1. TECHNOLOGY ADOPTION, PRODUCTIVITY, AND FIRM SIZE: THE CASE OF ITALY Matteo Bugamelli, Federico Cingano and Salvatore Rossi Bank of Italy Knowledge Economy Forum VII Ancona 17-19 June 2008

2. Why talking about Italy here? Not (just) because we are in Italy! If we are interested in understanding what drives economic growth in an advanced country… … the Italian economy is an interesting case in point… … since it has been growing much less than its partners in the last decade As well see later, lessons can be drawn for emerging countries too

3. The disappointing performance of the Italian economy Since the second half of the 90s: GDP growth has dramatically slowed down in absolute and comparative terms Hours worked increased but labour productivity stalled TFP drove down labour productivity

4. What could explain Italys growth and productivity crisis ? Two revolutions have shocked the world economy in the last 20 years: ICT and globalization The Italian economic structure shows a distinctive anomaly in the advanced world: dimensional fragmentation (firm dwarfism) Industrial districts (clusters) were in the 70s and 80s an original response to the trade-off between the need for flexibility and that of scale economies Since the mid-90s small size, even within clusters, is delaying the adjustment of most firms to the new technological and market environment

5. Empirical evidence (micro) on tech adoption, innovation and R&D [1] Pagano and Schivardi (2003) show that growth across European countries is positively related to firm size, especially in industries with economies of scale and high R&D intensity Fabiani, Schivardi and Trento (2005) show that Italian firms are more likely to innovate and invest in ICT: 1. when large 2. when share of skilled workers is high 3. when connected with a neighbouring, large firm 4. when adapt organization structure to ICT

6. Empirical evidence (micro) on tech adoption, innovation and R&D [2] Hall, Lotti and Mairesse (2008) show, based on a large sample of Italian SMEs, that: firm size and international competition have a positive effect on R&D effort R&D intensity has a positive and significant impact on the likelihood of introducing both product and process innovation

7. Empirical evidence (micro) on tech adoption, innovation and R&D [3] From 2007 Bank of Italys survey on manufacturing firms: 25.5% of firms has an internal R&D department, but… …more than half of R&D dep. are very small (5 employees); only a fifth has more than 15 employees Share of firms with R&D dep. increases with firm size

8. Has this situation recently changed? In the last 3-4 years restructuring and market repositioning by some Italian firms may have started (Bank of Italy 2006, 2007) A great heterogeneity within each sector is evident: specialization seems less relevant than expected, there are winners in traditional sectors and losers in high-tech ones

9. Evidence from Bank of Italys 2007 survey on manufacturing firms Export and value added growth in recent years has been higher for firms: more propense to ICT adoption and use that complemented ICT technology with highly skilled workers (human capital), in particular white-collars that complemented ICT technology with re- organization, in particular toward more horizontal structures Firm size matters for all those activities: actually, it is (slightly) growing

10. Industry tertiarization as a form of competitive advantage The winners are also those firms where innovation takes the form of a tertiary supporting activity, like marketing, branding, customer service In a research at the Bank of Italy we have shown that these factors have been increasingly important in recent years (eg. branding) Devoting care and resources to these activities is related to firm size

11. Innovation is crucial (private and public R&D, patents) Italys R&D/GDP expenditure is slightly more than 1%, just as it was ten years ago, much lower than EU-25 average (1.8%), very far from the Lisbon target (3%) The contribution of the private sector to R&D is low (50%, as against 60-70% in main EU countries), due to small firm size Italys innovation output (47 patents per million inhabitants) is largely below EU15 average (79)

12. Policy implications for Italy [1] Whatever side of the problem one looks at, firm size stands at the root of the Italian growth and productivity crisis Dynamics matters: one would want to see more small firms, particularly start-ups in innovative sectors, but also successful SMEs in traditional sectors, rapidly evolving into medium and large firms… …possibly shifting their sector specialization towards the neighbouring one with a higher technological intensity…

13. Policy implications for Italy [2] Dimensional growth of firms is hampered by many socio-political factors. Among others: 1. Traditional family-ownership model 2. Scarcity of financial intermediaries specialized in promoting firm growth (venture capital, private equity) 3. Diffused tax evasion and elusion in the presence of high tax rates, favoured by small size 4. Very intrusive red tape: being small helps No role for macroeconomic policies. Structural policies are needed, in many areas

14. Lessons for emerging countries? [1] As we have seen, insufficient firm size is crucial in explaining the Italian productivity crisis Italy inherited from the past a dimensional structure of its productive system more similar to that of an emerging country… … which is delaying and making it difficult to adjust to the the two world Revolutions (the change of technological paradigm and the advent of globalization) Prima facie such experience may seem irrelevant from the point of view of a less advanced economy, which has to adopt existing technologies and to develop its internal market…

15. Lessons for emerging countries? [2] … in particular, for countries emerging from transition private SMEs are the necessary antidote to the old model of large and inefficient state-owned firms Yet, even those countries should be forward-looking As soon as the private sector has consolidated, and the economy has reached a middle-income level of development, how to stimulate the endogenous dimensional growth of firms should become a policy priority Otherwise, as the recent Italian experience shows, an economy about to approach an advanced development stage may enter a smallness trap

17. R&D expenditure (% GDP)

18. Branding (as % share of sales)

19. GDP and productivity, 1981-06

20. Average firm size, 2005