Where SMEs thrive

Strengthening small- and mid-size enterprises to make the Korean economic model fairer and more equitable was one of the leitmotifs of the recent presidential campaign. Germany is the model to which many people point to. Italy could be another European country for the new Korean leadership to study as it seeks to promote so-called economic democratization.

That Italy is a country of SMEs is well-known. There are 3.5 million SMEs accounting for 67 percent of the country’s employment and 58 percent of its gross domestic product. Of course, most of them are micro-firms with less than 10 employees and with generally low productivity. But it is Italy’s internationally successful medium-sized firms that have captured the attention of economists and policy-makers.

Their strength lies in so-called network economies. Just as the Korean chaebol thrive on economies of scale - the ability to mass produce beyond the point that marginal costs start declining - Italian small firms flourish by clustering together in areas that produce and export high-quality goods. We’d like to meet the Korean woman who doesn’t dream of Italian fashion goods and luxury accessories! In fact, the main products that bear the label “Made in Italy” are less glamorous capital goods, including machine tools and equipment for textiles and clothing, leather and footwear, food processing and agriculture, packaging, wood processing, ceramics and metalworking.

The Mirandola biomedical cluster in the Emilia-Romagna region, close to Bologna, is a prime example. Since the 1960s, local entrepreneurs have developed competencies in the production of increasingly sophisticated medical equipment and have managed to attract large biomedical multinationals thanks to continuous innovation.

Most companies in Mirandola remain SMEs and they invest continuously to find new products and process innovations and build long-term supply arrangements with large multinationals. It is the smaller SMEs in the cluster, which have been unable to make such investments, that suffer. For a long time, the local SME association has been trying to convince them to collaborate more, but as elsewhere, entrepreneurs are very jealous of their independence and autonomy, even when it doesn’t play to their advantage.

Globalization has made it necessary for the Italian industrial model to adapt and the global financial and fiscal crisis is putting an extra strain on SMEs strongly rooted in their communities. A process of natural selection is taking place: Some districts are withering, while in others, leading companies are reaching outside the boundaries of their district to start outsourcing production to lower-cost locations and be close to the emerging middle classes of Asia and Latin America.

In Shanghai alone, Italy’s Consul General reckons there are more than 4,000 Italian factories. It’s hard to find an Italian entrepreneur who doesn’t dream of owning a subsidiary in China! Despite the problems of Italian big business and the increasing cost of energy imports - Italy, like Korea, hardly produces a drop of hydrocarbons - the industrial districts keep generating huge trade surpluses: 59 billion euros ($80.1 billion) in 2007, before the Lehman Brothers crisis, and 49 billion euros in 2011.

SMEs do not become more international in their production footprint alone. They also gather ideas, generate innovation and recruit local talent. The other side of the coin is a growing openness to immigrants at home. Italy has transformed itself in 20 years from a rather homogeneous country with an important diaspora to a more multi-ethnic society. It wasn’t without difficulty, for sure. But SMEs played an important role in generating employment and, more recently, entrepreneurial opportunities.

Which institutions have made it possible to achieve international competitiveness and preserve social stability? The success of the cluster phenomenon is rooted in the local context, local traditions and forms of social and economic organization. In Emilia-Romagna, regional authorities have implemented an industrial policy since the 1980s aimed at boosting competitiveness through better conditions for doing business and encouragements to companies that restructure to keep competitive.

At the initial stage, the focus was on the provision of services to help SMEs develop and social services like technical education and childcare that encouraged employees to acquire training and be more involved at work. Since the 1990s, industrial policy has aimed at creating a regional innovation system, connecting firms, universities and research institutions, which helped upgrade traditional sectors and lead to the development of new sectors.

Of course, not all is perfect. In some sectors SMEs are just too small to compete effectively against German (or Korean) rivals. Access to finance remains a major issue, and payment delays from customers (larger firms or the public administration) may generate liquidity problems. And the constant flow of highly-skilled craftsmen is slowly drying up as the younger generation prefers other occupations. But there are positive signals. For instance, the “Made in Italy portal” (http://www.madeinitaly.gov.it/), available in Italian, English, Chinese and Russian, helps Italian companies promote and sell their products around the world.

In May 2012, a earthquake devastated large portions of Emilia Romagna and the Mirandola biomedical district was severely hit. Its rapid recovery only four months after the quake - all schools in the affected areas were rebuilt - owes a lot to the high social capital that accumulated over the years thanks to the progressive social policies implemented by the Emilia-Romagna region.

The whole population mobilized to assist companies in damaged areas, kick-start reconstruction even before public funds became available and quickly resume economic activities. All kinds of people, including many immigrants, offered hospitality to those who had lost their homes due to the earthquake or went to damaged areas to help reconstruct.

Italy vindicates the expectation that innovative policies to assist small firms are crucial to creating jobs, supporting the economically weak and making the national economy more resilient. While no model can be reproduced and transplanted elsewhere, there is value in knowledge-sharing. Our advice: Forget the euro crisis and turn to Italy for inspiration!

*The author is in charge of Global Relations at the OECD Investment Division. He was Deputy Director of the Heiligendamm L’Aquila Process (the G8-G5 political dialogue) Support Unit at the OECD between 2008-10 and previously was a senior economist with the OECD development center and economics department and the World Bank Group.

by Andrea Goldstein