This report provides insights into the macro and microeconomic underpinnings of company profitability developments in Italy. It shows that the average ROA (returns on assets) of Italian companies declined slightly between 1993 and 2005 and then contracted sharply during the economic crisis before starting a slow recovery in 2013.
This decline appears to be attributable to a fall in productivity, rather than a rise in labour costs. The results are interpreted in terms of ‘active’ (based on innovation and higher expenditure on intermediate goods and labour) and ‘passive’ (based on cost control) business models, with the latter exemplified by domestic and usually small-sized and family-owned firms. From this perspective, subsidising innovation could treat the symptom rather than the disease. Instead, medium-to long term policies should focus on increasing the share of firms with ‘active’ business models.
The econometric analysis suggests possible instruments: increasing the efficiency of the market for corporate control; reducing the government ownership of firms; increasing the degree of competition in sectors where barriers are still present; and improving the effectiveness of the education system to raise the human capital endowment available to businesses.