solow found that between 1909 and 1949, technical progress had accounted for about 51% of the annual growth in GDP in the US. However, many firms and governments don't invest heavily in this department because R&D's output is uncertain and non-excludable.
Typically, firms and governments prefer to let other firms discover successful new technologies and then copy them. This is incredibly inefficient because it completely restricts innovation and undermines the very definition - to always seek the next best thing. If everyone is waiting on the other, the outcome is not optimal or beneficial to society as a whole. Hopefully, moving forward, companies like Corticeira Amorim can break this trend and move away from this type of thinking.
Portugal's business environment is not perfect; it still has a long way to go. Because of the country's focus on low-technology industries, Portugal's public R&D expenditure is still below the OECD median. However, it is on the right track. Portugal's policies continue to promote technology-based entrepreneurship, fiscal incentives for R&D, venture capital funding, and additional financing to promote SMEs' internationalization and competitiveness.
Corticeira Amorim provides an excellent case study for companies trying to stay relevant in the modern age. Governments and companies worldwide need to look at Portugal and Corticeira Amorim as proof of how successful businesses can be when giving them the right incentives to innovate and expand globally.
Lulwa Taqi is an intern at M74 from Kuwait. She is a recent graduate of Pace University in New York City, where she earned a bachelor’s degree in International Management and Economics. Her interests include the European Union’s integration policies, the Middle East’s geopolitical climate, and international trade.
The views expressed above are those of the author and do not reflect the official position of the M74 Group, which remains neutral on all matters. Publishers assume no liability for content.