What’s Gone Wrong with the Third Italy

Msc BUSINESS ADMINISTRATION INTERNATIONAL BUSINESS CONTENT Introduction p. 3 Early glitches of the SMEs within the industrial districts p. 5 Analysis of two of the regional clusters at stake p. 6 What went wrong? p. 7 Concluding remarks p. 9 References p. 10 Introduction The purpose of this paper is to determine to which extent the economic areas known as ’Third Italy’ have not managed to achieve the well-desired status. The local development model has been presented as the perfect small-scale flexible capitalist type that has adopted a post-Fordist mode of production (Grancelli, 2007).

The economic cluster referred to as Third Italy, was founded in the post-war period (1950s and 1960s) when the global economy was going through hard times of recovery. In the north-east part of Italy a new type of firms was developed. The question may be put why didn’t the other two important industrialized districts known as First Italy (the industrial heartland of the North) and the Second Italy (the backward South) have become the regions of wealth and economic growth.

The answer lies primarily in the cultural values: the local culture of entrepreneurship and cooperation (Boschma, 1998) that to some extent doesn’t apply for other Italian regions. The following figure displays accurately the industrial zone of Italy: According to Bagnasco (1977) from a economic point of view Italy was divided into the ’Three Italies’: the North-west, the big companies, was tagged as ’central economy’, the shallow regions of the South seen as ’marginal economy’ and the central-North-eastern regions- known as Third Italy- haracterized by the presence of small firms that are defined as ’peripheral economy’. Nonetheless, the way in which the Third Italy region was defined didn’t hide the real facts; when compared to the North-west typology, productivity per worker and work unit-costs were sensibly lower. But this didn’t disable the central-north-east cluster to have a significant development process that is confirmed by: a reduction of agricultural employees, an increase in manufacturing workers, growth in resident population, and an upward trend in Italy’s industrial national product (Bianchi, 1998).

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The “Third Italy” region, also referred to as Emilia-Romagna, forms a north-eastern group of counties that propelled themselves to a position of prosperity between the relatively wealthy north-western triangle of Italy and the relatively impoverished Mezzagiorno region south of Rome (Walcott, 2007). Localized production centres utilize export-oriented niche specializations to create place-based economies supporting local firms. Related residents supply both low labour costs and endogenously accumulated capital.

Light industrial products include foods, clothing, shoes, furniture, and metal work for a craft-based market. Building on a textiles and leather goods specialization, that demands rapid responses to a notoriously fickle fashion market, familial and other locally forged trust-based ties enabled local star “Benetton” to become an international fashion retail chain. Knowledge of the local market was so finely tuned that offerings were famously differentiated even within the same city (Walcott, 2007).

External economies of place propelled tightly organized local regions to maximize returns based on clearly defined sectoral specialization. In one example clearly defying physical topography, Silicon Valley imitators sprang up around the globe as hopeful high technology havens. A real estate set-aside does not an industrial district make, however (Walcott, 2007). Early glitches of the SMEs within the industrial districts In the early 1990s the one of the menacing forces against the Italian industrial clusters was the post-industrial transition.

The internationalization of the economy endangers the developing process of small-scale firms. One good argument is the external market that provides expanded multinational, multi-product, multi-market companies (Holland, 1987). Even if the European Union is trying to help out these businesses by adopting policies and programmes the structural problems are not accurately aimed (Dastoli and Vilella, 1992: 179). Firms part of the Italian industrial district were running short of breath confirming that the market by its self regulation has launched an attack to the ’small is beautiful’ saying.

Innovation plays a key part in the life of small and medium enterprises (SMEs) from the industrial clusters. It is noticed a decline in the importance of factors sources of external economies) that empowered the initial outset of the firms. The long used external sources were starting to lose grip in the face of the needed environmental efficiency (Bianchi, 1998). The changes that had to be performed weren’t a walk in the park. According to Bianchi (1990): the local entrepreneurs’ social culture and the past history successes disable the belief of urgent innovation investment.

Also, economic barriers have prohibited small firms to access the large scale research and development, marketing and etc. (Regini and Sabel, 1989). Furthermore, two additional problems sprung up from the innovation process that need to be taken into consideration: ’product innovation’ in those zone of production with a highly design content that subtracts the formal innovation side rather than the technological innovation, because the first one includes creativity, imagination and taste, factors that are not easily obtained in business-set like this.

The other difficulty is process innovation meaning that adopting a higher technological labour focused system would both increase productivity and decrease costs (Bianchi, 1998). Hadjimicalis (Hadjimicalis, 2006) introduces a set of arguments that could nevertheless be the real ones behind Third Italy’s downturn. ’The lack of attention to the role of state’ implies the obsolete focus on different direct and indirect protectionist measures and regulations as in the work of radicals Stoper (1997) and Scott (1988).

The most important protectionist measures as the Multi-Fibre Agreement that went in favour for Italy’s blooming manufacturing industries. The regulatory decisions have protected Italy along with other countries from ’unlimited competition’ in garments and textiles from the menacing low waged countries in the Eastern part of the world. Another governmental intervention was the fiscal regulation which consisted the hedging the exchange rates for the lira due to the devaluations throughout the 20th century and one of them when Euro currency was adopted in 2001.

An interesting fact is that all those authors that supported the theories behind Third Italy industrial clusters as (Asheim 1999, Becattini 1990, Cooke 1988) haven’t seen the harsh reality of such a business type: poor working conditions and safety conditions, longer work hours and low paid working hours. All the other specific characteristics of the small-scale enterprises from the region as: flexibility, innovation and embbededness of small firms (Hadjimichalis, 2006). Another term that was used to explain the success of Italian IDs is ’social capital’.

It is the theoretical concept that has been used by various authors. A good perspective is seen through the lenses of Hadjimichalis: ’From individuals to communities, from firms to families, from cooperation to competition, from working conditions to unions, from trust and reciprocity to corruption and from the success to the failure of a place, all are called social capital’, this explaining clearly the real trend of firms within the Italian industrial clusters. Analysis of two of the regional clusters at stake

The most remarkable evolution oscillations can be outlined in Emilia-Romagna and Veneto provinces, where ’industrialisation without breaks’ (Fua,1983) was followed by a third party strategy ’without breaks’ which means that the regions have gained the prestige of stability organisms within the frontier of national development. The Piedmont and Lombardy are also good examples for the comparative advantage of their early launch and the lasting predominance of their industries provided the solid foundations for a strong post-industrial transition (Bianchi, 1998).

Tuscany, on the other hand, has badly faced up to the need to restructure during the 1980s. Its historical memory describes best the anti-industrial attitude of its ruling class. Differences between the two provinces within the Third Italy are clear. The Emilia-Romagna’s type of industrial development is seen as unique and deeply rooted in the region’s culture and entrepreneurial activity (Heidenreich, 1996) and when compared to Tuscany’s inability to cope with a model of development that seems inapplicable to the case.

Table 1 underlines the two differences in between the two regions described above. What went wrong? The industrial district of Third Italy (IDs) have suffered severe changes during the early 1990s because of the demand fall for Made in Italy products along with the emergence of new lower waged Eastern Europe companies and developing countries (Grancelli,2006). The active devaluation of the lira due to the euro introduction had a significant impact on the upward trend of Italian exports.

The small-scale enterprises that have set a foothold into the creation of the so-called Third Italy region, were basically family businesses which put all into a network bowl had formed the leading industrial area of Italy and a model to follow on by the emerging countries. Following the same idea it could be said that the demographic decline has started a process of ’social construction of the market’ (Bagnasco ;amp; Triglia 1984; Dei Ottati 1995; Provasi 2002).

The financial global crisis has put its fingerprint on the actual Italian industrial districts, but those enterprises that could jump incremental innovation and ensure a competitive position globally had somewhat survived the impact (Whitford, 2001). The latter example of firms shows that they have created vertically integrated organizational blueprints, and made foreign direct investments in contrast to the swept out firms that have just relocated part of their production (Grancelli, 2006) to low pay working force or to attract foreign workers in the home production facilities.

According to Hadjimichailis (2006) : The erosion of the Italian industrial clusters was made through: ’ Relocation of production in Eastern Europe in search of low labour costs’ and this gave birth to: a severe increase in unemployment percentages and adding the hiring of immigrant workers within the Italian borders. Hadjimichailis (2006) also introduces the ’bloody Taylorism’ term which is used in relation to the destination markets of the Italian entrepeneurs, Eastern Europe countries.

This is used in connection to the SMEs of Veneto which were thought to re-establish Fordist factories due to delocalization processes. One example is the relocated production quotas abroad which ranged from 23% to 45% that resulted in a decrease of 28% of employment, 38% of production units in the region. This being said, the following concluding remarks could be made: ’Fordism is not only alive and well at the global scale, but it also returns as a solution to Italian firms’ from the industrial clusters, which were the models of flexibility and industrial district mythology (Hadjimichailis, 2006 : 95).

The eastern slide of some of the sub-contractors from the Third Italy confirms the ideology that coordination between subsidiaries abroad and the parent company could not be only made through tacit knowledge of skilled workers and technicians remains an important factor even in a globally set value chain (Biggero, 2006). Those actors that have relocated their business into the Eastern part of Europe, Romania or other Balkan countries are seen as ’extroverted actors’ that also maintained relations within the home country district (Tappy, 2005).

An important technological disequilibrium was introduced in the late 1960s – plastic materials for ski boots - by the lively research of external knowledge through some of leading firms. Another challenge of the north-eastern industrial clusters is the superior technological level of the products and putting a foot in the door of appealing mergers and acquisitions. Old, traditional and family driven businesses that are identified within the Third Italy areas need to see the ever changing strategy patterns as to going from a production to design phase which could attract cost diminishing (Cooke, 1998).

It must not be neglected the power created by the tight bonded social network that has nurtured its roots for more than 50 years and before de ’90s has raised economic analysts’ eye browses throughout the world. Concluding remarks In order to survive, Italian industrial districts need to be fulfilling the following two conditions: their social and geographical division of labour remains globally competitive as compared to similar areas, sectors and other forms of industrial production, and their internal system of social reproduction remains unchallenged. Hadjimichalis, 2006) Mergers and acquisitions with famous brand names could be live threats for the small business embedded firms from the industrial zones of Italy. The power of Fordism has not dawned; in fact there is an increase of business deployment using this theory mainly in the Eastern countries. De-localization breaks the mesmerizing effect of small-scale flexible companies and builds up the multinational company picture having vertical integrated characteristics.

The presence of a huge wave of non-EU immigrants also changes the parameters of the Third Italy’s rather stable local social structure, with a cap on immigrations that could preserve craft traditions and the reproduction of skills. Even though ’Third Italy’ concept is turning ethereal, the back stage offers the resources, specific capabilities and core competencies developed throughout the years by the district firms to achieve competitive advantage in their markets but also to allow their sub-parts within the industrial system (Schiavone, 2004).

As theories claim Third Italy revolves around the social capital theories that also could be a driver for economic performance (Granato et al. , 1996). In addition to too little social capital, too much social capital could have a negative impact on economic performance (Boschma and Lambooy, 2002). Finally, it could be assumed that the process of rethinking and reorienting of Third Italy’s entrepreneurial and family based firms has done a significant change to whole industrial aggregate. References Asheim B. (1999), “ Interactive learning and localized knowledge in globalising learning economies”.

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