The importance of innovation. Originality in exports. The extraordinary power of human capital in this era of the “knowledge economy”. These are the things that the experience of Silicon Valley can teach Italy’s prime minister, Matteo Renzi, who is in search of ideas to revitalise his country’s economic growth. This was the gist of a lengthy article by Enrico Moretti, a professor at the University of California, Berkeley, which was published last Friday in La Stampa following the meetings that Renzi had with the Italian scientific community in San Francisco and with the senior management of three of the most important corporations of the digital economy, namely Google, Yahoo and Twitter.
Moretti is a brilliant economist, one who has earned the appreciation of America’s president, Barack Obama, and who is known for his ideas in a recent book, The New Geography of Jobs (published in the US by Houghton Mifflin Harcourt and previously featured on this blog), about the importance of high tech in generating jobs, even in the more traditional service industries. As an experienced economist, one well familiar with the structure of the Italian economy and the reasons behind the country’s gap in productivity and competitiveness and in a position to compare Italy to the Silicon Valley in the name of innovation, he knows that development doesn’t come from the blind application of a successful model taken from a completely different context, but he also knows that innovative ideas successfully tested in one area of the world can provide invaluable ideas if shrewdly adapted to different situations.
So what does California’s high-tech industry have to tell us here in Italy, having been humbled by two decades of stagnant growth and a lengthy period of recession?
Moretti’s first point concerns the role of the “innovation sector” (a driving force not only in Silicon Valley, but also in other cities, including Boston, Seattle, Austin and Washington) and the industrial makeup of the export sector. Although it gives jobs to less than a third of the American workforce, exports are dominated by highly innovative industries and drive the entire economy. Moretti explains that businesses invest heavily in research and development, thereby generating unique goods and services that no other nation knows how to create. Globalisation benefits the businesses in this sector because emerging markets are not competition, but rather markets in which to sell their products. As China, Brazil or Poland grow, demand for products coming out of Silicon Valley increases, and this translates into more jobs and higher salaries. In Italy, on the other hand, Moretti says that exports are dominated by more traditional industries, from textiles and furniture to footwear and eyewear, which are under attack from international competition, and Italian businesses continue, unfortunately, to invest very little in research and development, not only as compared to Silicon Valley, but also as compared to nearly all other European nations. Stagnation and decline are inevitable under such circumstances.
But there’s more. In Silicon Valley, businesses start small and then grow. Even if many fail, one in a hundred becomes a global powerhouse with tens of thousands of employees. Italian businesses, on the other hand, start small and stay that way, due, to some extent, to deeply rooted cultural reasons, but also because Italy’s employment legislation and great fiscal pressures discourage growth.
Moreover, Silicon Valley firms invest a great deal in human capital, from in-house training and outside specialisation programmes to time set aside for personal projects or sabbaticals. Conversely, Italian businesses invest very little, which is having increasingly toxic consequences on worker productivity and on their ability to generate innovation. In the US, we see a virtuous cycle in which innovation leads to growth, which generates the resources to fund further investment in research and development and to create wealth and jobs. Indeed, the creation of economic value depends on talent and human capital like never before. Here in Italy, on the other hand, the cycle is a vicious one, made of scarce investment, limited wealth, decline, a lack of resources, and spiralling ever downward.
Moretti insists that the sum of all of these factors explains why the average productivity of export workers in Silicon Valley is more than double that of the average export worker in Italy, and this has an adverse effect on the nation’s entire economy in the form of lower productivity, fewer jobs even in the rest of the manufacturing and service sectors, lower wages, and less wealth.
So how do we close this gap? Moretti explains that it’s by shifting Italy’s industry mix from a nation that invests too little in innovation and human capital to one that invests heavily and produces innovative goods and services. Of course, it’s not a matter of copying Silicon Valley’s mix, which centres around the Internet, software, robotics, biotech, new materials and green technologies, but rather to focus on innovation in areas where Italian industry excels – an intelligent mix based on the strength of tradition and the drive of innovation.
In other words, it’s about enterprise responsibility and the essential cultural shift they need to be able to make (or, better, that they must continue making, seeing as how the best businesses are already moving in this direction, but there are still too few of them to drive the rest of the economy), but, above all, it is about political, governmental responsibility and that of the organised social partners (e.g. the industry associations, trade unions, and so on). Moretti continues by saying that the government needs to reduce the obstacles that are keeping Italy from growing and from modernising. It’s not that Italian workers are less productive than workers in the Silicon Valley because they don’t work as hard or are less creative or less intelligent. In fact, when Italians make the move to Silicon Valley, they do great work, oftentimes even better than their American counterparts. The problem is the business ecosystem and the system of incentives and disincentives created by the fiscal and legislative framework. Hence the need for reforms focused on allowing energy to flow free. As Moretti explains, it is clear that, without a system of taxation that is less punitive on human capital, without more modern employment laws, and without a faster legal system and a less medieval system of public administration, it will be difficult to attract foreign investment or stimulate domestic investment in advanced, innovative sectors.