Why is Italian TFP decreasing? An Econometric Analysis Compares Italy with Other Three European Countries

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1. Introduction 
 
Productivity is very important to measure the capability of a country to remain 
competitive against rivals. According to Solow's model, increase in the output per 
employee can come from an increase of capital per employee or from an increase of 
productivity (Blanchard, 2006a). Thus there are two sources of growth: capital 
accumulation and productivity improvements (Blanchard, 2006a). 
Productivity is the efficiency with which firms turn inputs into outputs (Syverson, 
2010). In this thesis a particular kind of productivity is considered: total factor 
productivity (TFP). TFP is a broad concept that takes into account not only capital and 
labour input, but also intermediate input such as energy, materials and services (OECD, 
2001).  
From 1995 onward Italian productivity is slowly decreasing. Data considered in this 
thesis are referred to the manufacturing sector, but the trend is similar also for the rest of 
the economy. From the seventies until 1995 Italian TFP shows a smooth positive trend, 
but from 1995 to 2007 it shows a negative trend. One accredited cause of Italian 
decreasing productivity is the scarce intensity of ICT assets. According to Bugamelli 
and Pagano (2004) the Italian technological lag with respect to the USA in 1997 was 
approximately 7 years, even if some catching up was and is taking place. 
Data seem to confirm that the current slowdown or recession is not just a cyclical 
episode, but it is the continuation of the negative growth that began since the mid-
nineties (Daveri, 2008). With the passing of time, the nature of the Italian growth 
process has changed: after 2000 GDP growth is driven only by the increase of the total 
hours worked (Daveri, 2008). Productivity shows a declining dynamic also in the years 
2006-2007, in contrast with the many illusions about the renewed ability to innovate of 
Italian companies (Daveri, 2008). 
Economists wonder long about why productivity differs from country to country and the 
the possible causes are many: from firms' external operating environments to production 
practices. 
This thesis investigates the reasons why Italian TFP is decreasing. The possible causes 
are listed and briefly explained. The theoretical hypothesis about the Italian situation go 
from the most traditional (small dimension of Italian firms and specialization in low-
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tech sectors) to the most revolutionary (the lack of complementarity between ICT assets 
and organizational changes). The debate has not identified a single cause, but, according 
to the statistical findings of this thesis, the lack of complementarity between ICT assets 
and organizational changes seems to be a very convincing explanation. In any case also 
the position of other economists have to be taken into account. According to Foresti, 
Guelpa and Trenti (2007), Italy needs to grow the size of its firms more than to 
restructure its sectors. The growth of firms size could also increase R&D expenditures 
(Leoni, 2007). According to Ciccarone and Saltari (2010), greater capital accumulation 
could be facilitated through tax incentives. A good educational system would allow very 
productive human capital (Syverson, 2010). Many Italian negative externalities (such as 
weak policy makers, heavy bureaucracy, inefficient justice and out-of-date 
infrastructures) should be definitely tackled. Companies should invest more in 
information and communication technologies (ICT) and they should reorganize their 
production system in a modern and efficient way. 
According to Ciccarone and Saltari (2010), there is a strong correlation between ICT 
investments and productivity. Bugamelli and Pagano (2004) argue that two 
preconditions must be fulfilled in a firm adopting ICT in order to get the expected extra 
productivity: an increase in the share of skilled workers and a reorganization of 
workplace. According to Trento and Warglien (2001), not only organizational changes 
are essential when ICT investments occur, but they are also facilitated by ICT 
investments. For Trento and Warglien (2001) ICT enable different production 
organizational forms, and, on the other hand, they allow to coordinate, process and 
diffuse a large amount of information at low costs (Trento & Warglien, 2001). Leoni 
(2009) highlights that ICT implementation requires a codification and standardization of 
organization processes. Activities that use ICT are knowledge-intensive and they need  
relational, learning and problem solving high-skills (Leoni, 2009). For this reason 
organizational forms such as lean production or communities of practice should be 
implemented more in Italy (Leoni, 2007). 
According to the findings of this thesis, Italian TFP is mainly affected by capital, ICT. 
The negative coefficient of the product between a variable that captures high-quality 
human capital and ICT suggests that in Italy has not yet happened the necessary 
reorganization of work. Even if the share of high-quality human capital increases, it can
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not increase productivity because the structure that can exploit high-quality capital 
lacks. On the other hand, also ICT investments need organizational changes, so that it 
would be possible to make the most of new technologies.  
According to Galli (2010), it is necessary to be cautious with these findings because 
data might be not reliable and Italian total factor productivity for the last ten years 
seems to be underestimated. If data were not well-collected, the entire econometric 
analysis would be affected. This thesis is written with the assumption that data are 
reliable, even if because they are retrieved from the websites of prestigious 
organizations such as OECD or EU-KLEMS. 
Even if the worrying dynamic of Italian productivity seems to be evident, there is not 
enough attention to this matter and to its causes. This brief thesis aims to stress the 
statistical evidence of Italian decresing total factor ductivity, and it aims to find the most 
important determinants of Italian TFP. The problem statement that guided this brief 
research was: why is Italian productivity decreasing? And in particular which might be 
the remedies? Does the capital affect productivity? What is the impact of ICT assets on 
productivity? What about human capital? Does Italy need a reorganization of work in its 
firms or not? What is the impact of R&D expenditures? But first of all some elementary 
questions find their answer in this thesis: what is productivity? Why is it so important? 
How is productivity evolving in Italy? 
The rest of the thesis is organized as follows. 
The second chapter gives some hints about the growth theory and it defines the concept 
of productivity. In particular the concepts of single factor and multifactor productivity 
are explained. Italian, Spanish, French and Germany productivity trends are compared 
and graphs related to the different levels of ICT assets among three European countries 
are briefly illustrated. Some economists' explanations of Italian decreasing productivity 
and some possible political advices are shown. The second chapter conclude with a 
research question: which are the relevant variables that affect Italian productivity? 
The third chapter shows how the econometric analysis is built and which are its results. 
In particular the theoretical basis is briefly explained. Then the the research 
development is synthesized and the results of some econometric models are shown. This 
chapter tackles results that both confirm and contradict the theory. Some possible
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explanations of the findings of the most relevant statistical regression are discussed. 
Some advices for future researches conclude the chapter.
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2. Productivity 
 
2.1 Introduction 
 
About the cause of Italian economy stagnation there is remarkable consensus: the 
insufficient growth of productivity can be considered the main reason of Italian 
difficulties (Ciccarone & Saltari, 2010). The development of productivity is one of the 
main determinants of the evolution of real national income per capita, that is considered 
an important indicator of living standard (ISTAT, 2007). Despite this, productivity 
seems not to be considered by Italian policy makers (Leoni, 2007).  
In the second paragraph of this chapter it is explained the theoretical framework that 
justifies a relation between real national income per capita and productivity. According 
to Solow's model the aggregate production depends mainly by two factors: capital and 
labour. As capital and labour can not increase further beyond a certain threshold, it 
becomes important to exploit more the inputs that are given. This means to increase 
productivity. Higher productivity means improved efficiency: better results with less 
effort. At the aggregate level productivity can be considered as a measure of a country's 
capability to remain competitive. But what is productivity? 
In the third paragraph a definition of productivity is briefly given. In particular the 
definition of productivity is linked to how it is measured. There are mainly two kinds of 
measures: single factor productivity and multifactor productivity; the difference 
between the two lies in the number of inputs considered.  Another distinction is that 
each productivity measure can be based on gross output or on value added. 
In this chapter a particular kind of multifactor productivity is used: total factor 
productivity. The choice lies in the significance of this variable and in the availability of 
relevant databases on EU-KLEMS website. In the fourth paragraph there is a brief 
description of KLEMS productivity and EU-KLEMS project. In the second part of this 
paragraph some evidence about the worrying situation of productivity in Italy is given. 
Data analysed are referred to the manufacturing sector and a comparison with the main 
Italian competitors (France, Germany and Spain) is made. 
The fifth paragraph proposes some possible explanations of the decreasing productivity 
in Italy, that is the main topic of this chapter. Only some positions are explained without