Globalisation of the economy carries with it market integration both through increased mobility of freight and capital flows between countries and tighter integration between industry and tertiary structures. Thanks to the extraordinary growth of Foreign Direct Investment (FDI), industry and tertiary structures are increasingly owned by companies from a range of countries. The main causes behind this process of supranational unification, which has progressed at an unprecedented rate for the last three decades, are the advancements in transport and communication technologies, logistics infrastructure and financial services, not to mention the major institutional changes brought about by liberalisation and privatisation, and by the evolution towards new political orders whereby the world economy is organised into large blocks.
The role played by businesses, however, is just as important as they have not only been the vehicle of these changes, but they have also been actively 'mobile', adapting their strategies and structures in order to take advantage of the opportunities for economic growth these changes wrought. Before the Second World War, Multinational Enterprises (MNEs) were mainly the result of vertical integration to access natural resources (e.g. by major oil companies or large food groups) or horizontal investments geared towards penetrating major foreign markets. These strategies led to duplicate structures being set up in a number of countries in the image of the parent company, but there was little awareness as to the advantages that integrating assets worldwide could actually have. In subsequent decades, enterprises became more skilled at mobilising and coordinating resources on an international scale as they sought to combine the advantages of sole ownership with the advantages offered by the host country. These businesses took on a global connotation and turned into organisations that were able to optimise the entire value chain worldwide so that their resources could be allocated more efficiently and exclusive production factors, both tangible and intangible, could be acquired. They had become aware that a suitable asset portfolio in a range of countries could make a major contribution to a business's overall competitiveness. Nowadays sites are chosen from ones all over the world in order to relocate and integrate production phases and corporate functions. Decisions are normally governed by the search for international excellence and assisted by new coordination technologies and methods that span distances, boundaries and national borders. It is also important to note that although this process was once restricted to large enterprises, smaller businesses have become progressively involved to the extent that nowadays more and more small- and medium-sized enterprises are expanding overseas.
The following analysis aims to afford an overall picture of Veneto's international growth by providing an insight into the multi-faceted nature of its foreign trade and Foreign Direct Investment, with special focus on its active multinationalisation, i.e. the foreign investments made by Veneto businesses.
Crosschecking figures for the mobility of freight, markets and MNEs highlights the key features and recent development of Veneto's model of internationalisation.
Over the last two decades, this model has witnessed the international integration of the local economy and in the long term Veneto has performed better on average than many other Italian regions and Italy as a whole.
Between 1991 and 2007 (Note 2)
, Veneto's exports increased by 8.7% per year, this is higher than the national average of 7.9%. When compared with Italy's other north-east regions, Veneto performed better than Trentino Alto Adige, and as well as Friuli Venezia Giulia and Emilia Romagna.
Regarding Foreign Direct Investments by Veneto businesses, 1991-2007 saw a rise in production activities abroad, which went from very low levels in the early 1990s (70 interests in foreign manufacturing companies, including about 8,300 employees) to much higher figures at the beginning of 2007 (968 foreign interests, including more than 103,000 employees).
During the same period, the value of imports into the region rose at an annual average rate of 8.4%, which was also higher than the national average of 7.5%. The number of foreign businesses investing in Veneto firms also grew, in the manufacturing sector in particular. The number of employees in Veneto businesses in which foreign MNEs held a stake increased by more than 80% between 1991 and 2007, in comparison to a fairly stable level of -0.5% nationwide.
Only in the past few years has there been a slowdown in the region's foreign trade: from 2002 to today, but excluding 2006, Veneto's annual exports have almost always grown at a slower rate than the national average (between 2002 and 2007 Veneto's exports rose at an average annual rate of 4.9% (Note 3)
compared to a national average of 6.3%). Imports followed a similar trend.
Although Foreign Direct Investment has also been more prudent of late, it still continues to grow at much higher rates than the national average. The number of people employed by Veneto businesses in foreign-invested companies abroad increased almost tenfold in the 1990s, then between early 2001 and early 2007 it grew by 37.8% compared with a national growth of 4.6%. The same period saw the number of people in manufacturing employed abroad by Veneto businesses rise by 35.4% compared with far more modest growth nationwide of 2.9%.
The growth in the number of foreign-invested companies in Veneto has settled. Between the start of 2001 and the start of 2007, the small rise in their number of employees (+0.7%) was thanks to growth in the tertiary sector, which compensated for the sharp drop in manufacturing activity (-11.9%). It should also be noted that Veneto's performance was still better than the national average: the number of employees in foreign-invested companies in Italy dropped by 6.1% across all the sectors in the Reprint database and by 17.9% in manufacturing.
Despite slower growth in recent years, Veneto is still among Italy's top exporters. The ratio between exports and industrial value added is higher than the national average (100 is the national average and Veneto stood at 124 in 2007) and in line with the North East; Veneto performed as well as Emilia Romagna, slightly better than Piemonte, Toscana, and Marche, and was well ahead of Lombardia (110). Only two neighbouring, smaller regions (Friuli Venezia Giulia and Valle d'Aosta) performed much better than Veneto.
Its strong growth in multinational expansion in the 1990s was not, however, enough for Veneto to become one of Italy's leading regions for multinationalisation via FDIs, and the number of Veneto businesses abroad is below the national average. If calculated in terms of economic size (employees abroad over local employees) the level of active multinationalisation is 77; the Italian average for all industrial activities and business services is 100 and the average for the North East is 81. However, Veneto's position improves when we look at manufacturing on its own: its figure stands at 94, which is higher than the one for the entire North East; however it is still below the national average and well below figures for North-West Italy and for Emilia Romagna in the North East.
Figures for foreign companies investing in Veneto are much clearer, however: Veneto's figures on aggregate and for manufacturing (44 and 47 respectively) lag well behind the figures for both outward investment and for the North East (65 and 60 respectively). Veneto's level of passive multinationalisation is lower than all the regions in the Centre North, apart from Marche; some of the regions of southern Italy (notably Abruzzo and Sardegna) also performed better than Veneto.
We can deduce from this state of affairs, that if Veneto is to become one of Italy's most internationally minded regions, which includes multinational production, it must regain the momentum of the 1990s, consolidate trends and head quickly down those paths on which it lags behind most.
If Veneto is to expand its presence in the international economy, then performance, long-term sustainability and, in some cases, improvement depend on the region's model of internationalisation, which we will attempt to describe below.
Currently, Veneto businesses mainly base their presence abroad on trade as their direct presence on foreign markets is fairly low. Where they do appear abroad, their commercial activities carry considerably more weight than the national average, thanks mainly to the extensive networks created abroad by the region's large enterprises, while a major portion of production investment abroad is geared towards relocating specific production phases to countries where labour costs are low.
Veneto's orientation towards trade, however, is not the result of unfavourable sectoral composition (i.e. a larger presence of sectors that are innately less inclined to multinational production). It seems rather to be the result of poor strategies in the region's industrial fabric, which is mainly made up of small- and medium-sized enterprises. These enterprises often find it difficult, both in terms of finances and management, to increase direct investment in foreign industries, and in particular those in advanced countries. One confirmation of this is the high number of manufacturing firms that relocate production to Central and Eastern Europe.
Veneto's foreign trade model stands out for the following reasons:
- it is markedly "gravitational", in the traditional sense whereby export volumes are proportional to the size of the destination country's economy and inversely proportional to its distance from Veneto, and in the sense that neighbouring countries attract proportionally higher export flows, as do those whose culture is less removed from Italy's, i.e. nearby countries;
- in the long-term, the main exporting sectors are consistently the same ones, their order of importance is stable and their specialisation veers away from the average composition of national exports. Veneto's exports are based on the following six main sectors: mechanical, metal products, electro-mechanical, textiles and clothing, other manufacturing industries (including furniture and jewellery), and leather and footwear. These sectors currently account for just under three-quarters of Veneto's exports;
- the competitiveness of Veneto's exports draws advantages and disadvantages from its sectoral specialisation: on one hand, the high presence of export sectors produces on aggregate a level of exports per employee that is higher than the national average, a figure strengthened by the good performance of local businesses in their respective sectors; on the other hand, this specialisation has not brought any benefit in terms of growth most recently since Veneto has a higher proportion than the national average of sectors such as textiles, clothing, leather and footwear, and other manufacturing industries; these sectors have suffered from greater international competition recently, with the result that exports have been hit by crises or have declined sharply;
- the trend in Veneto's leading sectors was extremely contrasting between 2002 and 2007, but can be explained as follows: although there was major growth in the first three sectors (mechanical, metal products and electro-mechanical), there was a drop in the other three (textiles and clothing, leather and footwear, and other manufacturing industries);
- since 2000, rubber and plastic has been one emerging sector that has contributed to the growth of Veneto exports, but the vehicles sector has tumbled.
Veneto's biggest enterprises, which are average sized in national terms, have made a major contribution to its international competitiveness, exports and foreign investments; their behaviour and performance go some way towards compensating for the region's sectoral composition, which has a low number of sectors that are more inclined towards internationalisation (e.g. high-tech and some large-scale distribution sectors). As confirmed by a number of studies (Note 4)
, business size is a critical variable that promotes more effective internationalisation, with strategies that not only benefit trade but also take advantage of the opportunities offered by international markets, both in terms of variety and potential for tangible and intangible investments. The sectoral composition of MNEs in Veneto mainly benefits the region's most competitive exporting sectors. Figures for the major foreign-invested companies in Veneto suggest that they have a positive dual role. Firstly, many of these enterprises are strongly export-oriented and in some cases their role as a hub in a production and international trade network makes them more inclined to export, with results that are sometimes better than those of other local businesses. Secondly it is likely that their presence stimulates local businesses to look abroad, creating a local export spillover as skilled resources and expertise are shared and transferred to foreign markets. This process fuels both learning and imitation, both through horizontal competition and vertical relations between client and supplier.