Competition in the global market

The value of business networks

The Italian industrial system is prevailingly formed by small and very small enterprises, concentrated in the manufacturing sector and strongly rooted in the national territory

To operate successfully in the globalized market and to compete with the new operators of rising Countries we need specific competences, adequate financial resources and a business organization able to grant an effective presence on wide territories from the geographical point of view.

Roberto Papeschi

The Italian industrial system is prevailingly formed by small and very small enterprises, concentrated in the manufacturing sector and strongly rooted in the national territory

In the present market phase, in which the consumptions of the most developed Countries are stagnant, the capability of exporting seems to be the distinguishing element of successful enterprises. This is true especially for a Country like Italy where the enterprise sizes are lower than other big European Countries’. In terms of number of small and medium enterprises (SME), in fact, Italy ranks first in Europe, counting almost the double of them in comparison with Germany (3.81 millions against 2.06 millions). Moreover, the vast majority of Italian SME is constituted by micro enterprises that employ less than ten people (3,610,090 enterprises out of a total of 3,813,805). An industrial structure of this type is affected by numerous negative aspects, including the fact that companies with these sizes contribute in relatively scarce way in employment and in the creation of added value. As a matter of fact, even if in Italy there are about 1.8 million SME more than in Germany, they employ 3 million people less and produce only 56% of the overall added value produced by the corresponding German firms. Moreover, other criticality element, SME in Italy are more concentrated in the manufacturing industry (31% against 21% of the EU mean), a sector that today is the one more exposed to the competition of developing nations with low labour cost. It is finally worth noticing that Italian SME tend to be rooted in the national territory and until now they have been scarcely oriented to operate in the global market. If we examine in fact the import-export data of the Community market we survey that, concerning imports only 6% of Italian SME buy products from other Union Countries against an EU average amounting to 17%, while only 3% of these same enterprises export in the rest of the EU, against the mean 7% of European SME. Naturally, the import-export situation of Italian enterprises with regard to non-European markets is even more negative, confirming the troubles with which deals the Italian industrial system to be competitive, on a world scale, owing to the small sizes of its companies.

The added value produced by Italian SME decreased in the 2005 – 2012 period unlike what happened in the rest of the 27-State Europe (Eurostat data processing by Cambridge Econometrics Institute)

A structural deficit
The data concerning the enterprise sizes of the Italian system show a cultural and structural deficit that damages the Country, in an economic context characterized by the market globalization. To operate successfully on the global market, in fact, you need business sizes allowing the availability of adequate financial resources and of advanced skills from the managerial and professional point of view, together with a corporate organization able to control diffusely a territory that is much extended geographically. How many companies, among Italian SME, can boast these characteristics? An analysis carried out by the Study Office of Mediobanca and published in 2001 highlighted that Italian SME able to compete on the global market were only a small percentage, out of a total of almost four million enterprises. In particular, the Mediobanca study indicated with the term of “Fourth Capitalism” an industrial system formed by a total slightly exceeding 4,000 Italian medium enterprises, each of them leader in its product sector and able to operate on the global market as real pocket multinationals, being able to match excellently high business culture with innovation capability, productive specialization and managerial flexibility. These enterprises, mainly headquartered in North Italy, are characterized by a family-type ownership and management, with irrelevant relationships with the capital market, to the extent that only few dozens of them are listed at the Stock Exchange. They are typically the basis of the Made in Italy, appreciated worldwide, and they operate in several product sectors, from goods for the care of the person and of the house to the machine tool and engineering industry in general. They have achieved important results in terms of growth and profitability, exporting on average more than 60% of their turnover. The enterprises of the Fourth Capitalism, however, cannot constitute the backbone of the economy of a Country with 60 million inhabitants. This is not possible in terms of contribution that these same enterprises can provide to employment and neither for the added value that they generate. The best of the Italian entrepreneurship represented by these same companies, in fact, operates in low added value ambits, not needing big capitals for investments in research and technological innovation. Also for this reason the generality of small and medium Italian enterprises turns to the self-financing for its development. Under these conditions, however, the competition with big world Groups, which thanks to scale economies can rely on huge financial resources, is unbearable in the medium-long term. This is especially true in a context of market globalization, where the business size constitutes a growing factor of organizational criticality, while the competition of the new players of rising markets is just moving towards the same product sectors in which the Made in Italy has reaped its best fruits until now.

The enterprises that even in the troubles of the general economic context have improved their competitive position are those that have staked on the export of Made in Italy

Business networks
The reasons for which in Italy, unlike our major European partners, big enterprises have not gradually grown in time and the few that existed, like Fiat, Olivetti or Montecatini, have disappeared or are disappearing, are numerous and partly include the individualistic nature of the entrepreneurs of this Country as well as the fact that Italy, until the end of the second world was, was a prevailingly agricultural Country. And even before, while in Europe big empires with solid central structures were rising, Italy was divided into small states under foreign government. But even when the unity of the nation was attained and also afterwards, along all the years of the economic miracle, Italy was not able to create a state structure and system infrastructures even remotely comparable to those of the other European Countries. Under these conditions the industries born in the post-war period were still too young and support infrastructures too weak to permit the Italian industrial system to react effectively to the market changes when it was transformed by globalization. In that context the Italian industrial system has developed according to the model of industrial districts, with chain aggregations prevailingly organized on territorial basis. The market globalization occurred in the last twenty years has made this development model obsolete, starting up a change process whose directions are, on one hand, the size growth of enterprises through a process of business merger and takeovers, mainly promoted by foreign investors. On the other hand there was the pursuit of purpose collaborations among different enterprises, anyway interested in a shared business. This is the route that has found its regulatory solution in the so-called “business networks”, based on an agreement, or better a contract, according to which activities and resources of one or more companies are shared in order to improve the entrepreneurial competitiveness of the members. The “business network” contract was introduced for the first time in Italy by the law 133/2008, referring to a decree of the Ministry for the Economic Development whose logic consisted in: “promoting the business system development through net actions strengthening the organizational measures, the production chain integration, the exchange and the diffusion of the best technologies, the development of support services and forms of collaboration among productive realities belonging to different regions,too”. Besides, the same decree provided for a first definition of the business networks, considered as: “free aggregation of productive centres, cohesive in the unitary development of industrial policies, also to the end of improving the presence in industrial markets”. This decree, however, was not transformed into law, but it was the preliminary condition for the successive law 33/2009 and then of the law 122/2010 aimed at disciplining business networks, with specific reference to the “network contract”.

Business networks are one of the answers that Italian SME are providing to compensate the structural disadvantage of their small sizes in the global market

The network contract
Business networks constitute an alternative for those companies that intend to enhance their competitive performance, individually and collectively, reaching and surpassing the threshold of a critical business mass, without necessarily merging of falling under the control of a single subject. The goals of the network, the mutual obligations among participants and the duration of the agreements are established in the “network contract” which must have mandatorily the form of la public deed or of a private writing. As such, the network contract must be drawn up and signed at the presence of a notary. Even if the contract must be entered in the commercial register of enterprises and the eventual presence of corporate assets and of a decision-making body are provided for, the business network is not a new model of company structure and neither an organization with legal personality and from this point of view it is similar to a community of people where all relationships are ruled by its members. For this reason the network is not a taxpayer and cannot issue invoices but it can however be holder of a bank account whose operating mandate is attributed to the performer subject entrusted with that in the network contract. Finally, concerning the responsibility of the joining companies, they are liable only to the extent of their contribution to the capital fund and of the obligations that they have assumed towards the other members, as specified in the network contract. Even with these limits, the business network can manage relationships with third parties and establish juridical relationships on behalf of its members, buy and sell goods and services, employ people and manage property rights such as patents and trademarks, in the ambit of the activities provided for by the network programme. Finally, it can participate in public tenders as well as take advantage of particular tax incentives, facilitations in the relationships with the Public Administration and of unsecured funds, when the latter are provided for by calls of the State or of the Region. Among the first bodies that issued calls for the promotion of business networks there are Tuscany Region, Emilia Romagna Region, Abruzzo Region, Basilicata Region, Calabria Region and Marche Region. The data published by Unioncamere highlight that the first network contract was signed in March 2010 and after little more than one year since the coming into force of this regulation, in Italy existed around 200 business networks with almost 1000 joining enterprises. At the end of 2012, moreover, the network contracts established in Italy had risen to 647, with 3,360 subjects involved, including 3350 enterprises, six foundations and four associations, coming from 99 provinces and distributed in all regions. The participation saw the presence of companies coming from all the Regions of the Country and especially from Lombardy (with 782 enterprises and 198 networks), from Emilia Romagna (with 482 enterprises and 145 networks) and Veneto (with 267 companies and 91 networks). Besides, concerning the network distribution by number of businesses, it turns out that the broader array of contracts concerns networks with a number of joining companies ranging from four to nine (310 networks). There are then 175 networks that include three subjects and 92 composed by two enterprises. According to Aldo Bonomi, vice-president of Confindustria, the target is to reach soon 2,000 network contracts, with 10,000 participating companies.

Through the business network, different entrepreneurial subjects interested in a common business share resources and competences, even maintaining a full corporate and managerial autonomy

A success still to be proven
In the opinion of the supporters of networks-businesses, the advantages of a network contract are numerous especially for small and medium enterprises that intend to enter new markets sharing their resources with other partners. In these cases, the network contract is considered as an innovative method to do business improving one’s own competitiveness and taking part in complex supply chains not otherwise accessible due to the lack of critical mass, especially in foreign markets. From this point of view, the network contract is considered a new and flexible instrument, suiting the requirements of businesses of any size and in any sector, integrating equally important but not easily reconcilable characteristics: the collaboration among different enterprises on shared programmes and with definite behaviour rules, together with the preservation of a complete entrepreneurial autonomy. More in detail, in favour of business networks it is worth reminding the possibility of sharing knowledge and competences with other enterprises, the establishment of innovative relationships of technical, industrial and commercial nature, among which very important is the collaboration with Universities and Research Centres, the possibility of benefitting from tax incentives and of gaining access under favourite conditions to public and private financial institutions, in addition to the prerogative of using infrastructures generally not accessible to small companies to widen the range of their goods and services, optimizing productive processes and reducing their implementation costs and times. Today, however, around two years after the first network contract, the uncertainties about the convenience of this form of association among enterprises have not been completely dissipated, also due to the slowness with which enterprises’ initiatives are going on towards this direction, compared with the other association forms with which a shared company business can be organized. In particular, when the reference market or the characteristics of the particular business make aggregations convenient, entrepreneurs can directly proceed with simple commercial agreements among the parties or with other operations of corporate type. Finally, when aggregations among enterprises are requested to take part in public tenders, they can turn to the already existing forms of associations such as TBA and Consortia. TBA (Temporary Business Association) is composed by organizations expressly conceived for activities addressed to a specific business, but limited in time. When on the contrary corporate alliances are more organic and the temporary business horizons are more extended, it is common practice for enterprises resorting to the most conventional examples of consortia, of which countless examples of application in the most different economic fields exist. Concerning then the tax reductions accessible to business networks, it is worth noticing that they are provided not as allocations of funds but rather in the prevailing form of suspension of the due tax on the profits accumulated in a capital fund intended for the realization of the network project. But considering that in these years corporate profits are absolutely random, such a tax incentive is scarcely significant, apart from the modest amount of funds that have been made available for these initiatives and the uncertainty for their future re-funding.

Distribution and number of business networks in the various Italian regions, surveyed at the end of 2012 (Data source Unioncamere/Infocamere)