Chapter 8. High-skilled employment, co-operation with HEIs and innovation in the business sector

Although Portugal has significantly increased its innovation capacity since it joined the European Union, the innovation output of Portuguese businesses have remained at a low level in international comparison, partly due to the dominance of SMEs and the weight of traditional sectors in the economy. Strong efforts have been dedicated to the support of research-based innovation and the upgrading of low-tech small and medium enterprises (SMEs). The government has progressively created a diversified system of intermediary organisations to support SMEs upgrade their innovation capacity and collaborate with academia. They fulfil a wide range of business knowledge transfer and service needs, but most of these organisations have, until recently, operated with fragile business models without systematic public support, which has hindered their ability to fulfil their mission.

The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.

Note by Turkey: The information in this document with reference to “Cyprus” relates to the southern part of the Island. There is no single authority representing both Turkish and Greek Cypriot people on the Island. Turkey recognises the Turkish Republic of Northern Cyprus (TRNC). Until a lasting and equitable solution is found within the context of the United Nations, Turkey shall preserve its position concerning the “Cyprus issue”.

Note by all the European Union Member States of the OECD and the European Union: The Republic of Cyprus is recognised by all members of the United Nations with the exception of Turkey. The information in this document relates to the area under the effective control of the Government of the Republic of Cyprus.

8.1. Introduction

Portugal has significantly increased its innovation capacity since it joined the European Union, but major barriers to economic innovation remain. This calls for co-ordinated efforts in research, innovation and higher education policy to increase the knowledge intensity of the private sector, which consistently supports both the supply and demand for knowledge in a consistent manner. This includes fostering the employment of highly skilled people in the private sector, enhancing collaborative R&D between businesses and HEIs and research units, supporting the creation of new firms, strengthening knowledge-intensive clusters and intermediary organisations that support them, and embedding Portuguese businesses and research units more firmly in international knowledge and value chains. Alongside support for research-based innovation, the upgrading of low-tech small and medium enterprises (SMEs) and the strengthening of managerial skills are crucial mechanisms for increasing the level of business innovation in Portugal.

Five factors are important in supporting the upgrading and diversification of the Portuguese economy towards more knowledge-intensive sectors (Table 8.1):

Opportunities and incentives are in place for co-operation and exchanges between ‘academic’ institutions and staff and individuals and organisations in the private economy and public services.
Strategy and dedicated funding instruments to support high-skill employment and innovation in the private economy and public services are clear, with changes organised to ensure transparency and predictability.
Strategy and policy and funding instruments to support innovation support the goals of international openness and attractiveness, including through attracting Foreign Direct Investment (FDI) and international staff.
Public and private resources allocated to innovation-related activities and support institutions are adequate to needs. Public funding mechanisms for innovation are designed to incentivise effective private investment in research and innovation activities and provide sufficient accountability for use of public funds.
Public policy and funding instruments to promote innovation are designed to accommodate the needs of different types of businesses/organisations/institutions and respond quickly and effectively to changing circumstances.

Against this backdrop, the Review considers two key questions in this section:

1. How can Portugal revitalise its industries, support the emergence of new sectors and strengthen firms’ competitiveness through innovation?
2. How can Portugal ensure that public research and the transfer of knowledge infrastructure both help support a virtuous circle of research and innovation?

8.2. Context

8.2.1. Business R&D and innovation investment

The Portuguese business sector has significantly enhanced its innovation capacity over the last two decades, in particular during the period preceding the 2008 crisis. It experienced the largest increase in business R&D investment (BERD) of all OECD countries, with BERD increasing from 0.11% of GDP in 1995 to 0.75% in 2009, then declining to 0.58% of GDP in 2015 and 0.62% in 2016 in the wake of the crisis. During the period of pre-crisis growth, the concentration of R&D activities in a small number of large enterprises decreased, and the ‘innovation base’ broadened. The number of researchers working in business enterprises reached its maximum in 2011, with 12 198 researchers [Full-time equivalent (FTE)] and has since stagnated, with small increases in 2016 (13 426) (DGEEC, 2017).

Innovation activities remain limited in Portugal, with low knowledge intensity and proximity to the market. About 2 500 Portuguese firms appear to perform research, and about 1 000 benefit from indirect or direct public innovation support schemes (Box 8.1). Portuguese firms principally conduct experimental development and applied research, and venture to a lesser extent into more upstream research, whether internally or through contracts with PRIs.

In small countries, innovation performance and participation in international markets are often closely correlated and reinforce each other. Most domestic firms in Portugal are small and do not participate in international markets. The virtuous circle between innovation and internationalisation has been initiated only in a few sectors of the Portuguese economy, such as shoes, textile, moulding; and in some dynamic start-ups.

Foreign direct investment (FDI) has grown, but remains limited. Multinationals that locate activities in Portugal are typically concentrated in service industries with modest knowledge intensity, such as accounting and human resource management, capitalising on access to good skills at low labour costs. In countries that are well-integrated in global value chains, foreign firms, in particular large multinationals, play a significant role in research and development (R&D) investment and provide a source of learning for domestic firms. Portugal has a few major industrial R&D investments from multinationals, such as Bosch in Braga and Volkswagen Autoeuropa in Palmela. These play an important role at the regional level, co-operating with clusters of local academic and business organisations. However, multinational firms are not sufficiently numerous in Portugal to be significant drivers of economic development at the national level.

The overall industrial structure remains dominated by small and medium enterprises (SMEs) and low- to medium-tech industries and services with low knowledge intensity, which invest less in R&D,1 Research activities in some formerly strong sectors have declined. Telecommunications represented the majority of business R&D investment prior to the crisis, but following privatisation no longer does. The decline in telecommunications investment has not been offset by other sectors, such as information and communication technologies (ICT) and telecommunications, in which the level of investment has remained stable. Promising new sectors, such as space and ocean-related activities, have not altered aggregate patterns of business R&D.

Micro and sectoral dynamics result in a business innovation landscape in Portugal marked by strong regional imbalances. Knowledge-intensive activities are concentrated principally in the Lisbon and Porto areas, and in the North and Centre regions. As in other OECD countries, remote and interior regions of Portugal face challenges of demographic decline and out-migration. Upgrading the knowledge intensity of these regions has been hampered by the low attractiveness of higher education institutions to students and staff from other regions, both as a result of their perceived remoteness and a lack of clear specialisation in areas of excellence.

Box 8.1. The main features of business research and innovation activities in Portugal

How much do Portuguese companies spend on R&D or innovation?

Portuguese firms expenditures on R&D amounted to EUR 1 156 million in 2016, representing 48% of BERD (up from 46% in 2015). R&D personnel was the largest source of R&D expenditures in the private sector (53%), followed by current expenses (31%) and equipment (16%).
Innovation expenditures include a broader range of activities than R&D, such as marketing and organisational innovations, and were estimated at EUR 3 billion in 2016, an increase of 37% compared to 2014.

How do Portuguese companies finance their R&D and innovation activities?

Private R&D in Portugal is overwhelmingly financed by firms themselves: 87% of private sector R&D was self-financed in 2016.
The government financed 4% of private R&D in 2016. Funds from abroad represented 7% of R&D funding to the private sector. The Framework Programmes and Horizon 2020 play an important role as international funders of private R&D.

How many enterprises engage in innovation in Portugal?

One can only estimate the number of innovative companies by crossing various sources of information, each of them using a different definition (R&D, innovation, etc.) or ‘marker’ (e.g., applications to innovation policy instruments).

One indicator of innovation is the number of enterprises active in the innovation-intensive sector, which are more likely to be engaged in technology development. There were 468 enterprises active in high-tech manufacturing sectors and 14 726 in high-tech knowledge intensive services in Portugal in 2014 (respectively 2 668 and 50 116 in Spain). These sectors are not very developed: high-tech and medium-high-tech sectors represented 4% of value-added in 2014, with medium-high tech representing the bulk of this figure.
A second measure of interest is the number of enterprises applying to direct and indirect innovation incentives: about 1 100 firms benefited from the System of Fiscal Incentive for Business R&I (Sistema de Incentivos Fiscais à I&D Empresarial) (SIFIDE) tax credit scheme in 2015 (upward trend since 2011). The same number of companies applied to the National Innovation Agency’s (Agência Nacional de Inovação) (ANI) collaborative schemes between 2015 and 2017.

R&D and innovation surveys can be used to estimate the number of research-active and/or innovative companies:

2 835 companies declared they carried out some R&D activities in 2015 in the R&D Survey.
About 4 094 companies declared at least one product or process innovation in 2015-16 according to the Innovation Survey 2016 (up from 3 395 companies in 2013-14).

Sources: MCTES (2017), Science, technology and tertiary education in Portugal – Perspectives for 2030, Background report to the OECD joint-review of Science, Technology and Tertiary Education in Portugal, draft document, Ministry of Science, Technology and Higher Education.; Eurostat (2018) Science and technology database (last accessed on 27 April 2018) http://ec.europa.eu/eurostat/statistics-explained/index.php/Science_and_technology.; OECD (2017d), Main Science and Technology Indicators, Volume 2017 Issue 1, OECD Publishing, Paris. https://doi.org/10.1787/msti-v2017-1-en; OECD (2017c), Review of national R&D tax incentives and estimates of R&D tax subsidy rates – 2016, Version 12 September 2017, Report for the H2020 project ‘TAX4INNO’, OECD. www.oecd.org/sti/RDTaxIncentives-DesignSubsidyRates.pdf ; DGEEC (2016), Principais resultados do CIS 2014 – Inquérito Comunitário à Inovação, September 2016, Direção-Geral de Estatísticas da Educação e Ciência www.dgeec.mec.pt/np4/207/%7B$clientServletPath%7D/?newsId=113&fileName=Principais_Resultados_CIS2014_29092016.pdf.

8.2.2. Business innovation performance

Business innovation performance in Portugal is limited, principally due to an industrial structure in which SMEs concentrated in low technology sectors play a predominant role in the economy. Despite rising investment in R&D prior to the 2008 crisis, innovation output indicators are lower than for other European countries. Patenting grew rapidly in the decades preceding the crisis, but it is still low by international standards, and most patents originate from public research rather than from the business sector.

Innovation surveys also reveal a post-2008 decline in the proportion of companies that report the introduction of innovation. Among surveyed firms in Portugal, 14.5% report having introduced an innovation into their market, a smaller proportion than in countries such as Greece, Italy, or Turkey – though ahead of Spain and Poland2 (OECD, 2017a). Moreover, Portuguese firms report that the type of innovation in which they engage is, on average, lower in knowledge-intensity (DGEEC, 2016). Business demand for new knowledge that is channelled through collaborative research and employment of high-skilled new recruits (including PhDs) is also low.

Innovation performance is unevenly spread between Portuguese regions. In Portugal as in all EU countries with regions that perform significantly below the European average, the Community Cohesion Policy is an essential source of funds to reduce the territorial economic and social disparities. Structural Funds have notably supported the formation of competitiveness and technology poles and clusters, which have been positively evaluated. However, the project-based nature of Structural Fund investments and their emphasis on research excellence limit their capacity to build sustainable and regionally relevant innovation ecosystems aligned to longer-term specialisation priorities. Stakeholders with whom the Review Team met suggested that national funds are used to compensate regions that are excluded from receiving money from European Structural Funds, which offset, in part, the intended effect of European Structural Funds to close the development gap.

8.2.3. Entrepreneurship

Entrepreneurship activities are well-developed in Portugal. The proportion of men and women involved in setting up businesses in Portugal is slightly above the EU average (Figure 8.1), and these Portuguese men and women own young businesses (between 3 months and 3.5 years old) at a rate significantly higher than EU and OECD averages. Overall, the share of the adult population (18-64 years old) involved in total early stage entrepreneurial activities3 was 8% in Portugal in 2016, more than twice the 2010 share. Youth entrepreneurship is also well-developed: the rate of those 18-30 years old involved in entrepreneurial activities in Portugal (8.2%) is slightly above the European average (7.7%).

Portugal also has a well-developed entrepreneurial culture: entrepreneurship is perceived as a desirable career choice by 69% of the adult population, above the EU average of 56% (EC, 2017). However, entrepreneurial activity and interest in business creation remains, in part, driven by a lack of satisfactory options in the labour market: over 20% of Total Early-stage Entrepreneurial Activity (TEA) was motivated by necessity over 2010-2014, slightly under the EU25 average for the period (OECD/EU, 2017).

Portugal has demonstrated a strong commitment to supporting entrepreneurship, having introduced a number of measures since 2008 to promote business creation across the country, including programmes targeting specific groups such as the youth or the unemployed. In particular, a national strategy for entrepreneurship, “Start-up Portugal” was introduced in 2016. The strategy outlines measures to boost economic performance and job creation in young firms. Portugal has several voucher schemes in place (an incubation voucher, the “start-up voucher” aimed at supporting business creation by the youth). Capacity-building initiatives are also well-developed and include training, coaching and mentoring (OECD/EU, 2017). The “National Incubator Network” (Rede Nacional de Incubadoras) was also created to co-ordinate best practices across the country. Youth entrepreneurship is a core focus of the national strategy and several dedicated programmes provide funding and entrepreneurship training to young entrepreneurs such as the Youth Guarantee Implementation Plan and the Youth Investment Programme (EC, 2017).

Young firms account for much of the new job creation in Portugal, but older firms are relatively small, pointing to a lack of growth after firm entry. Recent government initiatives have aimed to open up additional channels of finance for companies to stimulate growth. These include the new Capitalizar programme, among with other instruments (OECD, 2017c). Strengthening business innovation is a major challenge for Portugal. Public support for business R&D and innovation is mostly indirectly provided through tax credits, although debt financing, e.g. through loans and guarantees of business R&D investments has become more common in recent years. In particular, the recent Start-Up Portugal programme aiming at broadening developing market-based finance for SMEs could help alleviate the credit constraints of SMEs (OECD, 2015a, b).

8.2.4. Advanced skills for innovation and upgrading

Portugal has significantly improved the educational attainment of its population. It now offers a fairly highly-qualified human resource base of graduates and PhDs at comparatively low labour costs. The share of STEM graduates and PhDs is also slightly above the European average. This has been recognised by some international firms, which have established engineering activities in Portugal, for instance in ICT, biotechnology and the automotive industry.

Despite progress in raising the educational attainment of younger age cohorts, the entire adult Portuguese population has a low level of educational attainment when compared internationally. This weakness has compounded since the financial crisis and the subsequent economic recession by the outward flow of skilled adults leaving the country to find professional positions abroad.

Employers in Portuguese firms that require highly trained workers, especially graduates in engineering, report that firm growth may be hampered by skill shortages. Periodic employer surveys indicate that one in four companies with more than 10 employees considers access to the right technical skills a high or very high obstacle to their business activities, second to difficulties in laying off staff. The impact of skilled staff shortages on the capacity of firms to innovate is not well-documented. Non-innovative firms do not consider the lack of qualified staff to be the primary reason for their decision not to innovate (Eurostat, 2018),4 however, econometric analyses indicate that this factor does play a role in firms’ propensity to engage in product and process innovation in Portugal (Madeira et al., 2017). In meetings with the Review Team, senior managers from firms reported that some sectors face problems in finding appropriately skilled staff for their needs, especially engineers. Large firms such as Bosch have implemented targeted training programmes to ensure that they can obtain employees with appropriate skills, and these are sometimes in co-operation with higher education institutions.

Continuing training for adults remains limited and mainly benefits workers with the highest level of educational attainment. In 2016, 9.6% of Portuguese adults reported having participated in some adult learning in the past four weeks (Sofia Pacheco et al., 2017). This was slightly less than the EU28 average (10.8% of adults), but far above the level reached in 2007 (4.4% of adults, for an EU average of 9.2%), due to significant government efforts during the period 2005-2010. Since 2011, the participation of adults in training has decreased, in large part due to the fall in participation in learning opportunities targeting the low-skilled (OECD, 2018).

Demand for PhD graduates in manufacturing and services sectors is growing but remains limited. ANI implemented a dedicated scheme between 1997 and 2007, resulting in 296 PhDs and Masters hired in 177 companies. A similar programme will be resumed in the context of the programme Interface in the near future. Similar incentives, for instance implemented in some regions in the framework of their respective Operational Programme, have experienced a shortage of applications.

8.2.5. Research-industry knowledge exchange

In the decade prior to the financial crisis, industry and academic R&D capacity grew, and partnerships between them strengthened (Heitor and Horta, 2012). However, many sectors of the Portuguese economy, including large firms, carry out their business activities with little or no regard for domestic public research and higher education institutions. This separation between the scientific and private sector communities is reflected, for instance, in the low number of public-private co-publications per million population (30% of the EU average), in the share of patents co-filed between higher education institutions and firms, in the number of citations made in patents, and in the very limited share of higher education expenditures financed by business firms (Figure 8.2). Science-industry collaborations may be difficult to observe and quantify from research inputs or outputs because they often rely on informal channels.

Information provided by innovative firms themselves through innovation surveys confirm their limited co-operation with higher education institutions, in absolute terms and in international comparison (Figure 8.3). Small firms, although they have less co-operative relationships with HEIs than large firms in all countries, fare particularly badly in that regard in Portugal, while large firms are above the average of surveyed countries. The results of the latest Innovation survey, conducted in 2016, confirm these results.

Science-industry partnerships are not only limited in number and scope, they are also in most cases not embedded in formal contractual frameworks. Some noteworthy examples do exist, such as the pharmaceutical firm Hovione, which sponsors a lab for analytical chemistry in collaboration with several polytechnics. Besides the research benefits, this long-term partnership also ensures that graduates from these polytechnics can be trained in precisely those skills that Hovione would expect from its future employees. Moreover, polytechnics can offer short courses using the new equipment, which they otherwise could not afford.

The government recently launched the Collaborative Laboratories (CoLABs) as a new type of legal entity to host long-term, market-oriented, science-industry partnerships. Like the Institut Carnot in France, these entities combine at least one company and one research unit, which together are its shareholders. The partner company must commit its own resources in this joint undertaking, while the FCT is responsible for supporting the R&D unit. The official purpose of these consortia is to create “skilled jobs and economic and social value, by promoting employment through the development of knowledge-based activities, based on the implementation of medium-term research and innovation” (Encarnação, 2017). The “CoLAb Label” is assigned by FCT upon evaluation and is meant to be reviewed every five years.

This new scheme is still at a very early stage, with six proposals gaining approval as CoLABs by January 2018 in areas of national strategic interests (ocean economy, digital transformation, agriculture, and environment). EUR 19 million of FCT funding is earmarked for this scheme for the period 2017-2020, which might translate into a government support of around EUR 1 million annually per entity (or less if new CoLABs are labelled in coming years), to which matching funds from the non-academic partners must be added. Although the needs will differ according to the different underlying projects, this amount represents significant average funding which should allow ambitious research and innovation agendas to "co-develop".

8.2.6. Knowledge transfer infrastructure

Intermediary organisations – such as technology transfer offices and S&T parks – can help overcome the lack of absorptive capacity among traditional SMEs and bridge the gap between firms and academic institutions. This has been demonstrated by international experience, and by Portuguese success stories in the textile, shoe and molding industries.

The Portuguese knowledge transfer infrastructure has experienced gradual expansion and diversification in the past two decades (FCT, 2013; MCTES, 2017), and currently includes the following actors:

Technology centres that collaborate largely with low and medium-tech SMEs located in the North and Centre region, some of which are research-oriented.
R&D centres with in-house R&D. These represent a set of very diverse entities, more evenly distributed across regions and mostly collaborating with high tech SMEs and large companies of low-medium technological intensity.
Science and technology parks, which provide infrastructure to technology-based firms mainly in the North and Centre region.
Technology Transfer Offices (TTOs) and incubators/accelerators.

Technology and R&D centres generated income from national net sales and services during the period 2013-2015 of EUR 14 million and EUR 60 million, respectively. However, they operate with a fragile business model in which systematic public support is absent.

TTO activities focus on venture creation rather than patenting and licensing. TTOs have increased invention disclosures (2013-2015), but these have been concentrated in a few higher education institutions. TTO success stories include, for instance, the Instituto Pedro Nunes (IPN) in the University of Coimbra, a private-public incubator and accelerator under private management. It has been engaged in a technology transfer initiative to promote knowledge diffusion from large European agencies, such as The European Organization for Nuclear Research (CERN), European Southern Observatory (ESO), and the European Space Agency (ESA) to Portuguese firms, with a focus on the space industry. The University Technology Enterprise Network (UTEN), which has its origin in the international partnership signed by the government of Portugal with the University of Texas/Austin brings together the most internationally oriented technology transfer offices to strengthen their commercialisation of domestic research activities via joint activities and exchange of good practices (including through training of Portuguese technology transfer officers by American specialists).

8.2.7. Government direct and indirect support to business innovation

Business firms largely rely on their own resources to finance their innovation activities. Apart from the R&D tax credit, about 4% of business R&D expenditures have been financed through government funds in 2016.

Among firms reporting a product or process innovation during the previous three years, about one-quarter of firms, and one-half of large firms, reported benefiting from public support to innovation, near the OECD average.

Direct innovation financial incentives provided to business firms are financed through Structural Funds, particularly in the three “convergence” regions of North, Centre and Alentejo, and are managed by one of the three principal agencies active in the area of business support: ANI, IAPMEI and IACEP (Table 8.1).

The portfolio of innovation policy instruments used by the government in Portugal appears comprehensive and addresses all stages of the innovation cycle, from upstream research in collaboration with academic institutions to the support for international marketing of new innovations.

FCT is the main funding agency for basic and applied research. Few of its competitively allocated funds – about 1% – go to firms. Private firms may obtain FCT grants only in collaboration with HEIs, which occurs infrequently. Most FCT grants obtained by firms have been allocated to companies active in IT and computing-related areas (FCT, 2013).

The R&D tax incentive scheme SIFIDE (System of Fiscal Incentive for Business R&I) (Sistema de Incentivos Fiscais à I&D Empresarial) (EUR 194 million in 2015) is the main instrument used by government to support business R&D. In 2015 its share of GDP was twice that of direct funding instruments (Figure 8.4).

Table 8.1. Main policy instruments to support business innovation
	FCT	ANI	IAPMEI	AICEP
Business innovation and upgrading		R&D tax credit (SIFIDE)	Individual innovation grants for SMEs	Individual innovation grants
Collaborative research	Basic and applied research collaborative grants	Collective innovation grants (co-promotion projects)		Collective innovation grants (RCI R&D projects)
	Collaborative laboratories (CoLABs)
Knowledge transfer and entrepreneurship	Support to knowledge transfer via the Technology Office	Support to network of intermediary organisations (Interfaces) Support to knowledge transfer in companies (inc. IP) Support to technological entrepreneurship	Support to knowledge transfer in SMEs Support to technological entrepreneurship (StartUP Voucher and Visa)
Advanced skills for research and innovation	PhD and post doc grants Support to employment of PhD holders in business firms
Internationalisation of domestic research and innovation	Support to participation in the research and innovation international networks Support to international research programmes	Support to participation in the research and innovation international networks Support to SMEs’ internationalisation	Support to participation of SMEs in the research and innovation international networks	Wide range of instruments to support the internationalisation of companies
Demonstration and testing of innovation	Demonstration of advanced technologies and pilot lines	Demonstration of advanced technologies
Networks of innovative companies		Support to network of innovative companies (Mobilising projects)	Support to poles and clusters
Note: This table does not cover academic research support schemes, mainly provided by FCT (see chapters 2 and 3).
Sources: MCTES (2017), Science, technology and tertiary education in Portugal – Perspectives for 2030, Background report to the OECD joint-review of Science, Technology and Tertiary Education in Portugal, draft document, Ministry of Science, Technology and Higher Education.
JRC (2016), RIO Country report 2015 : Portugal, Joint Research Committee, European Commission, http://publications.jrc.ec.europa.eu/repository/bitstream/JRC101210/pt_cr2015.pdf.; Caldeira, J. (2017), Knowledge & Collaborative Innovation – The Role of the National Innovation Agency, Presentation at the OECD Workshop, Lisbon, 25 May, ANI.

The Portuguese tax credit, like that of Korea and Spain, aims to reward firms for maintaining and increasing their level of R&D investment by combining volume and incremental credits. Portugal has reformed the SIFIDE scheme in order to improve its attractiveness and effectiveness, and its tax incentives are currently among the most generous among all OECD countries. This generosity applies to both SMEs and large firms, and to both loss-making and profitable firms (OECD, 2017c).

The portfolio of policy instruments supporting business R&D has evolved across three cycles of Structural Funds, with increasing focus on spurring knowledge-based economic development. Analysis of the period 2000-2020 shows that:

Structural Funds initially focused on advanced training of human resources, research infrastructures and equipment.
There has been a marked increase in the support to business innovation and reduction in support to research activities. Research is now most often supported as part of collaborative research projects, or through national funds.

8.3. Assessment

Policy issue 8.1. The Portuguese innovation policy mix needs a careful balance between the support to high- and low-tech business firms

The economic success of many Portuguese firms has been achieved by incremental innovation and learning by doing rather than by science-based innovation.

As in many OECD countries, the support to science-industry collaborations and science-based start-ups ranks high in the research and innovation policy agenda. More should be done, including at the level of HEIs to provide the right set at incentives for greater engagement with industry at institutional and individual levels (see section 0). However, these initiatives, although essential, concern only a limited number of companies with the sufficient ‘absorption capacity’ to collaborate with academic institutions. The new CoLAB scheme for example is an important new development that could alleviate the problem of the lack of institutionalisation and long-term commitment of partners. It is however in practice limited to industrial partners that can afford multi-year financial commitments and have already built relationships with the academic institutions. Structured research-industry collaboration between industrial partners with little prior research and innovation experience and polytechnics, for example, might usefully complement the programme.

Current government policies in support of science-industry relationships and high-growth start-ups are not sufficient. Further support for low-technology firms is essential for further business innovation, and intermediary organisations will be key to this support. Tapping into the potential of firms that do not yet significantly innovate and serve mainly regional markets is a major opportunity that has not been fully addressed. The economic success of many Portuguese firms has been achieved by incremental innovation and learning by doing rather than by science-based innovation. It is therefore essential that public support covers a wide range of types of innovation, from the knowledge-intensive projects based on internal R&D and collaboration with academic research to rather informal and incremental innovation activities.

A key factor of success will therefore be the ability of Portuguese authorities, in close interaction with the research and innovation communities, to set up a co-ordinated, two-fold approach which supports business innovation from both sides of the supply and demand of knowledge:

An intensive margin approach aims to deepen the knowledge-intensity of medium-high and high-tech industries and services.
An extensive margin approach aims to support the upgrade of the innovation capacity of each sector, including lower-tech ones. Key to this process is the provision of systematic, hands-on and stable support to business innovation. Tapping into the potential of firms that do not yet significantly innovate and serve mainly regional markets is a major opportunity that is only imperfectly addressed.

Policy issue 8.2. There are emerging opportunities to support business innovation that merit well-designed policies

Although Portuguese business innovation capacity is limited, past accomplishments and positive trends exist, and merit well-designed policy support. For example:

Company R&D investment resumed growth in 2016. Provisional data show that the BERD increased from 0.58 to 0.62% of the GDP, representing an increase of EUR 120 million).
Some traditional industries have developed quite successfully by raising the added value of their activities, partly based on the use of new technology and targeting of higher end markets. After a significant downsizing in the shoe industry between 1994 and 2009, Portugal became the 11th largest shoe export country in the world, with the second highest average price per pair of shoes, just behind Italy, with a workforce of 35 000 people (Marques and Guedes, 2015). Other labour-intensive sectors such as textiles and clothing have also shown productivity gains in recent years.
The technological balance of payments has been steadily increasing since the late 1990s and is positive again since 2012, after a significant decline due to the financial crisis (OECD, 2017d). This is an indication that Portugal has developed more endogenous technology.
Business take-up of government innovation support has increased, as is demonstrated, for example, by the first calls for collaborative research organized by ANI (Caldeira, 2017).5 Furthermore, financial incentives attract each year a significant proportion of companies that had not applied to these instruments in the past, which tend to show that a certain industrial renewal or upgrading is underway. However, although above 50% during the period 2014-16, the rate of newcomers has been decreasing steadily since the period of rapid expansion that preceded the crisis (MCTES, 2017). Recent positive trends can also be observed in the participation of companies in EU programmes, either H2020 or SME-specific instruments.

Portugal has implemented a comprehensive portfolio of policies offering direct support for business innovation, largely co-financed by the Community Cohesion Policy. However, the project-based nature of Structural Fund investments and their emphasis on research excellence limit their capacity to build sustainable and regionally relevant innovation ecosystems aligned to longer-term specialisation priorities. Although hard to assert with certainty since only very few of these schemes have been assessed (beside some evaluations conducted at overall programme level in the framework of Structural Funds), the fact that the innovation support is often spread thin among a variety of business firms and intermediary organisations also probably limits their effectiveness. We estimate that, on average, EUR 490 000 was allocated by ANI to collaborative projects in 2015, equal to EUR 65 000 for each participating entity, half of which were business firms. Individual R&D projects managed by IAPMEI were substantially larger, at EUR 750 000 per project and EUR 255 000 per participant (calculation based on MCTES, 2017). Only very few of these schemes have been assessed, beside some evaluations conducted at overall programme level in the framework of Structural Funds.

Policy issue 8.3. Cluster-based approaches are instrumental to support innovation, including in less developed regions

Several examples in Portugal and elsewhere point to the importance of regional networks to support the innovation upgrading of firms in low-tech industry and service sectors, even in remote areas.

The added value of some innovation support schemes lies in the technical services they provide or in networking effects, rather or in addition to direct financial support. This is the case of ANI’s mobilising projects (Programas Mobilizadores). Business leaders having benefitted from this scheme suggested to the review team that the primary benefit of these broad projects was the stimulus they provide to the development of networks within a sector, linking one part of the “value chain” to another, rather than the limited funds received by each participant. Also, as shown by one rare example of specific scheme evaluation, Structural Funds have positively supported the formation of competitiveness and technology poles and clusters.

These initiatives can also have a positive effect to alleviate regional imbalance in innovation, a major concern for Portuguese authorities. However, there are important limitations to what research and innovation policies can achieve to counter the strong territorial concentration dynamics. The attractiveness for knowledge-intensive firms and highly qualified individuals of the peripheral regions depends on a wide range of economic and socio-cultural factors. These factors are slow to change and range far beyond the research and innovation policy fields, such as the population decline in the interior of the country, which will increase in the future. Stronger and wider co-ordination between policy fields will be needed to address these issues and ensure that research and innovation policies contribute to alleviate economic and social development imbalances.

Policy issue 8.4. Further support for intermediary organisations in low tech industry and service sectors is needed

Cluster-based initiatives often develop around intermediary organisations, such as technology centres, or higher education institutions, particularly polytechnics and regionally profiled universities. The government has progressively created a diversified system of intermediary organisations (transfer offices, technology centres, S&T parks, incubators, poles and clusters) to fulfil a wide range of business knowledge transfer and service needs, from science-based to very incremental and problem-solving innovations. It has been documented that some of these intermediary organisations, in particular Technology Centres, have been in several cases very instrumental in this upgrading process. They not only gradually provided the necessary technologies and skills, but also promoted and supported collective actions among these – sometimes competing – firms. This upgrading process came, however, at the price of significant job losses in these sectors, as exemplified, for instance, by the shoe industry.

Some intermediary organisations received Structural Funds when launched, but have since received no basic funding. This has resulted in more consulting engineering and other commercial activities, and less “upstream” applied research and innovation-collaborative activities. The 2017 Interface Programme assists some intermediary organisations in rebalancing their activities between risky collaborative applied research and innovation activities and commercial activities. The programme provides multi-annual basic funding, measures to support the hiring of PhDs by these organisations in collaborations with industry, and financial support for the acquisition of new equipment. This institutional funding, if limited to the funding of public service missions and linked to regular evaluations, could have a significant effect on upgrading the domestic firms' innovation capacity.

In some countries, including the United States, the United Kingdom and several Latin American countries, specific institutions have been set up to provide various ‘innovation support services’ to SMEs, most often in a regional context.6 These services include technology transfer and diffusion services (support in the form of advice and counselling for technology transfer and uptake by SMEs) as well as innovation management and non-technological innovation services (innovation management advice, audits to identify needs, innovation coaching, design and support for marketing innovative products, etc.) (OECD, 2011).

Policy issue 8.5. Mismatches between the supply and demand of qualified personnel may be hampering innovation

Portugal has improved the level of qualification of its population over the past decades. It now offers a fairly-qualified human resource base of graduates and PhD holders and low labour costs than other economies in Western Europe. However, there are some mismatches in graduate qualifications and industry needs. About 25% of young workers in Portugal were considered overeducated for their current positions in 2012; this is the highest rate of OECD countries for which data was available (ILO, 2014).7 Specifically, there appears to be an overemphasis on academically-oriented PhDs relative to engineers or more professionally-oriented PhDs.

This originates, in part, in secondary education, where more practice-oriented curricula are not held in as high esteem as theoretically-focused curricula (chapter 5). As consequence, practice-oriented higher education, e.g. at polytechnics, tends to be perceived as less attractive than academic education at universities.

Higher education and PhD training even in engineering disciplines do not consistently develop close links with industrial practice. Academic requirements seem to be difficult to reconcile with the need to prepare graduates for later employment outside of the public research system, and incentives for academics to intensify their collaborations are limited.

Policy issue 8.6. The knowledge exchange infrastructure should be strengthened to improve connections between tertiary education institutions (TEIs) and industry

Portuguese industry, public research and higher education institutions are not consistently connected to one another in a close and beneficial way. Data and the interviews performed in the course of this Review point to these factors:

The nation’s industrial structure is composed of SMEs in low to mid-tech activities for which the ‘knowledge gap’ between research carried out in academic institutions and firms is too wide to allow fruitful interactions, or even simply to identify the needs for such interactions.
Public research is strongly oriented towards scientific criteria, and tends to be weakly oriented to the needs of the private sector. There are weak incentives for commercial collaboration on the side of higher education and research institutions at the institutional and individual researcher level. Despite progress in recent years, academic institutions and researchers still benefit more, in terms of funding or career advancement, from publications and citations than from research that is coupled to innovation. Moreover, Portuguese funding agencies have a tradition of ‘neutral’ research policy, i.e. without formal strategic orientations of the calls for proposal for instance. Applied research financed under Portugal2020, hence subject to the Smart Specialisation Strategy, has alleviated this problem only to a certain extent since the excellence-based section criteria remain prevalent here as well.
Structured and institutionalised partnerships between HEIs and industry are infrequent, as demonstrated by the very limited share of higher education expenditures financed by business firms, although there are some notable examples. The new CoLAB scheme is an important new development that could alleviate this problem of the lack of institutionalisation and long-term commitment of partners, and be a channel to orient research towards economically and socially relevant objectives. Initiatives from Bosch and Hovione could also serve as role models for other companies or wider schemes. However, they also demonstrate that their main research partnerships are international rather than domestic, and that building such domestic partnerships requires years of private investment and public support.
Practice-oriented research, undertaken in particular in polytechnics, is not recognised at the same level as academic research, either by the majority of students and researchers or by public authorities. Recent initiatives such as the Programme for the Modernisation and Promotion of Polytechnics attempt to change this mind-set.

Technology transfer offices and science and technology parks can help bridge the gap between firms and academic institutions. This has been demonstrated by international experience, and by several Portuguese ‘start up’ success stories. However, TTOs have often limited budgetary and human resource. Studies have shown that the performance of knowledge transfer organisations and services is positively linked to the size of the higher education institutions to which they are connected. The University Technology Enterprise Network (UTEN) is an interesting initiative in that regard as it brings together the most internationally oriented technology transfer offices to strengthen their commercialisation of domestic research activities via joint activities and exchange of good practices (including through training of Portuguese technology transfer officers by American specialists).

Some countries have gone further and experimented with new approaches to strengthen knowledge transfer institutions and reach critical mass and high quality of services, for instance via the creation of new models such as technology transfer alliances (TTAs) which bundle the resources and standardise the practices of some TTOs.

8.4. Recommendations

Recommendation on providing resources to upgrade innovation capabilities

8.1. Establish regional innovation platforms to provide domestic SMEs easy access to critical resources – such as information, expertise, and equipment – for upgrading their innovation capabilities.

Efforts should be devoted to enhance the density of relationships in regions between domestic firms, higher education institutions (particularly polytechnics and regionally oriented universities), and the various intermediaries. This will require local and regional networks with a clearly acknowledged node offering a broad range of innovation services adapted to local needs.

The core of these networks could take the form of a permanent (rather than project-based) local platforms, i.e. ‘light’ co-ordination structures that gather on one site the competencies and offer of services of multiple partners (HEIs, Technology centres and various other intermediary organisations, consulting and engineering companies, individual experts, local administrations, etc.). Although not very formal (with a status of not-for-profit association for instance), it is essential that these platforms be resourced with some dedicated experienced staff and equipment (e.g. for metrology and testing) with the capacity to support the innovation activities of local companies. Different models exist, from the various types of regional innovation agencies (OECD, 2011) to technology-focused extension service organisations.

Emulating the best international practices, their activities should include not only specific hands-on support activities to individual (or groups of) SMEs (technical assistance and consulting, interface between experts, from academia and industry) but also public mission services (provision of information, awareness-raising, promotion of innovation, general capability building, etc.).

The public mission services provided by the platforms should be financed by the government on both the supply and demand sides:

on the supply side, the platform needs permanent funding to set, operate and maintain the needed skills and equipment
on the demand side, incentivise companies to use these services, for instance using ANI’s current R&TD Vouchers.

The twofold mission of regional innovation platforms
Public mission background work	Specific support to SMEs or groups of SMEs/joint projects
– Provision of information on opportunities for improvement in existing technologies, best practices, international trends, relevant regulations, business networks, opportunities to become government suppliers and other support to contractual arrangements – Awareness raising – General capability building – Stimulation and/or running of networks and clusters – Node for local/regional partnership – Promotion of internationalisation, promotion of foreign investors – Facilitator for sharing scientific and technical equipment – Maintenance of database of experts	– Benchmarking of companies in the industry at the national and international levels to gauge performance level – Technical assistance and consulting in the context of innovation/improvement projects designed individually for interested companies (including identification of needs) – Training of plant and administrative staff for the effective use of technologies more advanced than those previously used by the company – Provision of services to a group or network of companies with common needs and challenges that are not directly related to competition among them – Joint projects of companies and public and academic laboratories for solving specific problems associated with the companies’ products or processes – Advice on developing new strategies for the company and assistance in diagnosing and managing impending changes during implementation
Sources: Adapted from OECD (2011), “Maximising the impact of regional innovation agencies, https://doi.org/10.1787/9789264097803-9-en; Rogers (2013), “Technology extension services”.

The twofold mission of regional innovation platforms

Public mission background work

Specific support to SMEs or groups of SMEs/joint projects

– Provision of information on opportunities for improvement in existing technologies, best practices, international trends, relevant regulations, business networks, opportunities to become government suppliers and other support to contractual arrangements

– Awareness raising

– General capability building

– Stimulation and/or running of networks and clusters

– Node for local/regional partnership

– Promotion of internationalisation, promotion of foreign investors

– Facilitator for sharing scientific and technical equipment

– Maintenance of database of experts

– Benchmarking of companies in the industry at the national and international levels to gauge performance level

– Technical assistance and consulting in the context of innovation/improvement projects designed individually for interested companies (including identification of needs)

– Training of plant and administrative staff for the effective use of technologies more advanced than those previously used by the company

– Provision of services to a group or network of companies with common needs and challenges that are not directly related to competition among them

– Joint projects of companies and public and academic laboratories for solving specific problems associated with the companies’ products or processes

– Advice on developing new strategies for the company and assistance in diagnosing and managing impending changes during implementation

Sources: Adapted from OECD (2011), “Maximising the impact of regional innovation agencies, https://doi.org/10.1787/9789264097803-9-en; Rogers (2013), “Technology extension services”.

Their beneficiary targets should include SMEs with limited in-house innovation capabilities that rarely co-operate with academia, do not hire highly skilled staff and seldom use shared equipment. These companies generally do not innovate due to a lack of entrepreneurial culture, skills, and incentives, or their inability to identify innovation opportunities.

Several organisations deliver some of these activities, including polytechnics, technology centres (and other intermediary organisations), Clusters and Poles, and networks financed by ANI’s Mobilizing Projects. Building on the experience and resources of these organisations, the added value of the regional innovation platforms lies in their systematic approach and the wide range of services they would provide.

The precise composition and status of these platforms is beyond the scope of this Review. It should result from negotiations between national and regional authorities and the existing providers of some of these services.

Different options exist, including creating platforms within or in close connection with polytechnics, which could be the backbone of these platforms in each of their respective speciality. Several of the polytechnics the Review team visited have already engaged in significant collaborations with regional industries and services but these remain often on a limited scale. These institutions should be provided sufficient support and incentives to become acknowledged as key providers of research and innovation services in companies.

Recommendation on supporting efforts to strengthen local development

8.2. Continue upgrading polytechnics and regionally-profiled universities, supporting their capacity to further develop as ‘practice-based knowledge-intensive institutions’ dedicated to local development

Following a thorough review of their capabilities concerning linkages with industry partners, the most dynamic polytechnics and regionally profiled universities should be supported and incentivised to strengthen their profile in enhanced professional education. This profile would include short courses on emerging technologies, digitalisation, innovation management or other matters of primary relevance to industry, collaborative research and, more generally, the types of innovation support services needed in the regional innovation platforms. This would allow them to play a more extensive role in the provision of professional skills to support the upgrading of industry and services than they currently do.

The broadening of their range of missions and corresponding activities should be encouraged according to local needs, e.g. special forms of staff training geared towards the needs of clusters (on innovation, intellectual property (IP) management, digital transformation, internationalisation, etc.) and other support services to local companies. The type of public support they receive, currently focused on innovation projects in a rather narrow sense in the framework of the Structural Funds, should be adapted to this broadened portfolio of activities.

These HEIs could be incentivised to provide enhanced professional education through for instance institutional evaluation and performance contracts, in close connection with their research activities. Regarding Polytechnics specifically, the on-going specific FCT support to their research activities in collaboration with industry should be continued.

Recommendations on intermediary organisations to provide knowledge exchange and innovation services

8.3. Ensure that intermediary organisations have a sufficient level of guaranteed multi-annual funding to maintain and expand their networks, infrastructures and support services

Intermediary organisations (clusters, technology centres, applied research centres, etc.) fulfil various tasks to support innovation in firms and public organisations. Some of these tasks have the nature of public mission and should therefore be funded via stable state or EU funding (at a level of 20 to 30% of their turnover, as most of their counterparts with which they increasingly compete in Europe) in order to avoid significant drift toward more lucrative commercial activities (engineering consulting, etc.).

The government has recently announced the launch of the Interface Programme, which includes several support schemes (including a share of basic funding) for selected ‘labelled’ intermediary organisations. This programme should be implemented and maintained on a continuous basis for intermediary organisations that have successfully fulfilled the objectives announced in their development plans.

8.4. Support the sharing and pooling of resources among knowledge transfer organisations

The sharing and pooling (‘mutualisation’) of knowledge transfer services of different institutions should be promoted in order to encourage critical mass of project deal flows and strengthen the specialised expertise of internal staff of these organisations.

Various models of such groupings and partnerships –for instance the Technology Transfer Alliances – exist and could serve as examples [e.g. Innovation Transfer Network (ITN) in the United States, and Sociétés d'Accélération du Transfert de Technologies (SATT) in France. These initiatives differ according to the methods to mutualise knowledge transfer services, from the creation of networks and consortiums where some resources and shared and exchanges encouraged, to the merger of TTOs. The models also vary according to the logic of mutualisation, regional (one TTO to serve all universities and research institutions in a given region) or thematic (specialised ‘hubs’ of TTOs in specialised thematic areas).

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Notes

← 1. In 2015, low- to medium-tech industries and low knowledge intensity services accounted for respectively 30% and 8% of the BERD.

← 2. Portugal fares better in international comparison when considering only firms active in services.

← 3. Creating and managing businesses under 42 months old.

← 4. Only about 3% of non-innovative firms consider the lack of qualified staff as a very important barrier to innovation, a proportion that is lower than the EU average. http://ec.europa.eu/eurostat/web/science-technology-innovation/data/database.

← 5. 5. The number of companies included in the proposals to the first call was multiplied by respectively 3 and 2.5, representing 270 and 608 companies willing to participate in collaborative research.

← 6. 6. The long standing and positively evaluated Manufacturing Extension Partnerships in the United States (Robey J. et al., 2018) and the former Manufacturing Advisory Services in the United Kingdom. Some of the Catapult Centres in the United Kingdom now provide such ‘extension’ services.

← 7. This indicator of over qualification, here defined as the percentage of workers having more years of education than the job requires, is based on the 2012 European Social Survey.

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