In our view, the policy levers can be divided into three main areas:
i) measures directly aimed at influencing firms’ specific decisions;
ii) regulations of specific sectors or markets such as product, labor, and financial ones; and
iii) reforms of the business environment in general: the functioning of the
public administration, the rule of law, the education system, the availability of material and immaterial
infrastructure and the structure of the taxation system can all importantly affect, even distort, both
firms’ choices and allocative efficiency.
Our general conclusion is that policy priorities should fall into areas i) and iii). In area ii), we
acknowledge the efficacy of the intense reform effort in the labor and product markets; here we just see
scope for some further adjustments regarding the implementation of the new active labor market policy
setting and the removal of excessive product market regulations in some service sectors (mostly,
professional services and local public services).49 The Italian financial system is too bank-centered and
as such not geared enough towards supporting innovation and other risky activities that are better
financed by equity rather than debt. In this regard, measures aimed at improving firms’
capitalization and stimulating stock market listings and private bond issuing are very much needed;
as an example, the recently introduced Allowance for Corporate Equity50 has indeed favored a
change in firms’ financial structure (De Socio and Nigro, 2012; Gobbi, 2014; Rossi, 2016). As to the
banking system we recall Governor Visco’s 2017 speech to the Italian Bankers’ Association: ‘banks, too,
must change, seeking to become more resilient and increase profitability…Increasing profitability can be achieved only
through further progress in cost-cutting, organizational restructuring, and the adoption of effective governance
models; banks should make the necessary investment to meet, including by updating their business models, the
challenges posed by the sweeping changes in technology, regulation, market structures, and consumers’ demands’.
Let us now move to the policy priorities. In the first area, policy interventions should aim at
reducing the costs of investment (in both tangible and intangible assets) and innovation. If effective,
such measures would bring a double dividend: triggering the desired structural change on one side and
sustaining the growth of aggregate demand with further positive side effects on the willingness and
49 The most important measures may be found in the strengthening of the powers of the Competition Authority, the
establishment of a new independent regulator for public transport, and the transfer of water services into the regulatory
structure for utilities.
50 The Allowance for Corporate Equity (ACE, also known as Notional Interest Deduction - NID) is a tax incentive
introduced to promote the recapitalization of undertakings and to mitigate the different tax treatment applied to companies
funded with debt and others funded with equity. The qualifying equity increases may be inclusive of equity contributions,
retained earnings (with the exception of profits allocated to a non-disposable reserve), shareholders credits’ waiver.
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convenience of firms to grow, to undertake risky, but potentially more profitable, projects, and update
their technological endowment and organization.
Since the sovereign debt crisis, Italian governments have been particularly active in this field.
They have introduced direct subsidies to investments, such as the “new Sabatini Law”, and tax credits
such as ‘super-depreciation’ and ‘hyper-depreciation’, the latter being targeted to new advanced
technologies. To support innovation, industrial policy has been completely overhauled with measures
aimed at innovative start-ups, R&D tax credit for incumbent firms and the patent box for large,
multinational and strong innovators. While this new setting is in line with best international practices,
what still seems to be missing is the provision of careful policy evaluation assessments made by
independent authorities on the basis of the best practices recognized at international level. The
availability of such a reliable assessment is a necessary condition for selecting the most effective
instruments, redesigning the others, better allocating the limited funds across them.51
While the measures to support innovation and technology adoption go in the right direction, they
must be supplemented with interventions aimed at helping the financial intermediaries specialized in
innovative projects in their early stages and in evaluating intangible assets52, and improving the
cooperation between firms and universities in the creation of new technologies and products.53
Employer associations and unions should redesign the industrial relations system so as to
encourage contract decentralization. Strengthening the organizational flexibility of firms by providing a
better alignment between wage and productivity dynamics would benefit product, process and
organizational innovations, the adoption of new technologies and managerial practices and therefore
the competitiveness of the productive system as a whole.
The third area of measures is the one where we see a bigger and more pressing need for
intervention. Overall, what is needed are reforms that often are very complex and entail short-term
political costs with longer-term economic benefits.
51 It must be considered that, like many other reforms, it takes time for the positive effects to be identifiable, especially if the
policies are enacted in a period when demand collapses.
52 As happened in the US, Germany, Sweden and the UK (Hall, 2009), some sort of public support to the development of
venture capital intermediaries could be effective. This is desirable both in general terms since this market could be
underdeveloped due to some form of coordination failure (Lerner, 2009b) and more specifically in the Italian case where
foreign intermediaries may be reluctant to enter for the difficulties of evaluating small and not very transparent businesses,
for regulatory and linguistic barriers, and for other hurdles related to the functioning of the institutional context (for
example, the inefficiency of the public administration and the civil justice). See Bugamelli et al. (2012) for a more detailed
discussion on the policy interventions that might be needed in Italy.
53 The German model with public research centers specialized in specific fields and highly incentivized to favor the transfers
of new technologies to the private sector seems to be the right direction to go (Bugamelli et al. 2012).
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Starting with taxation, the work by Bobbio (2016) highlights that tax evasion, often caused by a
high tax burden, can be highly distortive because it generates unfair competition, limiting firms’ growth
and overall innovation. While Bobbio (2016) offers one clever example of how tax distortions may
severely impact on growth, we deem that for an effective and comprehensive reform a deeper analysis
of the structure of corporate taxation and of its real effects is very much needed.
Strengthening the innovative capability of the Italian productive system means raising the quality
of human capital. This calls for action along the whole chain: the education system (schools and
universities), the transition from education to work and on-the-job training. It is surely useful to
strengthen the evaluation system introduced by the INVALSI (the Italian National Education Service
for Schools) to reduce the existing disparities in schools; the same applies to the action of ANVUR,
which is the equivalent of IVALSI for the University system. The governance system must grant
universities and other institutions the flexibility to promptly adapt to the economic dynamics, updating
curricula and encouraging the transmission of knowledge between the productive and the educational
system. A larger supply of professional-oriented tertiary courses, though still very limited, could help
narrow the educational attainment gap with other countries and reduce the distance between the
demand and the supply of skills.
Improvements in the quantity and quality of material and immaterial infrastructures are much
needed. The fall in public investment since the crisis has weighed on infrastructure development.
However, returns to investment primarily depend on its quality and efficiency. Despite some progress,
in Italy time to completion is still long and costs remain high by international standards. Apart from
illegality, this reflects the uncertainty of the funding framework, weakness in project selection and
assessment, overlapping powers and responsibilities among different levels of government, and the
shortcomings of the rules governing public procurement. The new Procurement Code contains
relevant provisions to increase the efficiency of infrastructure spending. However, one and half years
after its approval, important parts of the reform (especially those aimed at reorganizing the functions of
contracting authorities) have not yet been implemented.
As to digital infrastructures, the Italian Digital Agenda’s commitment to bridging the digital
divide54 is key; to increase effectiveness, measures on the supply side must be accompanied by an
54 The goal is to enable 85 per cent of citizens, as well as public buildings, to have a connection speed of at least 100 Mbps.
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appropriate stimulus to demand55 by encouraging the development of e-commerce and e-government
and taking concrete action in the spheres of education and training.56
On the insolvency regime reforms are under way. After the measures introduced in 2015-2016 to
foster credit recovery and favor the restructuring of distressed firms, in October 2017 an enabling law
has been approved. The law tackles the main factors that negatively affect the functioning of the system
and contains provisions to enhance judges specialization and to favor early emergence of the crisis.
Going forward, the way the principles outlined in the law will be implemented is key for the success of
the reform.
This leads to the last, but definitely not least, point: the business environment. According to
some estimates by the Ministry for Simplification and Public Administration, Italian firms spend 1.7 per
cent of GDP on dealing with bureaucracy. This burden is often an incentive for firms to engage in rentseeking
behavior, with detrimental effects on competition, innovation and aggregate productivity
(Akcigit et al, 2017). The inefficiency of the civil justice system57, the degree of corruption, the presence
of organized crime, and the general malfunctioning of the public administration58 are the main drags
on productivity and GDP growth. The policy interventions on these matters have been very limited
and often ineffective. Besides their complexity, these reforms require a long-term perspective with
broad support that must go beyond a single legislature to avoid the risk of policy reversal.
