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Italy TrendChart Country Report 2006 - Innova

Italy TrendChart Country Report 2006 - Innova

Executive Summary 1.

Executive Summary 1. Introduction: innovation performance and policy objectives Over the last decade Italy’s economic growth has slowed and come to a halt, independently of the world economic cycle. It has been held back by the structural problems that reduce the ability of Italy’s productive system to take advantage of the opportunities inherent in the new patterns of world trade and of the innovative technologies that have spread throughout the world. The first few months of 2006 showed a slow recovery of the Italian economy. The qualitative cyclical indicators appear more favourable, signalling a strengthening climate of confidence among both firms and households. On the whole, very short-term statistical forecasting models suggest a return to positive GDP growth during the first semester of 2006 and improvements of some economic indicators compared with the low performance of the previous year. In fact, in 2005, the Italian economy stagnated with weak signs of recovery and the growth gap with respect to other eurozone countries widened. Low household spending, investment reduction and stable exports have contributed to the stagnation. The export situation is a clear sign of the country’s structural difficulty to adapt to the new technological and competitive context. According to the diagnosis endorsed by the majority of observers, the country’s prolonged social and productive stagnation is explained by the following factors: (i) insufficient business innovation in terms of processes, products and organisational innovation; (ii) inadequate average level of skills and know-how among the adult and the young population that affects workers’ productivity; (iii) an inefficient capital market; (iv) an insufficient quality and availability of several collective services often supplied with an inadequate cost/quality ratio offer. Between 1995 and 2004, Italian GDP grew by 1.6% per year on average, while growth in the eurozone reached an average of 2%. The lack of any growth at all in 2005 has further widened the growth gap with respect to the other leading EU countries. In spite of low growth, robust job creation in recent years has contributed to a fall in the unemployment rate to less than 8% in 2005. Although the gap is narrowing, the unemployment rate is still high compared to the OECD average and the employment ratio remains relatively low (57.4%), especially for females and senior workers, and far below the Lisbon target (70% by 2010). Inflation is still high (2.2% in 2005) and the gap to the EU average in consumer price inflation is expected to widen in 2006. Italy has a very large public debt that still exceeds 100% of GDP (the estimate for 2006 is 107.4%). Italian SMEs are characterised by a high degree of dynamics, however, as far as innovation indicators are concerned (business R&D expenditure; S&E graduates; tertiary education; lifelong learning; early stage venture capital; EPO and USPTO patents), Italy is still behind its main European partners, as shown by the Summary Innovation Index for European countries in which Italy has been ranked in 17 th place for the past three years. It has to be noted that, in spite of an overall deficient performance, the country performs better on indicators for non-technical changes (i.e. changed organisational structures and innovation generating significant changes/improvements in aesthetic appearance and industrial design). Several structural and cyclical factors differentiate the Italian economic system from its main international partners and they strongly influence the diffusion of innovation patterns and high-tech systems. These are: (i) a predominance of SMEs, which affects R&D expenditure, innovation enhancement and human capital improvement, (ii) the perception of innovation by SMEs as a modernisation process rather than as a strategic activity, (iii) an uneven distribution of economic activity and ICT infrastructure, (iv) low levels of technical education, (v) a limited propensity to patent applications, (vi) a shortage of finance and need for a more dynamic venture capital market. Furthermore, the majority of SMEs do not carry out “formal” R&D activities, but their innovative processes are strictly linked to their capacity of learning-by-doing. The innovation carried out by these enterprises is not properly recorded in the statistics since statistical data on innovation records only the more formal innovative activities (e.g. patents registration). In the light of this context, the main innovation policy objectives at national and regional level can be summarised as follows: (i) increase R&D spending (3% of GDP); (ii) increase business expenditure on R&D (66% of R&D spending), (iii) increase the use of digital technologies by SMEs, (iv) increase the digitalisation of the public administration; (v) increase/improve the educational attainment of the 1

population; and (vi) increase the networking and the interactions among the main players of the innovation system (the much quoted sentence “fare sistema”). 2. Major innovation challenges and policy responses Challenge 1: Creation of an environment favourable to innovation, specially for SMEs The creation of an environment favourable to innovation, especially for SMEs is a key challenge for the country and it is where Italy’s most obvious shortfall is found. It is a strategic priority since the lack of innovation is one of the reasons for the drop in competitiveness of the Italian system. It is also important to bear in mind that the key challenge specifically addresses SMEs and not larger firms as the former make up more than 98% of the Italian industrial fabric. Furthermore, it is also important to bear in mind that the country is specialised in mature/traditional sectors rather than in high-tech ones. Therefore the challenge is to promote innovation within the “bulk” of the Italian industry. The Italian government is aware of this situation and has launched several measures to address this challenge. However, when it comes to the practical aspects, the public instruments currently available to support innovation seem, in many cases, more suitable for larger enterprises. Actually, the administrative/bureaucratic burden in terms of eligibility, access conditions, delays in the publication of calls, evaluation of proposals and the effective provision of funds to the beneficiaries together with the uncertain continuity of measures often discourage the use of these instruments by SMEs. In addition, the latest reform of the public incentive system, rather than favouring, penalises SMEs in the access to credit. Furthermore, changes in legislation (e.g. increases and decreases in the tax on patents registration) certainly do not contribute to the creation of a confident climate. Finally, interesting measures that could have a positive impact - notwithstanding their somewhat limited budget - (e.g. high-tech fund for SMEs) restrict their application to selected high-tech sectors instead of covering all sectors. Likewise, the Italian National Reform Programme – PICO - recognises the need to boost innovation and technology transfer but the majority of the actions proposed focus on the development of strategic, high-tech sectors. To cite an example, one of the NRP’s key actions is the development of 12 strategic research programmes in specific areas, but only two (advanced materials-ceramics and food and agriculture) refer to “traditional” sectors, which is where most of the Italian SMEs operate. The same applies to another initiative related to the creation of 12 dedicated laboratories in key sectors, where only one focuses on applications in the food and agriculture, tourism and cultural heritage sectors. It can be seen that the country has opted for the development and support of hightech sectors, which is, without a doubt, a sound strategy for development but, at the same time, the government should not forget to implement initiatives aimed at the reinforcement of traditional sectors of the “made in Italy” segment (that have enjoyed a privileged position in the past) and sectors where Italy has a competitive advantage (e.g. tourism, cultural heritage) that could be re-launched and modernised by fostering innovation and by the introduction/application of the latest technologies developed in other sectors. Challenge 2: Improving innovation financing (banking system and venture capital), especially for SMEs The limited access pf SMEs to funding is another key challenge for the Italian system as increasing global competition calls for investments in innovation. Shortage of finance has been recognised as one of the main factors that hinder innovation and Italy is particularly badly placed in this field. Until very recently the theme of finance for innovation has been largely neglected. The Italian capital market is inefficient, slowing down the growth of companies through the introduction of third-party capital. The reform of the banking system and the reform of the public incentive system – which foresees an active participation of private banks in the system of access to credit - have not yet led to an increased capacity to establish adequate bank-business relationships, thus hindering innovation capacity and the growth of SMEs. In the Italian financial system, which is closely associated with the banking sector, steps must be taken to re-draw the rules these institutions apply to assess the viability of innovative projects, in order to combine the current rating methods based on financial and balance sheet performance with forms of technological rating; this would allow greater scope for solutions in which banks become shareholders in innovative firms and to increase the popularity of venture capital. Venture capital is another area where Italy is performing badly. Despite the launch of the high-tech fund for SMEs in 2005 (expected to start functioning in the following months) and despite several initiatives at regional level (“Early stage” fund in Tuscany, “Ingenium” in Emilia Romagna, “Next” in Lombardy, etc.) the venture capital market in Italy still has a long way to go. The National Reform Programme PICO cites the role of venture capital for entrepreneurship and recalls the fund for 2

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