Business Italy must enter the 21st century
The writer is a professor at the Booth School of Business at the University of Chicago.
Under the watchful eye of the Draghi government, the American private equity group KKR is bidding for Telecom Italia, one of the last large companies in Italian hands. Italy, the world’s eighth-largest economy, has just six companies in the Fortune Global 500, three of which are state-controlled. That compares to seven for Spain, whose economy is ranked 14th in the world by gross domestic product, and 26 for France, which is seventh.
Some accuse successive Italian governments of not having resisted foreign acquisitions. They point out that outgoing German Chancellor Angela Merkel prevented Fiat from buying Opel in 2009 and French President Emmanuel Macron delayed the acquisition of STX by Fincantieri in 2017.
Others see this latest offer as a sign of the ultimate triumph of the European single market. But I see a failure of the Italian economy to enter the 21st century.
The problem is not that foreign companies are acquiring Italian companies. It is that Italian entrepreneurs seem incapable of creating companies capable of being competitive in the global economy.
Why is it? First, Italian entrepreneurs are obsessed with control. In order to maintain majority control of the companies they found, they build flimsy pyramid structures, burden them with debt and ultimately do not extend much beyond the borders of Italy, as that would require the use of equity to pay for acquisitions.
This obsession with control is not just a psychological issue. In Italy, corporate control is very valuable, because whoever has it can easily take advantage of minority shareholders without fear of legal reprisals. Anticipating this risk, savers are reluctant to invest in the stock market and finance the expansion of Italian companies.
The second reason for the underperformance is the parasitic relationship between large national companies and the Italian state. For decades Fiat was heavily shielded from Japanese competition, while in the 1990s Olivetti was granted the second mobile phone license by a sympathetic government.
This parasitic relationship reached its peak when Silvio Berlusconi was in power, first in the mid-1990s and then again in the early 2000s. The country’s telecommunications strategy was subordinated to the private interests of the billionaire prime minister. Used to making quick profits at home through their political connections, Italian companies did not want to take the risks necessary to succeed in the global market.
The belief that “small is beautiful” has also helped prevent Italian companies from achieving the economies of scale necessary for global success. Italy invented pizza, for example, but still does not have a large pizza chain. The concept of the coffee bar is of Italian origin, but the country does not have a major coffee chain. The country is one of the biggest 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 is ranked only 17th in the world in terms of market value.
Finally, consider the failure to create world-class universities. The success of Montecatini and Olivetti in the 1960s is due to the technology developed in Italian universities. But who remembers the last Italian company to thrive on technology developed by researchers here? In the 2021 ranking of world universities in Shanghai, no Italian institution is in the top 150.
Many of these issues have been in the works for decades. Yet efforts to address it have been limited. Reforms to speed up civil trials are welcome, but have the unfortunate flaw of shortening the statute of limitations for criminal offenses, thereby helping corrupt entrepreneurs escape punishment for their crimes.
Moreover, not only does the flow of money provided by the Next Generation EU stimulus program foster the parasitic relationship between business and government, but the way the money is disbursed reinforces the cycle of dependency. Some 11 billion euros are set aside for promoting university research, but this represents well under 1% of GDP and does not even cover the annual R&D gap between Italy and the rest of Europe. As far as I know, no serious attempt is made to help Italian companies develop economies of scale to be competitive in the global market.
To win the challenge of global competition in the 21st century, Italy must not oppose the process of creative destruction. Rather, it should promote the development of new giants capable of conquering the world. If the EU’s next generation stimulus funds are not used to facilitate this process, a huge opportunity for the Italian economy will have been missed.