This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 03 ROME 000471 
 
SIPDIS 
 
DEPT FOR EUR/WE, EUR/ERA, EB/IFB/OIA/IPE/CBA 
PARIS ALSO FOR USOECD 
USDOC 4212/ITA/MAC/OEURA/CPD 
 
 
E.O. 12356: n/a 
TAGS: ECON EFIN ELAB PGOV IT KPRP EUN
SUBJECT:  AMBASSADOR'S PARTNERSHIP FOR GROWTH: ITALY'S 
ECONOMIC CHALLENGES AND THE U.S. EXPERIENCE 
 
Summary and Introduction 
------------------------ 
 
¶1.  Italy has proven to be the best U.S. ally in continental 
Europe in this young millennium.  Unfortunately, since 2000, 
Italy's economy has grown at an anemic annual rate of only 
0.75 percent.  To promote economic dynamism in Italy that 
will produce the resources for Italy to continue to join the 
United States in confronting future world challenges, the 
Ambassador has launched his "Partnership for Growth." 
 
¶2.  As a preliminary step, the Embassy and a leading Italian 
socio-economic think-tank, CENSIS, co-hosted a brainstorming 
session January 30.  Dubbed "Italy's Economic challenges and 
the U.S. Experience," the day-long session brought together 
Italian owners of small and medium enterprises (SMEs), 
representatives from larger U.S. (e.g., Microsoft) and 
Italian (e.g., Lottomatica) corporations, bankers, 
government officials, academics, and the Italian American 
Chamber of Commerce.  Participants described Italy as an 
economy with entrepreneurial dynamism (a leader in the EU in 
annual start-up firms per capita), but also as a "survival 
economy" with owners just trying to keep their businesses 
afloat.  Bigger companies are seen as part of the social 
welfare system and are expected to maintain a stable level 
of employment.  Red tape and lack of a sophisticated risk- 
capital market make it very difficult for Italian SMEs to 
innovate and grow.  Italian entrepreneurs see the need for 
"creative destruction" (i.e., closing non-viable companies 
to free resources for new enterprises), and mergers among 
SMEs to become more efficient and globally competitive. 
Greater university-private sector cooperation would foster 
innovation and growth in Italy. 
 
¶3.  As part of the Partnership for Growth, the Embassy will 
cooperate with Italy in broadening and deepening capital 
markets, especially access to risk capital.  We also will 
advance private sector-university cooperation and 
partnership in Italy, in particular by supporting and 
assisting the GOI with implementation of an Italian "Bayh- 
Dole Act".  End Summary and Introduction. 
 
A "Survival Economy" with "One Thousand Obstacles" 
--------------------------------------------- ----- 
 
¶4.  Censis director Giuseppe Roma characterized the Italian 
economy as "dynamic" but at the same time a "survival 
economy" burdened by "one thousand obstacles."   Roma 
maintained that, partially due to the cultural and economic 
environment, Italian entrepreneurs focus more on survival 
than growth.  Roma indicated that while Italy exceeds the EU 
average in new businesses per capita created annually, with 
very rare exceptions, these ventures remain small. 
Participants largely concurred with Roma and identified as 
key obstacles: high taxation, inflexible labor laws, 
inadequately trained personnel, and lack of a sophisticated 
risk capital market. 
 
Industry's Duty to Employ 
------------------------- 
 
¶5.  Italian participants argued that big businesses 
(industries) in Italy serve a social function.  Once created 
"the system" expects the enterprise to remain in business 
forever, becoming a "lifelong" provider of employment. 
While the government has provided some public funding and 
incentives aimed at protecting jobs (along with a "certain 
degree of tolerance" by authorities on tax reporting), 
participants argued that the system on balance hurt 
business. High labor costs and "jobs for life" (it is nearly 
impossible to fire an employee in entities with more than 15 
employees) are disincentives to new business opportunities 
and to grow and "stick one's neck out."   High fixed labor 
costs drain capital that would otherwise go to buying 
technology that would increase productivity, the consequence 
being an absence of a culture of innovation and growth. 
 
"Inward" Internationalization 
----------------------------- 
 
¶6.  Some participants said they had moved production to 
Eastern Europe, where the cost of labor is substantially 
lower.  However, they openly admitted that such moves may be 
short-sighted measures meant simply to preserve their 
existing share of the Italian market, rather than aimed at 
entering and growing in foreign markets.  One participant 
proposed that U.S. firms interested in Eastern European 
market team up with Italian companies already there, which 
would allow Italian companies a growth opportunity, and 
would allow U.S. firms to team up with a "western" partner 
in difficult markets. 
 
Small Is Ugly 
------------- 
 
¶7.  All participants agreed that it is no longer possible 
for Italian business to remain small and survive. 
Consolidation and growth is a necessity.  The next 
generations of entrepreneurs have come to terms with the 
need to cooperate and aggregate and turn over management of 
enterprises to professionals.  However, Italy must find ways 
to accelerate this process.  Not only do Italian 
entrepreneurs feel the need to merge and grow domestically, 
but it has become apparent to most that expansion in 
emerging markets will only be possible by teaming up with 
foreign partners. 
 
Risk Capital a Missing Ingredient 
--------------------------------- 
 
¶8.  Lack of a sophisticated, diversified risk capital market 
is a key concern of Italian businesses.  Participants 
unanimously sought U.S. collaboration.  While press 
headlines are grabbed by big, cross boarder bank mergers, 
SMEs want a more direct, "personalized," financing option. 
Businesses call for "tailored" risk capital typical of U.S. 
seed and venture capital, and private equity markets. 
Participants saw a catch 22 in which the absence of Italian 
risk takers has made the Italian market unattractive for 
those who offer risk capital. At the same time, absence of 
risk capital has not enabled potential risk takers to pursue 
their visions. 
 
Private Sector- University Collaboration 
---------------------------------------- 
 
¶9.  Participants also bemoaned the lack of a developed and 
structural collaboration between universities and the 
private sector.  Examples of successful isolated projects 
were provided, but participants cited the need for a legal 
framework providing a more dynamic and institutionalized 
collaboration.  In particular, the representative from the 
Ministry of Productive Activities (somewhat comparable to 
the U.S. Department of Commerce) underscored that Italy (in 
collaboration with the Embassy and the U. S. Patent and 
Trade Office) has drafted an Italian version of the Bayh- 
Dole act.  Participants identified the need for such 
legislation, which would provide clear property rights to 
university research and specific benefits to spin-offs 
resulting from the research. 
 
University Excellence 
--------------------- 
 
¶10.  Some participants argued that a related question is 
that concerning the legal value of university degrees, as in 
Italy competition for public sector employment is based 
solely on formal titles and not personal standing.  A 
university title legally is a fungible commodity (for the 
purpose of public administration employment, not the private 
sector).  It is comparable to a driver's license -- it 
doesn't matter where it was issued.  This has the perverse 
effect of eliminating competition among universities for 
better students/professors and diminishing universities' 
drive to innovate. 
 
¶11.  Universities, mostly state-run and low-cost, serve as a 
social "parking lot" for young people.  Students have little 
incentive to graduate on time and often linger until their 
late twenties to avoid the lack of opportunities in the 
"real world."  Experts, including former EU Commissioner for 
Competition Mario Monti, believe that eliminating the legal 
value of degrees will serve as catalyst to move Italy from a 
"bourbonist" higher education system, to one where 
excellence, innovation, research, and cooperation with 
private sector will become the driving force leading to an 
overall cultural change in Italian economic thinking. 
 
Next Steps 
---------- 
 
¶12.  While we cannot address all the challenges in the 
Italian system, we should engage in the areas of risk- 
capital markets and university-private sector collaboration. 
Within the framework of the Ambassador's Partnership for 
Growth we will share the U.S. experience in risk capital by 
bringing U.S. experts and practitioners to Italy. 
Similarly, we will work with Italy to promote innovation and 
collaboration between private sector and academia.  We think 
that, building on a 2003 bilateral declaration and 
subsequent bilateral collaboration, a key first step is to 
work with the GOI towards enactment of an Italian Bayh-Dole 
as early as possible in the new legislature (general 
election to be held in April).  Allowing a legal framework 
for such collaboration will have the effect of stimulating 
new initiatives and research collaborations.  We plan to 
begin this initiative with a meeting of key Italian 
university presidents in March. 
 
 
Spogli