Portugal: Selected Issues

This Selected Issues paper discusses a firm-level analysis of Portugal’s productivity gap vis-à-vis Europe and the United States. Portugal’s persistent GDP-per-capita gap with the highest-income euro area economies and the United States is primarily driven by weak productivity growth. While Europe’s leading firms, particularly in technology-intensive sectors, lag global peers because of lower innovation and R&D investment supported by limited equity financing, Portugal faces additional structural constraints that hinder business dynamism. Firms typically enter the market at a small scale and seldom expand, resulting in a relatively low presence of young, high-growth “gazelle” firms compared with both European peers and the United States. This reflects limited access to venture capital, shortages of skilled human capital, and tax and regulatory barriers that discourage firm expansion. Consequently, Portugal’s economy remains characterized by a disproportionately large share of small firms, constraining productivity and long-term growth. Addressing these challenges requires reforms to streamline product market regulations, reduce administrative burdens, and expand young firms’ access to long-term risk capital, including through coordinated European Union initiatives.