Regione del Veneto - U.O. Sistema Statistico Regionale
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Statistical Report 2013
Chapter 4

Businesses in Veneto: processes of change to resist the crisis

In order to beat the recession, the economy needs to undertake a path of transformation by strengthening its productive and financial structure. All the social and productive forces of this country must join in, led by businesses and supported by the banks and the political apparatus.
In last year's Statistical Report, we already maintained that the crisis can be considered as an opportunity to review corporate strategies, not only to contain losses, but also to increase the own competitive advantage by focusing on new strategic levers. Business transformation and development are strongly correlated, as they constitute the flexibility necessary to overcome this difficult period. Business transformation actions implemented to overcome the historical crisis-restructuring relationship, which can be considered as a punctual and cyclical phenomenon, can lead to an evolutionary process that will improve the company situation.
This chapter investigates the bedrock of businesses in Veneto: those that have always remained active in 2005-2010 and that are fairly structured, i.e., with at least 10 employees. Our purpose is to identify and define the features of businesses (other than micro-businesses) that have maintained or even improved some financial variables in recent years, including turnover and profitability, so as to be able to understand their strengths.
 
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4.1 The bedrock businesses

By cross-referencing various statistical, administrative, and accounting archives, we obtained a ceiling of 16,729 businesses that were always active in 2005-2010, i.e. the 66.6 % of all Veneto businesses with more than 10 employees in 2010, which generally correspond to 77.4 % of all employees. With respect to the entire framework of Veneto businesses, we will be working on 4.2 % of the enterprises and 42.7 % of the workforce.
By excluding companies with fewer than 10 employees, we will not take into account the most part of sole proprietorships, made up mostly by traders and professionals. In addition, we will not consider particularly flexible businesses that are terminated only to be constituted in another form (Note 1). In spite of this, we have decided to study this subset because, on the one hand, it represents the solidity of Veneto businesses, and on the other, the stability on which to build a real industrial policy aimed at supporting the growth and development of these businesses in the new global markets.
Their prevailing size class is between 10 and 19 employees, and their predominant legal form is that of limited companies. This is nothing new; it only confirms that the economic fabric of Veneto, like that of the rest of Italy, consists of small and medium-sized businesses, and that the most "resistant" among them are the most structured from a legal standpoint. The most interesting factor is the industry composition: more than half of the businesses analysed are manufacturers. If we consider that, at least in the last decade, the manufacturing sector represents about one-eighth (a third in terms of production of wealth) of the total businesses in Veneto, then we should think on the fact that businesses working in the industry in the strictest sense seem to be the most stable and robust over time.
Assuming that the whole manufacturing industry is 100%, metallurgy (19.4 %) is the most important sector, followed by fashion (16.3 %), the sector that aggregates "jewellery, furniture, and sports articles," chemistry and mechanics.
38% of the units in our study is composed of tertiary sector activities, among which trade takes the lion's share (16%). (Figure 4.1.1)
Businesses belonging to the secondary sector have been categorised in our cohort according to four classes defined by type of activity, technology, and characteristics of production and markets, based on a revision of Pavitt's taxonomy (1984) (Note 2) : They are as follows: (1) "traditional" industry businesses, (2) "specialised suppliers," (3) businesses characterised by a "high intensity of research and development," (4) "scale-intensive" businesses. According to our analysis, 45 % of the manufacturing sector ranks as traditional industry, 26.4 % as scale-intensive, 25.3 % as specialised suppliers, and only 3.4 % as being characterised by a high intensity of research and development.
Businesses belonging to the service industry (Note 3) have been categorised according to four classes as well, derived from a Eurostat/Ocse (Note 4) : taxonomy, defined by type of activity and knowledge content. They are as follows: high-tech or high knowledge content technological services, market services with high technological market or knowledge content, financial services, other services. Predominance in the tertiary sector can be ascribed to the traditional "other services" category: trade, tourism-related services (accommodation and food) and transport; in our analysis, these represent 76.7 % of the 5,707 service businesses belonging to the Ateco divisions we considered. They are followed by 16.2 % for market services with a high technological market or knowledge content, 5% for high-tech or high knowledge content technological services, and 2.2 % for financial services. (Figure 4.1.2) (Figure 4.1.3)
Out of the 16,729 businesses analysed, about 40% worked with foreign countries in 2010, mostly for amounts under a million euros (23.3 %). It is however necessary to observe that operators exporting goods for more than 5 million euro covered 84.5 % of the total exports value in 2010.
Exports value is distributed in proportion to business size and number: the 2,537 exporting businesses with up to 19 employees covered 6.5 % of the exports carried out by our set of businesses in 2010. They were followed with a share of 16.8 % by the 2,588 exporting businesses with 20 to 49 employees, an impressive 40.9 % by the 1,420 exporting businesses with 50-249 employees, and finally with share of 35.8 % by the 204 large exporting businesses with 250 and more employees, often belonging to large multinational groups.
Out of the 6,749 companies that exported their products abroad, 41.8 % reached up to five markets, 14.2 % from six to ten markets, and a good 44.1 % covered more than ten markets in the world.
As for individual sectors, mechanical engineering recorded the highest amount of foreign sales (21.6 %), followed by fashion (20.2 %) and other manufacturers - gold, furnishings, and eyewear - (14.6 %).
Only 5.1% of the businesses analysed invested in R&D; however, they covered over 75% of Veneto's total private R&D expenditure in 2010. Individual R&D expenditure data is only available starting from 2008, thus this variable will be studied only for the 2008-2010 period from here on.
Assuming that the whole R&D expenditure of the analysed businesses is 100%, only 6.5 % of this is made by businesses not operating abroad; 33 % by those that invoiced up to 5 million euros abroad; 32.2 % by those that exported from 5 to 50 million euros ; those that invoiced 50 million euros and over abroad were accountable for 28.3 % of all R&D expenditure.
The breakdown by turnover category shows a strong concentration of businesses in the intermediate range: 10.8 % of businesses invoiced up to 1 million euros, 49.7 % invoiced in 2010 between 1 and 5 million euros, 28. 4 % invoiced between 5 and 20 million euros, and the remaining 11.2 % exceeded 20 million euros in annual turnover.

Figure 4.1.1

Percentage breakdown of manufacturing businesses analysed by economic category - Year 2010

Figure 4.1.2

Percentage breakdown of exporting businesses analysed and of exports value by business export category - Year 2010

Figure 4.1.3

Percentage breakdwon of exports value for manufacturing businesses analysed by business economic category - Year 2010
 
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4.2 The evolution through the years

Let's assess the structural changes of these 16,729 businesses through the evolution of their number of employees. The mean and median (Note 5) data of the number of employees per business did not differ by much in 2005-2010 and settled around 40-43 employees (mean) and 18-19 employees (median). Looking at the double entry table with the figures for 2005 and 2010, the transformation through the years becomes more evident.
The main diagonal of the table shows the "stay" in the initial numbers between 2005 and 2010. Values above and below the diagonal, instead, indicate a progress or regression toward higher, or lower numbers.
Most businesses remained in the same employee size class. However, there was some shift from 2005 to 2010. 12.1% of small businesses in 2005 went over to the next higher class in 2010. 18.3% of businesses with 20 to 49 employees moved to the lower class, while 8% moved to the higher class. Medium-large businesses also tended to reduce their staff, with 13.6% moving down to the 20-49 class and only 3% with over 250 employees. Finally, 13% of large businesses, often belonging to multinational groups in which corporate reorganizations are very frequent, went down one size class. In fact, studying the data from year to year, we observe from 2005 a gradual shift towards the higher employee size class until 2009, the critical year, when beside a small increase in businesses over 250 employees, there was a slide of the intermediate classes and an increase of the 10-19 class. (Figure 4.2.1) (Table 4.2.1)
We observed the same trend for those operating abroad: in 2009, the class of foreign sales met with a general reduction, while in 2010 there was an increase of those who marketed their goods abroad, probably encouraged by the crisis to invest in sales in foreign markets. It appears in fact that 11% of the 10,372 businesses that did not export in 2005 started operating abroad for values up to 1 million euros. Operators up to 1 million and those between 1 and 5 million moved both in the lower and higher class, while operators with larger volumes were more stable. (Table 4.2.2)

Figure 4.2.1

 Breakdown of the number of employees per business. Mean and central tendency indexes (*) - Years 2005-2010

Table 4.2.1

Percentage  breakdown of businesses by employee size class - Years 2005 and 2010

Table 4.2.2

Percentage  breakdown of businesses by export class - Years 2005 and 2010
 
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4.3 How financial performances changed

By cross-referencing statistical, administrative, and accounting archives, we were forced to reduce our cohort of businesses under analysis, saving, however, almost all of the limited companies. We considered the financial statement unit values of more than 11,000 of businesses in Veneto among those with over 10 employees that were always active in 2005-2010 in order to make an assessment of the impact of the crisis on the key financial statement items. (Table 4.3.1)
Looking at the double entry table with the figures for 2005 and 2010 by turnover class, we notice that staying in a turnover class in 2005 tended to be more stable for high turnover classes; the values below the diagonal are not very noticeable, showing that an improved sales volume is most likely over the years.
More specifically, the box plot graph well summarises the results obtained: the median and average turnover and the third quartile values were growing in the years 2005 to 2008, before falling back in 2009 and re-ascending slightly in 2010, when what later turned out to be a brief recovery was glimpsed. We also noted in 2009 the higher concentration of businesses around the median value, which indicates a general contraction of the turnover among both large and small businesses. (Figure 4.3.1) (Figure 4.3.2)
The box plot analysis shows a similar trend for the main manufacturing sectors: obviously, the mean turnover values changed with reference to the goods produced, but both average and median values were higher for those operating abroad.
By comparing the median annual turnover of the main economic sectors, we find the same general trend observed in the box plot graphs, but we notice different effects from the crisis. While the median turnover in the service industry was very flattened and its decline in 2009 was imperceptible, that of the manufacturing industry stood at higher levels from 2005 to 2008, to then fall more sharply in 2009 to almost level with the service industry. (Figure 4.3.3) (Figure 4.3.4)
Some types of businesses that are part of our cohort deserve special consideration: operators working with foreign countries, those that invest in R&D, and those for whom both factors are present. In these three cases, we observe turnover values and related mean and central tendency indexes that are higher with respect to the overall number of businesses under analysis. Here is a banal question: is being internationalised and/or believing in innovation a cause or consequence of the improved performances? Our analysis is still at the embryonic stage and descriptive, and we are not able at the moment to give an exhaustive answer, we just observe what emerges from the figures. It is however true that a positive correlation exists among profitability, exports, and R&D expenditure, as confirmed by previous studies (Note 6) .
We also analysed annual turnover for the main sectors of the Veneto economy: trade held the highest median values, followed by mechanical engineering and fashion, which are above the median overall turnover.
A further disaggregation of sectors by number of employees is indicative of the median turnover trend in the period under observation. Businesses with a number of employees ranging between 10 and 19 reached a higher median turnover in the service industry than in the manufacturing industry, and the service industry was again less affected by the crisis in 2009. For businesses with 20 employees and up, the higher values came from the manufacturing industry, creating a gap with the service industry that increases in proportion with the number of employees. (Figure 4.3.5)
Obviously, the economic performance of an organization cannot be assessed only through turnover analysis, it is also necessary to consider the value of the costs required to generate such turnover and of the resources used.
For this reason, we evaluated ROI performance, but mostly we focused on EBITDA.
ROI relates the operating income with the capital invested by measuring the return on investment; it gives indications as to the business' strength, potential profit, and ability to resist over time, adapting to external and internal changes. (Figure 4.3.6)
Mean and median values are almost the same for this index and there is greater concentration towards the central values, which can be defined as fully satisfactory and better than the national average (Note 7) . In this case, we observe a decrease as early as 2008, and although there was a slight rise in 2010, we are still far from the results of 2007.
The other index we chose to make assessments on business profitability is EBITDA (Note 8). Almost equivalent to Italian MOL (gross operating margin), it is an index based solely on business operation and calculated as revenue minus costs, excluding interest expense, taxes, depreciation and amortization. It is useful to compare the profitability of businesses, as it does not take into account financial and budget policies (Note 9) . In addition, nowadays EBITDA is generally used to measure the capacity of a business to repay its enterprise debt. A positive EBITDA, in fact, shows that the company realizes enough of a profit to cover operating and personnel costs; it therefore corresponds to the production of income that can be allocated to taxes, amortization, and depreciation. (Figure 4.3.7) (Figure 4.3.8)
EBITDA also began to decline slightly in 2008, and to a greater extent in 2009, but in 2010 we can see how businesses went back to try and recover their historical margin.
This index confirms the higher profitability of those who export their goods and invest in research. In general, the industry kept higher EBITDA levels, but the gap with the service industry decreased during the crisis years.

Table 4.3.1

Percentage  breakdown of businesses by turnover class - Years 2005 and 2010

Figure 4.3.1

Turnover  breakdown. Mean and central tendency indexes (*) - Years 2005-2010

Figure 4.3.2

Turnover  breakdown for some business types. Mean and central tendency indexes (*) - Years 2005-2010

Figure 4.3.3

Median turnover values for some business types. Veneto - Years 2005-2010

Figure 4.3.4

Median turnover values for some industry sectors. Veneto - Years 2005-2010

Figure 4.3.5

Median turnover values for some business types and size class - Years 2005-2010

Figure 4.3.6

ROI  breakdown (*). Mean and central tendency indexes (**) - Years 2005-2010

Figure 4.3.7

EBITDA (*)  breakdown. Mean and central tendency indexes (**) - Years 2005-2010

Figure 4.3.8

Median EBITDA (*) values for some business types. Veneto - Years 2005-2010
 
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4.4 The best socio-economic performances

After evaluating their economic trends over time, we wonder which of these businesses had the best results in terms of both profitability and size increase.
The best situation in terms of performance is association + profitability + employment, as where this development takes place, there is greater and better production, as well as a competitive advantage for new goods (or services), and sectors expand whose products the world demands, while the overall quality of life increases.
Profitability can also increase for completely different reasons (Note 10) . For example, if we low average productivity sectors are contracted (as for example is the case with the construction industry) or businesses are restructured to achieve the same production volumes with less use of labour, greater profitability will correspond to lower employment.
We are interested in evaluating businesses not only economically but also socially, insofar as the higher employment a business offers, the greater its contribution will be to the distribution of wealth in the area, to the progress and welfare of those who work in it, and to suppliers.
Therefore, among the types analysed, we observe the characteristics of those who improved their position in terms of increased profitability, measured by EBITDA, and employment. The growth of these two factors was calculated using their average annual change from 2005 to 2010 (Note 11). (Figure 4.4.1)
It is comforting to note that the businesses in our cohort, analysed in their entirety, recorded a profitability increase proportional to the increase in number of employees.
The differentiation in business results seems to be a consequence of business size: if small businesses (10-19 employees) suffered in 2005-2010, recording negative average annual changes both in terms of employment and profitability, medium-sized businesses tended to maintain their status, while the larger ones greatly improved. Businesses with a number of employees between 50 and 249 showed a mutual proportional growth in profitability and employment, while those with over 250 employees further enhanced employment size.
Among the economic sectors, the service sector showed the best performance, with the exception of real estate services, with a decrease in the number of employees, and of professional and research activities, which fell both in terms of EBITDA and employment.
The analysis by sectors highlights within the manufacturing industry the particularly strong performance of agri-food businesses: as found in all classes of employees analysed, the average annual change was greater than the average growth of the set of businesses observed both as far as employees (the only case in the manufacturing sector) and business profitability. Manufacturers of electronic goods also achieved high average annual changes in profitability, next to three percentage points per year, which however did not match with equally dynamic performances from the point of view of employment. In this sector, business size, presence in new markets and the product's technological level seem to be the basic features needed for development and success.
Two sectors showed a negative trend: fashion and transport. The fashion industry has been paying a heavy toll to foreign competition becoming every day more effective, with unmatchable levels of costs. The observed negative data on employment dynamics can be explained in part by the great transformations that occurred in this sector. In order to overcome the crisis, it is necessary that businesses in the fashion industry tap into new markets as protagonists, focusing on the values of style and innovation, and definitively giving up on the unequal price challenge. As for transport, the positive notes only come from large exporting businesses (26 with foreign sales of more than 5 million euros out of 108 businesses) that increased both employees (+1 % per annum) and profitability (+3 % per annum). On the other hand, the path out of the crisis is proving to be increasingly challenging for smaller ones (-6.6 % of the average annual change for employees and -12.6 % of the average annual change in profitability).
The chemical industry increased the number of its employees, but profitability declined; probably due to the high cost of raw materials in recent years, as this sector also recorded an increase in sales during 2005-2010.
We classified our cohort of businesses based on the economic macro sectors they belong to, their domestic and foreign market relations, and their investments in R&D. The service industry reported the highest performance values, followed by those who invested in research, by those who exported, and by those who presented both of these factors. (Figure 4.4.2) (Figure 4.4.3) (Figure 4.4.4)
This work is still at an early stage, as it still lacks an inferential analysis of our cohort of businesses, and does not allow for the intensity of the effects of the still lingering crisis to be recorded, as the available data stop at 2010. However, it allows us to test numerically some hypotheses that often business operators already suspect, but for which there was no statistical evidence yet.
Business size is important. There is a vast literature on the topic that states how, through its organization, big business is able to contain costs, be more competitive, diversify its range of products, operate on foreign markets to compensate for the negative internal economic cycle, and, finally, invest more in research and innovation. However, there are also many studies that emphasize the abilities of small to medium-sized businesses (Note 12) , perhaps organised in clusters or networks, which address markets with greater flexibility and a more appropriate use of available resources.
Our analysis shows that the highest performing businesses were medium to large-sized; they were almost 3,000 (20.7 % of the businesses we observed) and amounted for 66.6 % of all employees in our cohort of businesses (2010 data). The only small businesses that managed to emerge did so thanks to innovation and research investments.
That the service sector emerged with the top performance might be surprising, seeing as how in the previous paragraphs the median turnover value of the manufacturing industry was always higher. This is due in part to the fact that manufacturing industry costs are generally higher, and so they lower our profitability index, and in part to the presence of group leaders in tertiary businesses that benefit from research and export sales by businesses belonging to the group.
As already stated in the previous paragraphs, the success enjoyed by businesses engaged in research and development and operating in foreign markets is not surprising, and shows in these graphs an improvement in profitability that is more than proportional to that of employment.
We intend to draw insights from this preliminary processing and implement an econometric model that would allow us to investigate further on profitability, globalization, innovation, and business investment. (Figure 4.4.5) (Figure 4.4.6)

Figure 4.4.1

2010/05 average annual growth rate of EBITDA (*) and of employees by employee class

Figure 4.4.2

2010/05 average annual growth rate of EBITDA (*) and of employees by economic sector

Figure 4.4.3

2010/05 average annual growth rate of EBITDA (*) and of employees for the manufacturing sector

Figure 4.4.4

2010/05 average annual growth rate of EBITDA (*) and of employees by business type

Figure 4.4.5

2010/05 average annual growth rate of EBITDA (*) and of employees by business type with 10-19 employee size class

Figure 4.4.6

2010/05 average annual growth rate of EBITDA (*) and of employees by business type with 50-249 employee size class