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The competitiveness of Italy has, historically, been liked to a strong tradition of artisans and unique, fragmented clusters of small and medium enterprises, which have become inexorably linked and dependant on one another, encouraging acumen of the specific industry and growth. Additionally, the Italian peninsula has an important past and tradition of influential empires, whether they were the Romans, Florentine Republic, Genoa, or the Venetians (to reference several examples the many ruling powers which left marked impacts). In any case, the well-preserved monuments and cities of the above-mentioned empires, along with Italy’s unique cultural heritage and inherent geographical beauty, have laid the groundwork for a booming tourist industry, which has been allowed to thrive in the context of Italy’s relative political social stability.

All summed up, the presence of these historical factors have contributed to the birth of a post Second World War nation, which has evolved over the last 50 years to become one of the most developed countries in the world. However, its economic future could be now be considered as hazy and uncertain, given economic and social barriers, as well as the unraveling of its Key Success Factors, and in light of intensifying competition from rapidly developing new world powers. And, it will be essential to make some key changes to keep Italy in the competitive arena.

Regarding the overwhelming number of smaller firms in Italy, according to ISTAT Criteria, there are 199 Industrial Districts, of which the majority are concentrated in the northern half of the country (which helps explain disparity between prosperous northern half of country with a considerable higher employment rate, as compared to economical void in the south). The industrial districts can be defined as, primarily, very specialized, historical, family owned (48.1%) small and medium sized enterprises, which produce consumer goods and commodities in a bound area. The success of these districts may be linked to the disadvantages in growing too large, such as facing significant tax disincentives. This fostered networks of firms cooperating to ensure the success of the industry. Recently, however, this system has undergone some challenges.

First, the advent of very low cost goods on the domestic and foreign markets (from Eastern Europe, Turkey, China, etc.) of constant increasing quality is contributing to a decrease in demand and domestic producers. Additionally, many of Italy’s entrepreneurs, along with the rest of the population are aging. In fact, 20% of Italy’s population is over the age of 65, and not surprisingly, the average age of an entrepreneurial owner in Italy is 61, with the largest group of owners (30.9 %) between the ages of 61-70 year old, while only 4.8% of owners are aged 40 years or less.

In particular, the age structure has implications, which include management challenges. Many of the entrepreneurial leaders are not adept in the modern business skills (such as Internet, email, and software applications). Additionally, regarding outbound, retiring managers, there is a problem of succession. As is typical in many family firms, the decision is made to place relatives in key positions, even though they lack the qualifications to be successful. The nepotism also holds true for larger family owned firms, contributing to poor transparency and corporate governance. And, this challenge is somewhat heightened by the risk intolerance that pervades the atmosphere of Italian culture, especially, regarding oneself and one’s family. Resultantly, the enterprises are reluctant to incur debt or risk as an approach to grow and compete.

In addition to the managerial issues and challenges, there are several labor issues. Regarding the workforce, due to the demographical shift and many years of a low birth rate; the young talent pool is diminishing, and a large swathe of the most talented of the remaining pool seeks higher paying opportunities abroad. Additionally, the Italian labor market is fairly rigid. This is true in an economic sense, in that employees are granted long, if not lifetime contracts, which makes firing (even the most unproductive employees) a challenge and very expensive. Additionally, from a social standpoint, as mentioned above, the low risk tolerance of the Italians as a society provides impetus for many workers to not search for new opportunities, and in a general sense, results in a less fungible labor market.

Another important factor for consideration is the political instability of the Italian government, which has experienced more than 50 governments during the post Second World War era. As a consequence, the institutions of the governing bodies could be defined as largely inept, making it difficult to promulgate legislation and enact/enforce regulations. The lengthening of bureaucratic procedures negatively impacts the ethics of management and employees.

Another, interesting characteristic of the government has been its unbalanced support of “national champions” (such as Fiat), which results in severe market distortions and drains federal funds. The unwavering support of the government for singled out companies has reduced their incentive to be productive and innovative, while stifling the growth of new competition. Ironically, although the government supports some national champions, it has remained significantly outside of the confines of the small and medium enterprises. Additionally, regarding tourism, there is no ministry of tourism promoting and managing the resource, despite over the last several years, an average of circa 40 million visitors annually. This is perhaps, particularly significant, given that the EU is providing developing assistance to new member states, which are in a position to begin eating away at Italy’s market share.

Confronted with the above mentioned challenges there are some key areas, which should be addressed to help prepare Italy to deal with competitive issues and remain successful in the future. In particular, areas of emphasis should include improving innovation, training and increasing coordination for SMEs, favouring risk taking and entrepreneurship (banking and private equity), labour market reforms, and government reforms.

Given that labor costs for small and medium enterprises, which are the engine of Italy’s economy, are difficult to reduce, innovation and efficiency should be put at the forefront of increasing the long-term competitiveness in a global context. Incremental improvements could occur in several ways. First, private run, government funded business assistance could be emphasized to support the small firm nexuses. Secondly, Italy’s R & D spending, one of the lowest in Europe (currently 1.2% of GDP), must increase to encourage innovation. It is the hope that innovations will also lead to higher quality products, compared with competitors. Academia could also play a role by offering incentives through regional scholarships to students who dedicate a portion of their studies working on the challenges of industrial districts. Additionally, tax incentives should be offered to firms that cooperate in and contribute to research projects and innovation experiments. Business assistance centers should offer technical and management training workshops for small family firms, which should improve the skills of “family managers.”

Regarding investments in Italy, in 2005, total private-equity investment in Italy was half the European average in proportion to GDP. As a rule, small firms with highly innovative projects are unable to raise funds directly in the capital market, nor can ordinary bank lending suffice. Thus, to help foster the growth of smaller firms the availability of private equity and bank loans must me made more available. Tax incentives for private equity firms (including foreign) and the reform of banking regulations could be a good starting point.

In addition to addressing the capital side of the equation, Italy must also work on adjusting its labor system. Reforms to the system could mitigate the current effects of long-term contracts and the lack of fungible labor. Additionally, the welfare system could emphasize retraining and the building of skills essential for the economy. Changes in this direction should help generate a more productive workforce, which has incentives and is accountable for its actions. The source of labor must also be addressed (i.e. the low birth rate and diminishing supply). The government could approach this issue from 2 sides: first, provide fiscal and social advantages for couples who engage in matrimony and offer support and heavy incentives to families that have children; second, evaluate increasing the number of immigrant work visas to skilled candidates from a basket of non-EU countries.

Finally, and perhaps a very difficult point, is that the Italian government, itself, must implement enforceable reforms that create transparency and accountability within the executive and judicial institutions. This can only be achieved with very strong, visionary political leadership.

To conclude, over many years, Italy has evolved into a unique economic system, with significantly high levels of specialized knowledge and collaboration, which has allowed it to become one of the most developed countries in the world. However, changing global competitive dynamics and demographic shifts have pressured and challenged this success framework. Thus, for the continued growth and prosperity of Italy, and its ability to be an influential economy, new approaches to the traditional system, along with governmental reforms, should be considered.