Bank of Italy - CEPR - EIEF Conference
Firm Dynamics and Economic Growth
Opening remarks by Salvatore Rossi
Senior Deputy Governor of the Bank of Italy
and President of the Institute for the Supervision of Insurance (IVASS)

I am delighted to welcome you all to the Bank of Italy, and to open
this workshop, which was jointly organized with the CEPR and the Einaudi
Institute of Economics and Finance.
Over today and tomorrow, 29 original papers will be presented, selected
from more than 150. These works have been produced by distinguished
scholars from academia and research institutions around the world. They
cover a wide variety of topics relating to firm dynamics and its effects on
economic growth. Two keynote lectures will also be delivered, and I would
like to thank the internationally renowned speakers, Professor Ufuk Akcigit
from the University of Chicago and Professor Gian Luca Clementi from New
York University.
There is no need for me to underline the importance of studying firm
dynamics today. The recession which followed the global financial crisis
hit the whole world almost simultaneously ten years ago, though to varying
degrees in different countries.
Firm dynamics is key to explaining the differences in its impact.
Country-specific frictions to the physiological exit and entry of firms in the
market may severely limit growth prospects for an economy. Italy is a case
in point, as I will discuss later. In the short run, they affect and are affected
by business cycle fluctuations and financial shocks.
At this moment in time, after years of recovery, economic growth is
slowing down somewhat all over the world. Forecasts made by international
organizations are currently reflecting the decline shown by conjunctural data.
Growing trade tensions, political uncertainty, and expectations that monetary
stimulus will gradually be reduced in the main economic areas of the world are
the most cited facts. In many advanced economies, the economic slowdown
is raising concerns about potential output, since the recovery of recent years
has not been accompanied by as buoyant an increase in productivity as we
might have expected.
That's why firm dynamics is more important than ever before. Innovation
and technology adoption by as many firms as possible is the main source of
growth and jobs in the economy, and they depend very much on the process
of firm entry, survival, growth, and exit through which the market selects
the most efficient and innovative players. New and young firms are those
which drive input accumulation and output growth. If the most productive
firms thrive and the less productive ones exit smoothly from the market, the
economic system works well.
These ideas are very old, dating back at least to Joseph Schumpeter's
'creative destruction' and they are now an intrinsic part of empirical analyses
from all around the world. Indeed, thanks to the efforts of several scholars and
research centres, among which I would like to thank the OECD researchers
that conducted the seminal FirmDyn project, we now have a lot of comparable
data on firms' entry, growth and exit from the market, over their entire age
distribution, in each national system.
These country-level indicators are of course deeply affected by business
environments and policies. For instance, entry barriers and direct or indirect
public subsidies to firms in trouble can alleviate the welfare costs of crises
in the short term, but may have long-term negative effects on firm selection
and economic growth. To take another example, if the judiciary works
badly and private contracts are difficult to enforce, incumbents have a clear
advantage over entrants. Finally, if the political system works badly, some
firms may escape competition thanks to their political connections.
Finance also plays a role in shaping firm dynamics. New businesses need
money, which can't always be provided by banks, because of the riskiness
of the venture and the scarcity of collateral. Venture capitalists are the right
answer, yet their contribution is quite varied across countries. Technological
improvements, for which the Fintech label is a proxy, are now filling these
gaps, but the process is uncertain and uneven. For now, at least in some
countries, new and young firms have to rely on bank credit and face tight
capital constraints.
If we leave aside cross-country differences and do some time-series
analyses, we notice a decline in business dynamism since the early 2000s
all over the world: for most OECD countries, new firms' entry rates are
now significantly lower than at the beginning of the century. What are the
causes of this phenomenon? One may be the possible increased market
power of incumbents. Another may be the fact that technological change and
globalization increase the ability of more productive firms to gain market
share. These two possible explanations have markedly different policy
implications. The scientific debate is currently ongoing, and during this
workshop other possible explanations will be discussed in depth by several
presenters.
Recent research has highlighted how firm dynamics may have a role
in explaining not only long-term potential growth but also business cycle
fluctuations. The procyclicality of entry rates could be driven by a tighter
selection of new firms during downturns, and slacker entry requirements
when the economy is doing well. While this phenomenon is a stylized fact,
its implications for the propagation and persistence of aggregate shocks have
only been studied quite recently. Moreover, the impact of recessions induced
by financial rather than real shocks is still comparatively underexplored.
Today's presentations will also cover these important issues, which have
clear implications for policies to stabilize the business cycle.
Let me conclude with a few words on Italy. Its lack of business dynamism
has been an important determinant of the sluggish productivity growth over
the last 20 years according to most research in this field, much of which has
been conducted by the Bank of Italy's economists.
From the mid-1990s onwards, aggregate productivity in Italy has grown
at a significantly slower pace than in the rest of the euro area. Total factor
productivity (TFP) has been virtually flat, and yet at the same time the ICT
revolution and the ensuing globalization of production were exploding,
helping most other economies to reap enormous benefits in terms of
productivity and growth.
The inability of Italian firms to do the same is normally attributed to the
large share of micro and small firms in the system: those firms invest less
in innovation and technology adoption, and are more vulnerable to global
competition. Yet the small size of most firms is a dynamic malaise of the
system, not a static one, and is caused by the lack of business dynamism.
Italian startups grow less and for a shorter period of time than new
businesses in other OECD countries. They are poorly selected over their early
years of life: exit rates are generally flat over the age distribution, meaning
that less productive firms are not wiped out from the market when they are
young. As a result, Italian firms are older, smaller and less productive than
those from other developed countries.
The causes of this lack of business dynamism are manifold. Italy
holds negative records for some of the frictions I discussed before: judicial
efficiency is particularly low and financial leverage is among the highest
by international standards. We have several specific dysfunctions, such
as widespread tax evasion, the political connections of entrepreneurs, and
cronyism, all of which distort competition in the economy, and slow down
creative destruction and firm churning, with negative consequences for
aggregate growth. The structural reforms that are needed to put Italy back on
track should address these diverse and complementary issues in a bold and
coherent framework.
* * *
Ladies and gentlemen, I believe the discussions you are going to have
today and tomorrow will provide important insights for addressing these
issues too.
I would like to thank the organizers of the workshop: Francesca Lotti
and Francesco Manaresi from the Bank of Italy, Salomé Balsandze from
the Einaudi Institute of Economics and Finance and the CEPR, and Luigi
Marengo from LUISS-Guido Carli University. I also thank Alessandra
Piccinini from the Bank of Italy for taking care of the logistics.
I welcome you once again and wish you a fruitful exchange of ideas, as
well as a pleasant stay in Rome.

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