Scalers and the economy

A small group of SMEs that grow fast over a short period of time, i.e. “scalers”, provide a large part of the growth in jobs and economic value in OECD countries. This section contains an overview of the recent trends in the number of scalers in Portugal and benchmark their contributions to job and value creation with other countries.

Around one in five Portuguese SMEs is a scaler

In Portugal, about 10 300 small or medium-sized enterprises (SMEs) became scalers between 2018 and 2021, accounting for 21% of the 50 000 SMEs in the non-financial business sector. Among those, about 4 800 were scalers in employment, 8 500 were scalers in turnover, and 3 000 were scalers in both employment and turnover.

Scalers in year 2020 are defined as enterprises with 10 to 249 employees (SMEs) that increased employment or turnover by at least 10% per year, on average, over the three previous years (2017-20). This means they grow by at least 33% over the three-year period.

The number of scalers in turnover grew by 90% from 2013 to 2019, exceeding 10 000. The number of scalers in employment grew by 117% over the same period, reaching 6 400. The upward trend reflects a period of economic expansion across the OECD in the wake of the Global Financial Crisis. The number of turnover scalers declined sharply in 2020 as the COVID-19 pandemic spread. The number of scalers in employment fell as well, but less so. The reason is that SMEs that grew in 2018 and 2019 and were on track to become scalers by 2020 were unable to continue growing and might even had to reduce output or employment. The impact on turnover was more severe than on employment as generally firms tend to try to retain staff even through a crisis and particularly during the COVID-19 pandemic, Portugal and most other OECD countries provided relief measures to support employee retention.

High-growth scalers, defined as SMEs with annual growth rates exceeding 20% over three consecutive years, may exhibit distinct trends through economic cycles. Compared to other scalers, high-growth scalers may be faster to react to economic shifts and new market opportunities, but they may also be more constrained by lack of financial resources or tight labour markets. About one in three scalers grows by more than 20% per year on average over three consecutive years, qualifying as “high-growth” scalers. In 2021, there were 1 400 high-growth scalers in employment and 3 500 high-growth scalers in turnover. The number of high-growth scalers in employment gradually increased over time until the onset of the COVID-19 pandemic, reaching a peak of 2 000 in 2018. High-growth scalers in turnover a similar upward trend, reaching a peak of 4 200 in 2019.

Scalers in employment created 117 000 jobs over three years

In Portugal, scalers in employment created 117 000 jobs over the 2017-20 period, which accounts to 8.6 jobs for every 100 workers in SMEs in 2017. The contribution of Portuguese scalers in employment is slightly below the average of all countries for which data are available.

The contribution of scalers in turnover was below the average of other countries

The total sales of Portuguese scalers in turnover in 2020 was EUR 16 billion larger than in 2017. The increase corresponds to 9.6% of the total sales of Portuguese SMEs in 2017. This compares to 12% on average across countries with available data, indicating that the contribution of scalers in turnover to value creation is about 20% lower in Portugal.

Scalers’ characteristics

All types of SMEs can scale up. This section describes the characteristics of scalers in terms of sector of activity, size, age, and geographical distribution. It also compares the likelihood of SMEs to scale up in Portugal and in other countries across different groups of SMEs.

Portuguese SMEs operating in construction and advanced services are more likely to scale up

Most Portuguese scalers operate in non-tradable services, construction, or medium-low tech manufacturing and extractive industries (22%, 21%, and 20%, respectively). The distribution of scalers across economic activities mirrors largely the distribution of SMEs across these activities.

However, in certain sectors scalers are overrepresented, particularly in the construction sector, which comprise 21% of scalers but 12% of all SMEs. This reflects the higher probability of SMEs to scale up in these sectors. About 43% of SMEs in the construction sector become scalers, compared to 16% among SMEs in the education, social, or health services sector. Relative to other countries, Portuguese SMEs have a higher likelihood to become scalers in the construction sector and a lower likelihood in the education/social/health services sector.

Sector groups include the following two-digit NACE sectors:

• Low and medium-low technology manufacturing and extractive industries: food, textile, paper, wood, refined petroleum, rubber, plastic, basic metal products, mining.

• Medium-high and high technology manufacturing: chemical products, pharmaceuticals, computer, electronic/electrical equipment, machinery, transport equipment.

• Advanced tradable services: software, telecommunications, consultancy, legal services, accounting services, architectural activities, scientific research.

• Other tradable services: travel agency, services to buildings/landscape, employment activities, veterinary, accommodation/food services, services for transportation.

• Other non-tradable services: electricity, gas and water supply, waste management, wholesale and retail trade, repair of motor vehicles/household goods, real estate activities.

• Education, social care and health services: Education, human health activities, residential care, social work.

• Construction: construction of buildings, civil engineering, specialised construction activities.

Source: Manufacturing sectors are aggregated using Eurostat’s high-technology classification of manufacturing industries. The classification of tradable and non-tradable services is based on Piton, S. (2021). Economic integration and unit labour costs. European Economic Review, 136, 103746.

SMEs across all size classes scale up

57% of Portuguese scalers have between 10 and 19 employees at the beginning of the growth period, and 30% of scalers have between 20 and 49 employees. In contrast, SMEs with 100 to 249 employees represent only 4% of scalers. The likelihood to scale up is similar across SMEs of different sizes, therefore the size distribution of scalers closely follows that of all SMEs. About 25% of SMEs in the 10-19 size class become scalers, compared to 18% of SMEs in the 100-249. Differences in the likelihood to scale up across size classes in Portugal are aligned with the cross-country averages.

Most of Portuguese scalers are mature SMEs

Most Portuguese scalers (60%) are mature SMEs that are more than 10 years old. 23% of scalers are less than 6 years old (i.e. young) and the rest (17%) are between 6 and 10 years old.

Young SMEs are twice as likely to scale up as mature SMEs. About 37% of young SMEs scale up, compared to 30% of SMEs aged 6 to 10, and 19% of mature SMEs. This results in scalers being overall younger than other SMEs. The share of young scalers in all scalers is equal to 22%, i.e., eight percentage points more than the share of young SMEs in all SMEs. However, six out of ten SMEs are mature firms in Portugal. It follows that most scalers are mature SMEs, as the lower likelihood to scale up is counterbalanced by a larger base. Similar to size, differences in the likelihood of scaling up across age classes are similar in Portugal and in the 15 other countries.

Growth trajectories

While many SMEs consolidate at their new size after scaling up, rapid growth also brings new challenges, with some scalers failing to adapt. This section illustrates the growth trajectories of scalers in the three years following their (first) expansion phase.

The majority of scalers maintained their new size or even continued to grow

Between 2016 and 2019, 21% of Portuguese scalers in employment continued to scale up in employment after a first scaling up in the previous three years. These 540 firms employed 25 000 more people after six years. Among scalers in turnover, 27% achieved two high-growth periods in a row, reaching a total turnover that was 301% higher in 2019 compared to 2013.

In addition, 49% of scalers in employment and 44% of scalers in turnover maintained their size or grew moderately in the following three years. Relative to other countries, the share of scalers that consolidated at the new size or continued growing was 5 percentage points higher for scalers in employment and 4 percentage points higher for scalers in turnover than the cross-country average.

One in five scalers contracted after scaling up

Scaling up also brings challenges for SMEs. Firms may need to comply with stricter regulations, improve their managerial practices, or adopt a different financial model. Some scalers may struggle to adapt and experience a contraction after growing. In Portugal, 20% of SMEs that scale up in employment between 2013 and 2016 reduced their workforce over the following three years. Similarly, 17% of scalers in turnover had a lower turnover three years after scaling up, underscoring the challenges inherent in maintaining an expanded scale. Relative to other countries, the share of scalers having a reversal was 7 percentage points lower for scalers in employment and 1 percentage points lower for scalers in turnover than the cross-country average.

One in ten scalers was inactive three years after scaling up

For 10% of scalers in employment and 12% of scalers in turnover, there was no information available on their employment or turnover levels in 2019. This lack of information is open to different interpretations. First, the firm may be closed or about to close, which in most cases indicates that the business has not been successful. Second, the company may have been acquired by another entity, which often indicates success rather than failure. Third, the lack of information may simply be a “nuisance” in the data, e.g. due to reporting errors. It is not possible to know the exact incidence of each of the three alternatives. However, it is known that acquisitions are rare events even for growth-oriented businesses. Conversely, around 8-10% of businesses close each year. Therefore, it is likely that most former scalers with missing information have ceased operations.