Preface
Like many other countries, Portugal has been strongly affected by the global economic slowdown related to the COVID-19 pandemic, reflecting in large part a significant population of micro-firms with limited capacity to adapt to stringent containment measures, especially in the tourism sector, as well as relatively high exposure to disruptions in global value chains.
Although the recovery is now in process, with GDP expected to return to pre-crisis levels by mid-2022, there is considerable scope to strengthen the recovery, and reduce vulnerabilities to future shocks by revitalising progress Portugal has made in recent years in developing a dynamic entrepreneurial ecosystem. Significant potential exists to leverage on its population of small and medium-sized enterprises (SMEs), responsible for 68% of value added and 60% of gross exports. SMEs in Portugal are on average relatively more innovative and digitised than those in many other OECD economies. Portugal has also seen significant growth in foreign direct investment (FDI) in export-oriented manufacturing over the past decade, motivated by relatively low labour costs and a skilled workforce, a strong SME sector with research and development capacities, and good infrastructure. This has supported the creation of value chain networks involving multinational enterprises (MNEs) and domestic SMEs, raising the opportunities for knowledge and technology spillovers in the domestic economy.
Not all firms and locations, however, have the same potential to successfully integrate into these networks and in turn boost competitiveness, productivity and inclusiveness. Public policy interventions can enhance the positive spillovers of FDI for SMEs and the broader economy, but such interventions require concerted action. To ensure that SMEs can absorb the benefits of FDI, policymakers need to understand the drivers and factors that can foster stronger SME-MNE value chains and how public policies at national and subnational levels can promote them.
Action is needed, particularly now, as Portugal considers policy options to ensure a strong and resilient post-COVID recovery. It should build on its ‘Portugal 2020’ national programme, which provides a comprehensive framework for implementing EU Structural and Investment Funds, to strengthen policy coherence and coordination. This includes supporting SMEs, entrepreneurship, and the linkages between FDI and SMEs. Efforts are underway to further attract FDI and boost FDI-SME linkages, particularly in the fields of skills, innovation and digitalisation and licensing, which can benefit from public and private investments, including those financed by the European Recovery and Resilience Facility.
This report aims to support these efforts. It assesses the linkages between inward FDI and SME productivity and recommends how Portugal can increase the potential of foreign investment for local SMEs, and, in turn, support the broader economic recovery. This includes exploring the characteristics of FDI that enhance the ability of SMEs and the local economy to absorb positive spillovers.
The Government of Portugal and the OECD are very pleased to have joined forces in producing this study, which pioneers 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. We thank all agencies in Portugal and the OECD Secretariat who have contributed to this assessment and the European Commission for the financial support and strategic cooperation.
We hope this assessment will help lay the foundations of a more resilient and inclusive recovery.
