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Surviving under the shelter of government subsidies or ‘avoiding disaster’? New evidence from Italian Industrial Districts, 1971-91

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  • Anna Spadavecchia

    (University of Reading)

Abstract

"One common criticism of government financial subsidies to firms is that they break the nexus between the firms’ performance and efficiency, thus generating dependence on subsidies and the permanent capture of government funds. This criticism was often made about the Italian government’s financial subsidies to SMEs between the 1950s and 1993. It was claimed that the subsidies granted through the regional policy for Southern Italy enabled entrepreneurs there to maximise profits by reaping benefits from institutions rather than from the market. This paper tests this criticism for financial subsidies to SMEs in the South, and in the more prosperous North-East - where smaller subsidies were available as part of the national industrial policy. It argues that although Southern entrepreneurs did benefit from institutions, the rationale behind their behaviour was avoiding the risk of bankruptcy rather than maximising profits. This paper uses company reports and balance sheets of two samples of SMEs: 32 in the Southern industrial district (ID) of Barletta and 22 in San Mauro Pascoli, a classic ID in the North-East, the so-called ‘Third Italy’. The two samples were constructed following company records across time, and therefore it was possible to apply, for the first time, the methodology designed by Bagella and Caggese in 1995. Following this methodology, the trading life of companies that received subsidies was divided into pre-subsidy, subsidised and post-subsidy stages. Moreover, subsidised companies were separated from companies that never received subsidies. The comparison of the investment activity and profitability of these four groups shows that in the South, non-subsidised companies undertook investment characterised by higher returns and higher risk than the other three groups, unlike the sample from the North-Eastern ID. The analysis shows that behind the low-profit and low-risk strategy of Southern subsidised firms and the high-profit and high-risk strategy of non-subsidised firms lies precisely the same economic rationale - minimising the probability of company failure. For companies in the North-eastern ID sample, the probability of failure is much lower because of the less risky economic environment and their higher levels of long- and short-term capital. Thus, whether subsidised or not, they can consistently pursue a profit-maximising strategy. This conclusion throws additional light on the complex impact of state subsidies and different levels of risks on firms’ investment behaviour."

Suggested Citation

  • Anna Spadavecchia, 2005. "Surviving under the shelter of government subsidies or ‘avoiding disaster’? New evidence from Italian Industrial Districts, 1971-91," Working Papers 5011, Economic History Society.
  • Handle: RePEc:ehs:wpaper:5011
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    File URL: http://www.ehs.org.uk/dotAsset/06ffc4b5-9559-4ad0-b28a-7dfcc18a2a28.doc
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    Cited by:

    1. Dan Coffey & Philip R. Tomlinson, 2006. "Multiple Facilities, Strategic Splitting And Vertical Structures: Stability, Growth And Distribution Reconsidered," Manchester School, University of Manchester, vol. 74(5), pages 558-576, September.

    More about this item

    JEL classification:

    • N00 - Economic History - - General - - - General

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