The annual RIO Country Report offers an analysis of the R&I system in Italy, including relevant policies and funding, with particular focus on topics critical for EU policies. The report identifies the main challenges of the Italian research and innovation system and assesses the policy response.
The Italian economic fabric is characterised by a production specialisation model still focused on traditional labour-intensive sectors with limited intensity of research, development and innovation, and by the small size of Italian firms. A small set of innovative firms coexists with a large majority of small and micro enterprises with low productivity. The low level of research and development (R&D) activity is both a consequence and a cause of Italy’s relative specialisation in low- to medium-technology products.
The intensity of business expenditures for research and development (BERD) in Italy is 0.72%, much lower than in other large EU economies such as France (1.46%), Germany (1.93%) or the UK (1.11%). The BERD in absolute values was €10.9b in 2013, a slight decline from €11.1b in 2012.
It is worth noting that two firms alone – FIAT in the automotive and parts sector and Finmeccanica in the aerospace and defence sector – accounted for 60% of all R&D investment by Italian firms included in the EU top 1,000 Scoreboard ranking (edition 2013).
Other indicators point to the low innovativeness of Italian businesses. For example, in 2014 only 18% of large companies were selling online, just over half the EU average (35%). Small and medium-sized enterprises (SMEs) were even less active, with only 5.1% of them selling online — the worst performance in the EU, and far lower than the EU average of 15%. In addition, Italy ranks 20th among the 34 countries analysed by the Innovation Union Scoreboard in terms of ‘non-R&D innovation expenditures’. The rankings for ‘Sales of new-to-market and new-to-firm innovations as % of turnover’ (17th) and ‘Knowledge-intensive services exports as % of total services exports’ (21st) are also not outstanding.
The tight lending conditions and the small scale of the venture capital market – Italy ranks 18th in terms of venture capital as a percentage of GDP – are also hampering innovation activities, especially for new, small, innovative companies. Over 80% of firms’ R&D spending is internally funded in all four large EU countries, according to the Bruegel Institute. However, in Italy the second biggest source of financing is bank loans (which fund slightly less than 10% of R&D spending), whereas in the UK this proportion is much lower (1%) and equity plays a more important role. Indeed, the role of venture capital funds or business angels, private investors operating on a smaller scale with respect to venture capital funds, is extremely limited in Italy.
In March 2013, MISE reformed the system of firms’ incentives, to target innovation for competitiveness and support investments in enabling technologies. Firms’ incentives are financed by the Fondo per la Crescita Sostenibile (FCS), which includes all the resources for technological innovation.
The MISE has also developed a support strategy based on three pillars: promoting investments, access to capital markets and innovative entrepreneurship.
A new tax credit scheme, available for 2015-2019, has been operational since summer 2015. It allows a 25% tax credit for incremental investments in R&D, up to a maximum annual amount of €5m for each beneficiary. The tax credit is increased to 50% in the case of R&D activities performed in collaboration with HEIs, PROs or other businesses. Incrementality is calculated upon the average of investments made in 2012-2014, and the annual expenditure should be at least €30,000. The forgone tax revenues have been estimated at about €2.5b for the 5 years of validity of the measures.
Italy also introduced a patent box for the first time in 2015, which allows the deduction of 50% of the revenues originated from direct/indirect use of intellectual property (IP) rights (patents, trademarks, industrial designs and models).
Moreover, a MISE–European Investment Bank (EIB) agreement, which allocates €100m of the MISE Guarantee Fund for SMEs to cover the risk of losses in R&D projects of SMEs and Mid-Caps, is expected to trigger a loan portfolio of at least €500m by the EIB. In addition, liberalisation measures have been taken on the capital markets, allowing bond issuing by unlisted companies and lending to firms by securitisation (SPV) and insurance companies. It is worth noting that Italy was the first EU country to set up rules for the collection of risk capital through online crowdfunding platforms in 2013.
Italy also established the legal definitions of innovative start-ups (2013) and innovative SMEs (2015). These companies are defined on the basis of their R&D expenditure (15% of costs for innovative start-ups and 3% for innovative SMEs), qualified personnel (proportion of personnel holding a PhD and/or a master’s degree) and IP ownership/licensing. Innovative start-ups and innovative SMEs benefit from reduced red tape, tailor-made labour law, tax relief, the possibility of raising investments through equity crowdfunding, etc.
With the recent measures, Italian policy-makers have been trying to establish a consistent and stable framework to support R&I activities carried out by Italian businesses, whereas past support measures were characterised by their limited timespan and uncertainty in terms of budget availability.
There is also some anecdotal evidence that R&D activities by Italian businesses are under-reported; the new tax credit scheme might have a positive impact on the emergence of the non-reported R&D.
Finally, the recent measures show a shift towards a support system dominated by indirect funding, which might not be entirely suitable for young companies. As recently recommended by the Organisation for Economic Co-operation and Development, Italy should try to implement an appropriate mix of direct and indirect funding to business R&I.