Portugal’s Productivity Gap vis-à-vis Europe and the United States: A Firm-Level Analysis

Portugal’s large GDP-per-capita gap with the highest-income euro area economies and the US is primarily driven by a productivity shortfall. At the EU level, European leading firms, particularly in the tech sector, trail leading global counterparts in productivity and innovation, partly reflecting far less R&D investment rooted in less reliance on equity. In Portugal, those factors are compounded by a broader lack of dynamism. Firms enter the market small and rarely scale up, resulting in a much smaller economic footprint of young high-growth firms than in European peers and—even more so—the US. This rarer occurrence of “gazelles” in Portugal partly reflects limited access to venture capital and inadequate human capital, as well as tax and regulatory obstacles to firms’ growth. Taken together, this comparative lack of dynamism of leading and young high-growth firms alike explains Portugal’s larger share of small firms. Potential policy remedies include streamlining Portugal’s product market regulations and red tape and improving young firms’ access to long-term risk capital through EU-level initiatives.