Finance and Structure of the State-owned Enterprise in Italy. IRI from the Golden Age to the Fall

The state-owned enterprise has had a first-rank place in Italian economic growth in the last century, although its ability to overcome gaps in technology and institutions proved to be somewhat insufficient. At a certain point, in the 1960s, it was so successful in coping with modernization processes that even in Britain it seemed reasonable to argue about the advantages of adopting the Italian model of public enterprise. The ensuing decline and, eventually, the dramatic fall of the Italian state-owned enterprise has been related to a vast array of factors. Some factors are typically endogenous, as when personal managerial capabilities are concerned or political mistakes are assumed to be responsible for capital misallocation and losses in profitability. In these cases the analysis emphasized what are essentially degenerative processes within the model, also in relation to changes of the international context. Some factors are instead typically exogenous, as it may be when external price shocks are taken into account and the oil shock or the deregulation wave are considered. There is even a more radical interpretation of the end of the public enterprise which emphasized the relevance of changes in technologies, namely the underlying shift from investment-based strategies to innovation-based strategies, as the fundamental reason for its collapse. This chapter argues that all these factors are better understood if attention is directed to the relationship between finance and structure within the state-owned enterprise in the long term. This approach suggests a new perspective on the causes of the sharp decline of the largest state-owned holding, IRI, by pointing out that a incoherent governance model failed to react to a rapidly changing environment, whilst a huge amount of debt undermined the financial position of the group. Thus it was not possible to pursue appropriate investments in emerging technology and financial weakness cut off the state-owned enterprise from the emerging stream of sectors and innovations. This chapter is organized as follows: the first section presents in general terms the conceptual frame employed in the analysis; the second section deals with the capital structure of the top 200 manufacturing firms from 1952 to 1991, in order to assess to what extent corporate ownership has been relevant in determining different or similar degrees and dynamics of their capitalization; the third paragraph addresses the specific financial structure of IRI as holding company over time in relation to the main changes which occurred within the domestic financial system; the fourth section considers the financial dynamics of sectoral sub-holdings in relation to investments, by estimating the relative weight of the individual sectors in driving the debt of IRI out of control; finally, in the fifth section some conclusions will be drawn.