Process of Economic Development in Italy - Essay Example

Italy demonstrates characteristics of a late-industrialized economy (process of economic development started in 19th or 20t h century) (Quatraro 2009). The Italian economy retained its slow industrialization even in the late 20th century. Late-industrialized developing economies are known to grow at a very fast pace but in Italy the government has a protectionist attitude towards its domestic industries which has hindered its growth and development. The protectionist attitude of the government is also responsible for the Italian companies not being able to compete in the global market. Even though Europe claims to be having united identity the differences between neighboring countries can be much larger than countries across continents. Italy is diverse culturally, economically and politically (TDS 2012). The culture, administrative, geographic and economy (CAGE) distance framework helps the mangers to identify and assess the impact of distance on different industries. Cultural distance can impact trade (Ghemawat 2004) and language plays an important role. Italy’s language is unique and even though it is a part of Europe Union, English is not the predominant language in Italy. Italy is homogenous linguistically (TDS 2012). According to Ghemawat trade between countries that share a common language is much higher than between countries without a common language. Italy maintains political or administrative distance as it focuses on protecting its domestic industries. The government thereby does not encourage foreign direct investment (FDI) due to which cross-border competition is also limited. Competition leads to innovation and creativity but this remains unexplored in Italy. Divided into several regions, Italy has introduced some decentralization to the government machinery but the regional governments still seek additional powers. However, frequent government turnovers have left the political condition quite unstable in Italy. International trade has been impacted due to extensive corruption, massive government debts, and organized crime. The country has been besieged with political scandals. Because of poor government policies and institutional weakness, government involvement tends to be high in sectors such as electricity, farming and telecommunications (Ghemawat 2004). Because of the government policies in Italy cross-border competition is low which hinders growth and development. Geographically, however, Italy is well positioned as it has a huge coastline and is bounded by countries such as France, Austria, Switzerland and Slovenia. It is strategically located and has 32% of arable land. The country has no international disputes with its neighboring countries and its communication and transportation links are good. However, it has limited natural resources and most of its land is unsuitable for farming (TDS 2012). Communication and transportation across nations is not a constraint to conduct business as Italy is well positioned geographically. Economically, Italy has high budget deficit and as a result of which it is unable to reduce the high public debt (TDS 2012). The nation has few natural resources and is a net food importer. Italy’s economic growth has been slow as the GDP contracted as a result of slow down of the world economies. Italy has suffered as a result of globalization and most (58.1%) of its international trade is with countries within the European Union such as Germany, France, UK and Spain (TDS 2012). Italy also has a large underground economy and all of these factors have created economic distance which impacts trade with other nations because as Ghemawat (2004) asserts rich countries engage in more cross-border economic activity according to their economic size, compared to the poorer countries. Because of its protectionist attitude, Italy has not been able to attract FDI. According to the UNCTAD – the United Nations Conference on Trade and Development, Italy does not even feature among the top 15 attractive economies for FDI (Roe 2010). However, from an agricultural economy, the nation has evolved to an industrialized state and is now a member of the European Union and the Organization for Economic Cooperation and Development (OECD). Italy is divided into several regions and the north-east and central regions of Italy have a large number of SMEs that have formed clusters which led to exports of luxury apparel, tiles, packaging machinery and furniture (Boari 2001). Clusters lead to innovation, creativity and growth, which is what the Italian cluster experienced. Packaging Valley is one of the most successful clusters in Italy located around the Northern Province of Bologna. The cluster includes large manufacturers, a large number of SMEs engaged in assembly and supplies or specialized parts and components (Boari 2000). Italian packaging machinery industry is internationally competitive as they offer cutting-edge technology. All the firms in the cluster registered growth which is evident from the increase in the number of patents. Packaging machinery manufacturing started with trying to fulfill the need of a large pharmaceutical company but soon could address the need of various local and foreign producers of chemicals, pharmaceutical products and confectionery. This confirms to Porter’s (2000) contention that competitive advantage may reside in the locations where the business units are based. To compete in the global market competitive advantage of nation can be achieved by enhancing the four factors in the Diamond Model of Porter. In the case of Italy it has been found that clusters had their origin in the factor conditions, demand factors, and in the presence of related firms. Clusters help upgrade the factor inputs through support from competitors and through additional skills, information on marketing, technology and knowledge of customer needs (Porter 2000). At Packaging Valley, demand factor contributed to the growth of the cluster as customers located in the region sought new and innovative products (Boari 2001). Demand conditions within the industry also are important as it helps firms to compete on differentiation. Demand-side advantages can be gained through clusters. The Packaging Valley had several small workshops working for different industries but all firms – both large and small – shared a creative and flexible workforce. Skills were also shared through frequent interactions between the designers and assemblers. Subcontracting also led to the evolution of the SMEs. The success of clusters is based on the relationship between the firms and their customers. Rivalry is not from local firms but from imports, according to Porter which Boari also endorses. When new firms entered the cluster they did not enter into direct competition but they moved downstream and also helped the established firms to upgrade technology. Firm strategy and rivalry receives impetus through changes in the rules, incentives and norms and the role of trade associations is important, contends Porter (2000) but in the clusters in Italy, business associations and new institutions did provide information on market and technology; they even organized training for the personnel but there is no conclusive evidence to suggest that these public policy measures impacted the economic performance of the clusters. While clusters in Italy can be found in different industries and they are also heterogeneous in size, not all clusters could gain international competitiveness. Today Italy has clusters of Colton mills, silk firms and woolen clusters (The Economist 2011). Typically firms in clusters are supportive of each other but globalization has led to increased imports that are relatively cheaper. This weakens the benefits that firms in clusters could derive. Firms in a jewelry cluster in Italy have been suffering due to unfair competitor from China where labour laws are lax. Moreover, firms from clusters have moved production overseas which destroys the competitive advantage and weakens the network on which the clusters had been thriving. While to some extent production has moved overseas, Italy has not been able to engage with the global economy via trade and foreign investment. Italy is a nation of small firms where 84% of the manufacturing workforce is employed by the SMEs (Shapira 1996). While R&D activity is lower in Italy than other industrialized nations, there are many technology diffusion activities in different regions within Italy that are not included in the R&D budget. The national policies in Italy support the premise that technology is demand driven. The private sector and the SMEs are provided incentives for diffusion of technology. Italy is divided into 20 different regions and the regional government is responsible for economic activity and technology diffusion. Each regional centre supports the SMEs but the nation has always protected its domestic business interests (Lyman 2012). They are not open to global trade, investment and mergers. The government has always limited foreign access to Italian economy. According to Perkins and Neumayer (2005) new technologies diffuse more rapidly where countries are “open” to trade and investment. Trade openness influences the diffusion of technology in three sectors – textiles, steel and telecom. Growth in trade and investment is expected to increase the demand and supply of modern technology. Market liberalization should lead to efficiency, competitiveness and productivity. However, despite Italy having cutting-edge technology in packaging machinery, because of the protectionist attitude of the Government, technology diffusion has been limited. Technology diffusion occurs if multinationals are allowed to enter the nation but Italy shows no “openness” in its attitude. The multinationals would evaluate any nation based on the institutional contexts. A nation’s potential can be ascertained by mapping its institutional framework. Companies that would seek to invest in Italy would evaluate the macro-economic factors and the socio-political factors. Political system affects the product, capital and labor market (Khanna, Palepu and Sinha 2005). Political system in Italy is unstable as discussed above. The social environment of a nation is equally important. Social cooperatives in Italy are critical to the delivery of social service by arrangement with the municipalities. These cooperatives promote labor integration, and also support people that had been previously excluded from the labor market (Gosling 2003). These social-cooperative have served to enhance the wage rates in Italy. The social enterprise development has shaped its welfare system. However, in most parts of Italy the family has the responsibility to support its members which reduces the burden on the government, which only provides education and healthcare. Unemployment rate is high in Italy as a result of which people work for low wages without standard benefits and protection as they are employed by the underground economy (TDS 2012). Italy has four major trade unions and these unions represent 40% of the work force. These trade unions are the General Italian Confederation of Labor (CGIL), the Italian Confederation of Workers Unions (CISL), the Italian Union of Labor (UIL), and the General Union of Labor (UGL). These unions were originally closely associated with political parties but have now evolved into fully autonomous and independent bodies. Three of these unions are also affiliated to International Confederation of Trade Unions (ICFTU) and coordinate their positions when any major issue arises. The multinationals hence would have to take the labor market conditions before deciding to invest in Italy. Italy’s economy and capital market has been shrinking and there has been a drop in consumer spending. Italy is the Eurozone’s third largest economy but it has contracted for the past four quarters as change in government policies (BBC News 2012). In a bid to reduce its debt levels the government has implemented a series of drastic spending cuts. Besides the capital market is not open to foreign investment. The institutional framework in Italy is not conducive to attract foreign investment. Italy as a nation demonstrates that while it is geographically close, it is culturally, economically and administratively at a distance even from its neighboring countries. According to Ghemawat (2011) as these distances increase, cross-border interactions tend to decrease. Italy can still have a global company as in the case of packaging machinery but the mind-set of its employees and the organization will not have a global citizenship orientation. They would continue to be deeply rooted in their home countries but to be a cosmopolitan company these differences have to be managed. Being a protectionist country, the administrative and political distance appears to be increasing. However, since technology diffusion is taking place within Italy in a subtle way, perhaps the government could use technology to decrease the distances. Innovation can also thrive when internal distances are minimized. Italy demonstrates no signs of encouraging cosmopolitan companies within the nation. The clusters that seemed promising are also dwindling as the SMEs demonstrate individualistic culture. Thus, despite being a late-industrialized economy, Italy has made little progress with an unorganized labor market. It continues to maintain cultural, economic and administrative distance with other countries, which also impacts diffusion of technology. Works Cited BBC News. "Italy recession deeper than first estimated." September 10, 2012. Web Oct. 24, 2012, Boari, Christina. "Industrial Clusters, Focal Firms, and Economic Dynamism: A Perspective from Italy." The World Bank Institute. 2001. Web Oct. 22, 2012. Ghemawat, Pankaj. “The Cosmopolitan Corporation.” Harvard Business Review 89 (5) 2011: 92-99. Ghemawat, Pankaj. “Distance Still Matters: The Hard Reality of Global Expansion.” Harvard Business Review 79 (8): 2001 137-147. Gosling, Paul. "Social co-operatives in Italy: Lessons for the UK." SEL. 2003. Web Oct. 22, 2012. Khanna, Tarun. Palepu, Krishna G. and Sinha, Jayant. "Strategies That Fit Emerging Markets." Harvard Business Review 83 (6): 2005 63-76. Lyman, Eric J. "Italys protectionism addiction." 2012. Web Oct. 22, 2012. Perkins, Richard. and Neumayer, Eric. "The international diffusion of new technologies: a multi-technology analysis of latecomer advantage and global economic integration." Annals of the Association of American Geographers 95 (4): 2005 789–808. Porter, Michael E. "Location, Competition, and Economic Development: Local Clusters in a Global Economy." Economic Development Quarterly 14 (2000): 15-35 Quatraro, Francesco. "Innovation, Structural Change and Productivity Growth Evidence from Italian Regions, 1980-2003." 2009. Web Oct. 22, 2012. Roe, Alex. "Foreign Direct Investment – Italy Not in Top 15." June 29, 2010. Web Oct. 23, 2012. Shapira, Philip. "An Overview of Technology Diffusion Policies and Programs to Enhance the Technological Absorptive Capabilities of Small and Medium Enterprises." 1996. Web Oct. 22, 2012. http://www.prism.gatech.edu/~jy5/pubs/oecdtech.htm TDS. "People." Travel Document System. 2012. Web Oct. 22, 2012. The Economist. "Clusters flustered." April 14, 2011. Web Oct. 22, 2012. Read More