Foreword

The COVID-19 pandemic hit countries and regions hard in the OECD and European Union (EU) area and beyond. The impact has been very uneven across places, reflecting differences in health and economic resources, and differences in disruptions of business activities and global value chains (GVCs). As economic prospects brighten but high uncertainty remains, national and subnational governments aim to build back better and lay the foundations for more resilient, sustainable and inclusive growth, across all regions.

This will require higher productivity and more innovation, as well as greater knowledge, technological and skills diffusion across heterogeneous places and firms. Two levers of productivity and innovation will need to be strengthened: small and medium-sized enterprises (SMEs) that constitute the industrial fabric of many regions and countries, and foreign direct investment (FDI) that contributes to the knowledge base and capital stock of host countries and regions. Linkages between these two levers also need to be strengthened. FDI can help SMEs increase productivity and innovation, provided diffusion channels and supportive conditions enable spillovers. In turn, SMEs and their innovation capacities are an important determinant for FDI location decisions. Together these can create a virtual circle of spillovers that foster higher SME productivity (and cost effectiveness) and in turn, through upstream integration into the supply chains of MNEs, higher competitiveness of MNEs.

This report provides an assessment of FDI-SME linkages and spillovers in Portugal, and proposes a number of policy options to improve these spillovers. It provides a diagnostic of enabling conditions for FDI diffusion to domestic SMEs and identifies the extent to which different FDI-SME diffusion channels are at play in Portugal. Building on this assessment, the report looks at the institutional and governance framework and policy mix in place for enhancing FDI-SME diffusion in the country. The final chapter of the report looks at FDI-SME spillovers and related policy approaches through a regional lens, focusing on the regions of Alentejo and Norte.

The report contributed to the development of a multi-year project supported by the European Commission to boost productivity and innovation in EU countries and regions through stronger FDI-SME linkages and ecosystems. The report is jointly developed by the OECD Investment Committee and the OECD Committee on SMEs and Entrepreneurship and contributes to their respective FDI Qualities Initiative and work on “Global value chains: Seizing the opportunities for SMEs”.