The writer is a professor at the University of Chicago Booth School of Business
Under the benign gaze of the Draghi government, the US private equity group KKR is bidding for Telecom Italia, one of the last large firms in Italian hands. Italy, the eighth largest economy in the world, has only six companies in the Fortune Global 500, three of which are controlled by the state. This compares with seven for Spain, whose economy is ranked 14th in the world by gross domestic product, and 26 for France, which is seventh.
Some blame successive Italian governments for not resisting foreign acquisitions. They point to outgoing German chancellor Angela Merkel blocking Fiat from buying Opel in 2009 and French president Emmanuel Macron delaying Fincantieri’s acquisition of STX in 2017.
Others regard this latest bid as a sign of the ultimate triumph of the European single market. But I see a failure of the Italian economy to move into the 21st century.
The problem is not that foreign companies acquire Italian ones. It is that Italy’s entrepreneurs seem incapable of building companies that are able to compete in the global economy.
Why is this? First, Italian entrepreneurs are obsessed with control. In order to retain majority control of the companies they found, they build fragile pyramid structures, burden them with debt and ultimately do not expand much beyond Italy’s borders, since doing so would require using equity to pay for acquisitions.
This obsession with control is not just a psychological matter. In Italy corporate control is highly valuable, because whoever has it can easily take advantage of minority shareholders without fear of legal retribution. Anticipating this risk, savers are reluctant to invest in the equity market and finance the expansion of Italian firms.
The second reason for underperformance is the parasitic relationship between domestic big business and the Italian state. For decades, Fiat was heavily protected from Japanese competition, while in the 1990s Olivetti was granted the second mobile phone licence 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 thanks to their political connections, Italian companies were unwilling to take the risks needed to succeed in the global marketplace.
A belief that “small is beautiful” also helped to prevent Italian firms from achieving the economies of scale necessary for global success. Italy invented the pizza, for example, but still does not have a large pizza chain. The concept of the coffee bar is Italian in origin, but the country is not home to a significant coffee chain. The country is one of the world’s biggest tourist destinations, but it does not boast a large chain of hotels. And while Italy is one of the global capitals of fashion, the biggest Italian-owned fashion company is ranked only 17th in the world by market value.
Finally, consider the failure to create world-class universities. The success of Montecatini and Olivetti in the 1960s was driven by technology developed in Italian universities. But who remembers the last Italian firm to have prospered on the back of technology developed by researchers at home? In the 2021 Shanghai ranking of world universities, there is no Italian institution in the top 150.
Many of these problems have been decades in the making. Yet efforts to address them have been limited. Reforms to speed up civil trials are welcome, but have the unfortunate defect of shortening the statute of limitation for criminal offences, helping corrupt entrepreneurs to escape punishment for their crimes.
Moreover, not only does the flood of money provided by the Next Generation EU recovery programme foster the parasitic relationship between business and government, the way that cash is disbursed entrenches the cycle of dependence. Some €11bn is earmarked for the promotion of university research, yet that is well under 1 per cent of GDP and does not even cover the annual gap in R&D between Italy and the rest of Europe. No serious attempt is being made, as far as I can see, to help Italian companies develop the economies of scale to compete in the global marketplace.
To win the challenge of global competition in the 21st century, Italy must not stand in the way of the process of creative destruction. It should instead foster the development of new giants capable of taking on the world. If the Next Generation EU recovery funds are not used to aid this process, a huge opportunity for the Italian economy will have been missed.