Great instead of big: how Italian entrepreneurs are forming grids to beat the crisis
"Italy found an answer to two conflicting pressures: the necessity to cooperate, and the entrepreneurial need for independence"
Small and medium European businesses provide two thirds of all jobs in Europe, so it’s crucial to find new ways for these small companies to thrive even in uncertain times. In Italy, small companies have been organising themselves in so called “grids”, loose cooperations that allow them to work together in flexible and innovative ways. The model has proven so successful that the Italian government recently expanded the scope.
Italy, like the rest of Europe, depends heavily on small and medium sized enterprises for job creation: there are 4,4 million enterprises in Italy, of which only 3.400 are considered large. The rest are small and medium sized companies, or even micro-enterprises. (Only 5 % of Italian SME’s have more than 9 employees!)
But what sets Italy apart is the way how it made it possible for small companies to work together organically to beat the crisis.
The first forms of this cooperation appeared during the crisis of the 70’s and 80’s when small entrepreneurs joined forces in districts to keep their head above water. These districts arose naturally between local entrepreneurs who had known each other for a long time and had learned to trust each other.
Districts proved so successful that the Italian law maker recognized them on legislative level and introduced special regimes with tax, financial, administrative and R&D advantages for the districts. Today, there are more than 140 traditional districts and 20 technological districts all over the Italian territory.
Traditional districts are mainly engaged in metalworking, fashion, house system, food-industry. Technological districts are involved in ICT, pharmaceutical, aerospace and biomedical sectors.
Today, just like in the 70’s, the Italian industry faces economic difficulties. The crisis is characterised by high cost of labor, bureaucracy, excessive tax load, weak internal demand and generalized sense of uncertainty due to “Euro-crisis”.
Everybody realises that with demand in home markets down, growth will have to come from abroad. It’s here that grids clearly provide an advantage. SME’s who are organised in districts simply perform better than their counterparts who are not organised in districts. Even during the crisis SMEs in traditional districts continued to increase export at a pace of 8 % per year. SME’s in technological districts saw their exports increase at a pace of 5 % (with peak of 13% reached by biomedical districts).
Solving the puzzle: independence versus cooperation
Districts are not the only way Italian entrepreneurs can work together: they can also join a “grid” (contratto di rete, a cooperation specifically to increase innovation or competitiveness of Italian companies), or create ‘consortiums for internationalization’.
There are technical and legal differences between the three forms of cooperation, but all try to offer a solution for two conflicting pressures:
- On one hand, small companies realise that working together increased their potential to export or grow internationally. Paying for market research, legal research, and setting up operations abroad is very expensive. This goes for the EU, but especially so for companies looking to expand in countries like Russia or Brazil. If you can share costs with partners who are in the same industry but address a different segment, your chances of success will improve considerably.
- On the other hand, entrepreneurs don’t like to cede control over their operations. Entrepreneurs are fond of their independence, and they don’t want to be locked in a contract with a partner.
What these grid like structures have in common is that they offer a relatively low barrier of entry, and that it’s possible for the partners to define a point of exit that automatically dissolves the partnership. Partners can agree to have the grid dissolved when a certain milestone is reached, like when a company reaches a certain size. Or they can agree to work together for a defined period of time, like one or two years. This allows smaller companies to focus on being “great instead of big”.
Monti’s government is still taking steps to increase the export capabilities of the Italian SME’s, which it identified as a key means to overcome the crisis. Export consortia used to be limited to export and any related promotional activities. SME’s could only partner directly with other SME’s. Recently though, the scope of the consortia was widened considerably: banks, large corporations and public agencies can now participate.
Activities covered by the consortia now include
- preliminary research
- staffing and training
- and even import of raw materials and semi-finished products to be used in export products
The consortium for internationalisation is increasingly becoming a very sophisticated legal tool to form ad hoc cooperation with international and local stakeholders, and to explore new and promising markets.
If any other countries would be interested in setting up similar structures, I would advise them to consider these necessary conditions for succes:
1. Provide an easy exit. I think this has been a huge factor in the success of the Italian cooperation schemes. Smaller entrepreneurs want flexibility, and don’t want to be joined at the hip with other entrepreneurs whose focus or drive might change over time. Italian companies can even choose to automatically dissolve their cooperation based on milestones or timing.
2. Limit barriers of entry. In Italy, the administration will not impose particular restrictions on the size or revenue of partners in grids. If a bank and a few SME’s want to set up a consortium for internationalisation, they simply need to do their own homework. They have a strong incentive to perform checks on each other, anyway, and any additional adminstrative burden would probably only serve to slow the initiative down.
Talk to us!
Do you know other European countries who have special legal constructions that allow SME’s to work closely but without ceding control over operations or assuming a great deal of risk? Let us know at email@example.com
(Notes: SMEs are defined by the European Commission as having: (i) less than 250 persons employed; (ii) an annual turnover of up to EUR 50 million, or a balance sheet total of no more than EUR 43 million.
The phrase “Great instead of big” comes from D. Burlingham, author of ‘Small Giants. Companies that Choose to be Great Instead of Big’ New York, Penguin, 2005.)
Photo: Milan skyline, http://www.flickr.com/photos/ac_theart/
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