Inside the Magic Box: Internet and the Growth of Small and MediumSized Enterprises Some Evidence fro

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Inside the Magic Box Internet and the
Growthof Small and Medium-Sized EnterprisesSome
Evidence from ItalybyGiovanni Ferri (),
Marzio Galeotti (), and Ottavio Ricchi ()
Istat - Stat-Fin Joint Workshop  Productivity
and Competitiveness in the New Information
Economy Rome, June 26th and 27th, 2003

• () Università degli Studi di Bari
• () Università degli Studi di Bergamo
• () Ministero dell Economia e delle Finanze

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Presentation outlay

• The focus is on the relationship between internet
  and (Italian) SMEs operating in non-ICT sectors.
• There are three main sections
• 1 - Short review of the new economy literature
  that looks at the impact of ICT/internet on
  aggregated growth and, more specifically, on SMEs
  growth.
• 2 - Analysis of the impact of the new economy on
  a productive system specialized in the old
  economy what does the theory predicts? Is there
  something special with Italy? A sample survey of
  450 Italian SMEs is described
• 3 - Empirical analysis,
• We argue that a) we can not find evidence of
  internet affecting directly companies growth b)
  however internet does seem to loosen some of the
  constraints that usually inhibits SMEs growth c)
  this mechanism works irrespectively of the
  sector in which the firms operate

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New Economy, Aggregate Economic Growth and the
Growth of Small Firms

• the debate on the impact of the new economy on
  macroeconomic performance can very shortly be
  summarized
• Unlike most of the OECD members, US and other
  economies strong on ICT (other Anglo-Saxon and
  northern Europe countries) in the 90s grew
  faster than in the 80s
• The acceleration was accompanied by a boost in
  productivity related to TFP increase in ICT
  sectors and to capital deepening in non ICT
  sectors.
• Whether or not the acceleration in productivity
  growth can be attributed to a technological
  revolution brought about by ICT is still under
  discussion. The implication on employment,
  business cycle and other relevant aspects are
  also being debated. (Gordon (2000), Oliner and
  Sichel (2000), and Jorgenson and Stiroh (2000).
  More recently, Stiroh, 2001 Baily and Lawrence,
  2001.

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• Effects of ICT on enterprises productivity are
• Efficiency gains and organizational changes
  related to network aspects of the new economy
  (Mariotti, 1997)
• Reduction of management costs, increased
  possibility of delegation and more intense use of
  idiosyncratic knowledge (Schivardi and Trento,
  2000)
• This benefits should be ripped everywhere,
  however it is difficult to find a direct impact
  of ICT investment on productivity outside US. The
  difficulty is probably increased by poor data.
  Ref. Bassanini, Scarpetta e Visco (2000) Daveri
  (2000).
• Two more facts are relevant. There is a lag (with
  respect to the US) in the diffusion of ICT
  investment therefore the benefits might still be
  on the way. In continental Europe the ICT
  sector is relatively smaller therefore most of
  the benefits should - in any case - arise from
  capital deepening. .
• SMI accounts for 95 of enterprises and for 60
  to 70 of employment therefore perspective
  impact of New economy on them is very important

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• SMEs are generally more flexible and innovative
  than larger firms (Brok and Evans, 1989 Acs,
  1996 Sutton, 1997).
  We lay down the role that the new economy can
  play
• We focus on determinants of SMEs growth and on
  constraints that inhibit it internet
• However they confront a number of problems
  financial constraints, difficulty in accessing
  and exploiting technology, regulatory burdens
  labor constraints
• The new economy, and in particular internet,
  discloses a number of opportunities for SMEs,
  giving rise to
• Possibility to exploit at the same time the
  advantages of small scale and the economies of
  scale through networking amongst firms and with
  other institutions
• Increased chances to expand product market and
  consumer base and to bypass entry barrier in
  foreign markets
• Enhanced capability to overcome infrastructure
  and structural obstacles
• Opportunities for venture capital to operate
  (whit a positive feedback of further development
  of the ICT sector)

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The New economy in a productive system
specialized in the Old economy, the Italian case

• Relevant facts about Italy (Schivardi and Trento,
  2000)
• Most of the Italian companies operate in non-ICT
  sector
• Specialization in quality consumer goods depends
  on specialized labor this might pose specific
  requirement for ICT applications
• Productive system based on SMEs clustered in
  industrial districts
• Small size of companies may limit ICT adoption
  at the same time it might lower incentives to
  vertical integration
• Possible implications and issues to look at
  empirically
• relationship between internet and firm size,
  performance
• How does ICT interacts with constraint faced by
  SMEs
• enhanced competitiveness of industrial districts
• relationship between ICT, human capital and, more
  in general, labor

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Survey design
In the summer of 2000, we interviewed 450
Italian SMEs having size comprised between 5 and
50 employees. In addition, our sample has the
following characteristics

• Half of the firms have less than 16 employees
  while the other half have more than 15 employees.
• Half of the firms in the sample are incorporated
  as limited liability companies (SRL) while the
  other half are joint stock companies (SPA).
• 80 percent of the firms belong to the
  manufacturing sector, while the rest is in the
  service sector.
• The sample shares are very close for the four
  geographic areas in which Italy may be subdivided
  (Northwest, Northeast, Center, South-Islands).

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Main statistics

• Average growth of sales over the three-year
  period (1997-99) is 17.4 percent.
• As a ratio to sales our firms export a
  significant share (19.2 percent) and spend
  non-negligible amounts in RD (5.4 percent).
• 18.9 percent of our firms have education
  agreements with schools and/or universities
• 29.1 percent belong to industrial districts and
  24.4 percent participate in a Consorzio fidi,
• 76.9 percent of the cases managers are also
  members of the controlling family
• 60 percent of the companies own a website

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SMEs were asked which are the constraints to firm
growth they perceived as most binding.

• labor market issues 30.5
• labor cost is too high 5.8
• insufficient supply of skilled workers
  9.8
• inadequate flexibility of the labor market
  14.9
• the tax system 28.8
• relationship with Public Administrations 20.4
• Access/cost of external financial
  resources 19.6
• Competition adverse market conditions 17.4
• infrastructure quality 6.0
• Lack of state support 8.2
• Other
  17.3

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Descriptive evidence
A few distinctive features of high-growth and
low-growth SMEs
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Firms Features as to Internet and E-Commerce
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Some very preliminary and rudimental usage of
cluster analysis. NOT INCLUDED IN THE PAPER
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Conclusions,

• it is difficult to identify a direct impact of
  Internet on firms sales growth
• generally, our indirect constraints indicator
  appear to limit company growth
• constraints to SME growth are affected by ICT,
  some (but not all) of the constraints are weaker
  for those firms that are active on Internet

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Open issues and possible extensions,

• Is the analysis vulnerable to the new economy
  bubble burst? NOT SO MUCH
• Survey design issues
• We only use sales growth as a performance
  indicator but also investment and export (both
  as a proportion of sales growth) could be
  perceived as such
• Relationship between internet and
• firm size
• usage at sector level
• Industrial districts
• has not yet been fully analyzed