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Responding to the pandemic: what’s required is a (new) industrial policy
The ongoing pandemic is bringing the global economy to its knees, but history teaches us that it is possible to recover from the blow: the essential stepping stones to starting afresh are attention to new business opportunities, flexibility and innovation, backed by an active industrial policy
Massimo G. Colombo, professor of Entrepreneurship and Entrepreneurial Finance
School of Management Politecnico di Milano
The coronavirus pandemic promises to bring the world economy to its knees, with devastating consequences for the GDP of every country, no matter how developed.
However, scientific literature analysing the economic impact of previous “perfect storms” gives us some hope. The capitalist system is resilient, and rapid collapses in demand and production are more or less quickly followed by recovery, which can be more or less vigorous (see the Economist, 21-27 March, “Free exchange: From v to victory”).
What should the Italian government do to make the post-pandemic recovery as quick and vigorous as possible?
First of all, regardless of the measures that the European Commission will put in place, we must not repeat our past mistakes and we must be prepared to do “whatever it takes”. The first essential step, on which everyone agrees, is to support those suffering from a significant decline in income, in order to sustain aggregate demand and avoid the country’s social disintegration. Italy’s production must also be ensured the liquidity required to avoid closing down healthy firms facing temporary difficulties, thereby preventing a long-term reduction in production capacity. The loan guarantee facility supporting access to finance by SMEs is a step in the right direction. The important thing is to reopen the taps should this facility be insufficient.
However, we must go further still and draw up an active industrial policy for recovery. Apart from the negative shock on supply and demand, the pandemic also generates exciting new business opportunities, connected with transformed consumer models and new ways of doing business. Clear examples are the unique advantages of teleworking and the increased, albeit forced, interest in home shopping and entertainment services.
In this situation, small businesses, especially young ones, are ideally positioned to capture these new business opportunities, due to their flexibility and the spirit of initiative of the entrepreneurs who manage them. Moreover, they can prove to be a fundamental element of strength and dynamism in the national production system. However, to express their growth potential, they must be able to restructure and alter their resource portfolio, investing with a long-term perspective in innovative products and services and in the ability to market them globally. A study on the strategies of a sample of 340 high-tech Italian start-ups during the global crisis of 2008, carried out by the School of Management of the Politecnico di Milano and coordinated by Professor Colombo, confirms this point of view. Despite the average decline in demand that these firms experienced between 2008 and 2010, start-ups that invested massively in product and service innovation and in market internationalization experienced a 20% higher than average growth in turnover during this period.
It is the responsibility of the Italian Government to support and facilitate the transformation processes of such companies. On the one hand, the government must ensure that these companies have access, at competitive conditions, to the financial resources – in particular in the form of risk capital – necessary to support these processes and to scale their business. The CDP Innovation Fund is ideal for this purpose.
On the other hand, it is likely that high-skill human resources (managers, technicians) will have to leave large and small businesses adopting business models rendered obsolete by the pandemic, and will become available on the labour market. These human resources are invaluable for the growth of innovative small businesses. The government can facilitate their absorption into such firms, for example by temporarily suspending social security contributions for newly recruited qualified personnel.