Italy must enter the twenty-first century

Under the benign eyes of the Draghi government, US private equity group KKR has bid for Telecom Italia, one of the last big companies in Italy’s hands. Italy, the world’s eighth largest economy, has only six companies in the Fortune Global 500, three of which are state-controlled. This compares with seven for Spain, whose economy ranks 14th in the world in terms of GDP, and 26 for France, which ranks seventh.

Some blame successive Italian governments for not resisting foreign acquisitions. They note that outgoing German Chancellor Angela Merkel prevented Fiat from buying Opel in 2009, and French President Emmanuel Macron delayed Fincantieri’s takeover of the STX in 2017.

Others regard this latest offer as a sign of the eventual victory of the European single market. But I see the failure of the Italian economy to move into the twenty-first century.

The problem is not that foreign companies are acquiring Italian companies. It seems that entrepreneurs in Italy are unable to build companies that are competitive in the global economy.

why is that? First, Italian entrepreneurs are control freaks. In order to retain majority control of the companies they come up with, they build fragile hierarchical structures, overburden them with debt, and eventually don’t expand much beyond Italy’s borders, because doing so requires using shares to pay for acquisition costs.

This obsession with control is not just a psychological issue. Control of companies in Italy is highly valued, because whoever owns them can easily take advantage of minority shareholders without fear of legal reprisals. Anticipating these risks, savers are reluctant to invest in the stock market and finance the expansion of Italian companies.

The second reason for the poor performance is the parasitic relationship between the large local companies and the Italian state. For decades, Fiat was largely shielded from Japanese competition, while in the 1990s Olivetti was granted a second mobile phone license by a sympathetic government.

This parasitic relationship came to a head when Silvio Berlusconi was in power, first in the mid-1990s and then again in the early 2000s. The country’s communications strategy was subservient to the private interests of the billionaire prime minister. Italian companies were accustomed to making quick profits at home thanks to their political connections, and were not prepared to take the risks necessary to succeed in the global market.

The belief that “small is beautiful” also helped prevent Italian companies from achieving the economies of scale needed for global success. Italy invented pizza, for example, but it still doesn’t have a big pizza chain. The concept of the cafe is Italian in origin, but the country is not home to a significant coffee chain. The country is one of the largest tourist destinations in the world, but it does not have a large chain of hotels. And while Italy is one of the world’s fashion capitals, the largest Italian-owned fashion company ranks only 17th in the world by market capitalization.

Finally, consider the failure to create world-class universities. Montecatini and Olivetti’s success in the 1960s was driven by technology developed in Italian universities. But who remembers the last Italian company that thrived on the back of technology developed by researchers back home? In the 2021 Shanghai ranking of world universities, no Italian institution is in the top 150.

Many of these problems have been in the making for decades. However, efforts to address it have been limited. We welcome reforms to speed up civil trials, but an unfortunate drawback is that the statute of limitations for criminal offenses is shortened, which helps corrupt entrepreneurs escape punishment for their crimes.

Moreover, not only does the influx of money provided by the EU’s Next Generation Recovery Program reinforce the parasitic relationship between business and government, the way the money is spent perpetuates the cycle of dependency. About €11 billion has been allocated to promoting university research, yet this represents well under 1 per cent of GDP and does not even cover the annual research and development gap between Italy and the rest of Europe. There is no serious attempt, as far as I can, to help Italian companies develop economies of scale to compete in the world market.

To win the challenge of global competition in the twenty-first century, Italy must not stand in the way of a process of creative destruction. Instead, it should promote the development of new giants capable of taking on the world. If the EU’s Next Generation Recovery funds are not used to aid in this process, a major opportunity for the Italian economy will be missed.

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