All that you ever wanted to know about the political economy of small businesses in Italy, but were afraid to ask (and much, much more)

Matt Yglesias and Tyler Cowen argue that Italy’s economic problems have a lot to do with the country’s reliance on small businesses.

Matt:

Jared Bernstein cautions against the over-lionization of small businesses in the New York Times. I agree. The best evidence for skepticism continues, I think, to me the fact that if small firms were so fantastic Italy and Greece would be the economic superstars of the western world … you can have an economy like Italy’s with lots of barriers to competition so that poorly managed firms stay in business with low productivity

Tyler:

A good introduction to the bright side of Italy’s economy is Michael Porter’s 1998 The Competitive Advantage of Nations; Porter portrays Italy as having some vital clusters of family-owned businesses, largely in the North. Do you want your kitchen redone with some nice marble tile? Italy can supply just the right stuff. This neat graph shows just how much Italy has specialized in small business. Perhaps therein lies the problem. With the advent of modern communications and information technologies, arguably the return to “small family firms” has fallen. The return to “largish projects consummated over large distances” has gone up. For Europe, the big winners here are the Nordic countries, which have worked very effectively with information technology and which do not rely so much on family ties to get efficient, non-corrupt management. The losers are Italy and Greece and Portugal too … These countries seem to be locked out from some of the major sources of contemporary economic growth.

My first reaction is that if you’re really interested in the Italian small firm model, I have a not particularly cheap book that I’d like to sell to you. But that’s not a very good first reaction, especially as I deliberately steer clear of the bigger controversies over whether small firms are a viable path to economic growth etc. Richard M. Locke’s Remaking the Italian Economy is much better than Porter at discussing the specificities of the Italian small firm model, and the ways in which the Italian economy is intensely localized – while national level institutions matter, it is really, really difficult to make generalizations about e.g. small firms in Italy, because what small firms do, and how they work together differs dramatically from location to location.

This matters. Carlo Trigilia and Luigi Burroni have a more recent article (paywalled) on the regionalized Italian economy which comes to quite different conclusions than Matt and Tyler do. First, they point to the continued importance of localized specialized economies in Italy, contra Tyler, these have done better than other parts of the Italian economy, although they have seen minor declines. Second, their statistics show that some localized economies are in fact doing quite well – those that have ‘medium-sized’ firms (by Italian standards – these firms, with 50-250 employees, are indubitably small firms by US standards).

The majority of the localized systems that saw an increase in manufacturing employment are those with a stronger presence of medium-sized firms (+45%). During the period 1996-2003 medium firms experienced a growth in revenues (+42.8% vis-a-vis 26.4% for large firms), in exports (+51.7%, +31% for large firms), in added value (+33%, +11% for large firms) and in employment (+18%, – 10.2% for large firms). The emergence of medium firms with a leadership role is an especially important change for Italian regionalized capitalism. These firms are specialized in mechanical engineering and machine tools, but also have more traditional specializations in so-called ‘Made in Italy’ goods, such as textiles, clothing, footwear, furniture etc. The management structure is still based on family control, but professional managers are increasingly used. The network of suppliers, especially those with a strong influence on the quality of goods and services for the final market, is often located in the same local system as the client firm. At the same time, these medium-sized firms are also strengthening their relationship with foreign subsuppliers, offshoring some stages of the productive process or of the making of specific components, while more strategic ones … continue to cluster near to lead firms.

This suggests a number of things. First – that the Italian small firm model may have more life in it than Tyler believes it does. Italian specialized firms are bulking up a little, but are still small, and seem to be able to compete reasonably well. Second, that the usual ecological problems of inference apply in spades to studies of the Italian economy. The Italian economy, as Matt says, has an unusually large number of small firms, but this does not mean that small firms are necessarily a bad thing. Some small firm based micro economies in Italy seem to be thriving, as in the past, and where they are not (as in Prato) it is in areas of production that can be easily replicated by cheaper competitors. To put it another way – Italy is not so much a single national economy as a congeries of micro-economies, all of which share a common set of problems stemming from national regulatory inefficiencies. Some micro-economies respond badly to this, others far better. Finally, however, this does not mean that Matt’s arguments about the US are wrong. Italian small-firm romanticism may (with appropriate hedging and qualifications) have an empirical basis – but this does not mean that US small firms are like the more successful Italian small firms, or that they can even be brought to resemble them. As Trigilia has argued in other work, the public weaknesses and private strengths of the Italian economy are mutually reinforcing – the kinds of dense social networks that successful small firm clusters rely on would be impossible to replicate in an economy, such as the US, with many easy exit options.

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