Italian Firm Size: The Battle Rages On

Henry Farrell pushes back against what I was saying about Italian over-reliance on small business. But two can play at the “let’s cite some research” game. Consider “Italian Firms in History: Size, Technology and Entrepreneurship” recently published by Franco Amatori, Matteo Bugamelli and Andrea Coll (PDF) which concludes that small firm size is indeed a major factor in Italy’s recent relative stagnation.

They argue that “[t]he size of a firm is indeed positively correlated with innovation, internationalization, adoption of advanced technologies, ability to face new competitive challenges; through all these channels, larger firms record higher productivity, surely levels, often growth rates” (the quality of the English prose in this essay is not the best). Their argument boils down to the idea that the smallness oriented Italian firm structure is uniquely ill-suited for R&D investment (because they’re too small to get meaningful capital together) or to take advantage of improved communications and information technologies (since these are largely about helping large institutions manage themselves). They also argue that smaller firms are less able to take advantage of the upside possibilities posed by globalization, leaving Italy to be unusually aversely affected by international competition.

Their account of why Italian industrial firms stay so small is a little bit hazy, but they seem to say it has to do with inability to create properly regulated financial markets that people actually want to participate in. Absent a credible financial system, family firms have a trust advantage that keeps them viable even as they tend to be poorly managed. They also make this observation about the service sector:

It is worth reminding the example of the 1998 reform of the retail sector: thanks to the geographical differences in the elimination of restrictions on entry into the retail sector, Viviano (2008) could show that in the areas where the restrictions on the number of businesses or on the selling floorspace have been eased, the ratio of workers employed in the sector to the total population has increased by nearly one percentage point. The lowering of barriers has also led to an increase in incumbents’ productivity and a reduction in their profit margins, thereby spurring the use of ICT and helping to contain the rise in the prices of food products (Schivardi and Viviano 2011).

That’s basically the barriers to entry story I was telling in the first place, and it still seems important to me. Like all modern economies, Italy is overwhelmingly services (73 percent by GDP, 65 percent by labor force), so this part of the picture matters lot. Incidentally, a different Schivardi and Viviano study (PDF) of this 1998 reform found that localities governed by right-wing parties did more to protect the interests of incumbent small firms against new entrants and thus have performed much worse.