SIZE OF FIRMS AND GROUPS IN THE ITALIAN MANUFACTURING SECTOR Marco Cucculelli and Donato Iacobucci

Abstract Firm size in the Italian manufacturing industry has converged toward a small dimension (10-49 employees) which can be considered the most efficient one, given the prevailing trends in demand and technology. The convergence process towards this efficient size shows two different patterns: in the north-western regions it is the result of a "destructuring" process of large firms, while in the northeastern and central regions small firms have represented a specific feature since the beginning of industrial development. In assessing the efficient size of firms we must consider that the technical and the legal units do not always coincide with the economic unit. Indeed, during the last decades we have observed a rapid diffusion of groups of small and medium sized firms: i.e. set of companies controlled by a single economic subject (one or more persons) by means of ownership ties. The diffusion of this organisational form is the result of the growth process based on the diversification of activities. In this context, the group allows a greater operative and strategic autonomy of its units and the possibility for them, thanks to their legal status, to adapt their relationships with customers and suppliers. 1. Introduction Most scholars share the belief that small and medium size firms (SMEs) are playing and will continue to play a relevant role in the Italian manufacturing industry. Even if the trend towards the reduction in firm size seems to be a common feature in almost all the industrialised countries, the complete acceptance of this belief needs to be supported by a closer investigation as to the effect of the reduced dimension on firms' "efficiency" and, more generally, on their ability to exploit the advantages of the small dimension in real market contests. The aim of the paper is that of analysing the long term trend in the size of firms in the Italian manufacturing industry by sector and geographical area. It also investigates some recent trends in the organisation of firms, with specific regard to the development of groups. While official statistics continue to concentrate the attention on the technical (plant) and legal (firm) unit, the rapid diffusion of groups of firms, even among SMEs, makes it clear that the economic unit is bigger than what first appears. The paper is organised as follows. In section 1 we highlight some aspects of the relationship between firm size and efficiency. In section 2 we provide an empirical support for the hypothesis that the reduction in size can be seen as a part of the development process specific to some regions in the North and Centre of Italy. In section 3 we provide some data regarding the diffusion of groups in the manufacturing industry and discuss the causes of the phenomenon. In section 4 we draw some conclusions.

2. Trends in firm size in the Italian manufacturing industry Empirical investigations aiming to evaluate the "efficiency" of a certain size of firm in a particular industry are usually conducted in three different ways. The first two are based on direct comparisons of estimated cost functions and rates of return for (real) firms of different size. The third relies on the estimation of production costs carried out by exploiting all technical information available on manufacturing processes. All those methods suffer from a common limit arising from the need to provide estimations of non-technical inputs in the production functions. An alternative method has been devised by George Stigler: it is the so called "survivor technique" and relies on the hypothesis that "the competition of different sizes of firms sifts out the more efficient enterprises" (Stigler, 1958 p.55). In practice, this technique consists in grouping by size all the firms of an industry and in calculating what share of the industry output can be attributable to each class. If the share of the output of a single class reduces over time, the corresponding size is defined as relatively inefficient and the degree of "inefficiency" is higher the more rapid is the reduction of the share over time. On the contrary, an "efficient" size corresponds to a class whose share of total output is rapidly increasing. Stigler underlines that the "efficient size" is the one that allows the entrepreneur to deal efficiently with the whole set of difficulties and obstacles that a firm has to overcome every day. It is, in other words, the optimum "trigger" level that permits to get a better solution to problems like the management of innovations, unions relationships, the control of market competition and so on. It is not, therefore, just an efficient technical measure of the size of a plant. The aim of evaluating the existence of an "efficient" size in the Italian manufacturing industry has led us to apply Stigler's survivor technique to the Italian case. However, as industry output data are not available in our country, the test has been carried out by using employment data drawn from Industry and Services Census for the years 1951, '61, '71, '81 and 1991. The survivor technique has been therefore applied on the distribution of firm's employees by class of employees in the manufacturing industry of the following Italian areas: North-West, NorthEast-Centre, South. It is worth noting that the survival test is most effectively employed when applied to single industries or, even better, to clusters of firms employing similar technologies or serving the same market. More generally, the test yields correct results when applied to an aggregate of firms (or to an industry) that share similar technologies and organisational structure; furthermore, the reliability of the results increases in accordance with the degree of similarity between all units in the cluster. Because of this reason, we have performed a large number of tests, each one for a different industry, that we do not report in the paper for lack of space. Nevertheless, some remarks will be relayed concerning three aggregates of industries -- total manufacturing, mechanical industry and "fashion" industry -- that we believe to be good proxies for the general trend in the firm size distribution of Italian manufacturing industry. Table 1 reports the distribution of firm's employees by class of employees in the last fifty years: the striking issue which can be drawn from the data is the strong convergence of manufacturing enterprises' size, in terms of employees, towards a smaller dimension that ranges between 10 and 49 employees. According to the survival test, this size class should include therefore the "minimum efficient scale" of the manufacturing industry, because it accounts for a share of total employment that rises from about 13% in 1951 to 30% in 1991. On the contrary, all other size classes have to be defined as relatively "inefficient", according to the same test, because they show a stability or, more often, a reduction of the share of total employment they account for.

Table 1 -- Percentage distribution of employees in Manufacturing Industry according to firm size by number of employees. 1-5

6-9

10-49 50-99 100-499 >500

Total

1951

25.7

5.0

13.1

6.7

16.9

32.6

100.0

1961

20.1

6.7

17.2

9.0

18.8

28.0

100.0

1971

16.7

5.5

19.1

9.0

18.6

31.1

100.0

1981

11.0 10.8

22.7

8.6

18.5

28.2

100.0

1991

15.7

8.7

30.0

8.9

16.8

19.8

100.0

1951

13.2

3.6

12.2

6.7

19.4

44.8

100.0

1961

10.8

4.9

15.1

8.6

20.8

39.9

100.0

1971

9.4

3.9

15.4

8.3

19.0

44.0

100.0

1981

7.3

13.9

17.6

7.3

18.0

35.8

100.0

1991

11.0

7.1

25.4

8.6

18.1

29.7

100.0

1951

35.7

6.6

17.0

8.6

17.6

14.4

100.0

1961

25.3

9.5

23.1

11.1

18.7

12.2

100.0

1971

19.4

7.5

26.1

11.2

19.8

16.2

100.0

1981

14.7

8.0

31.0

11.1

19.7

15.4

100.0

1991

16.7 10.3

36.1

10.0

16.7

10.2

100.0

ITALY

NW

NEC

Source: ISTAT In the mechanical industry (see Table 2), the observed convergence towards the small dimension in far less evident. This is primarily due to the presence of some kinds of industries (as the automotive industry) in which the economies of scale still play a relevant role. However, if we direct our analysis to other mechanical industries (as machinery or mechanical appliances, for example) we can observe, on the contrary, a distribution of firms' size that is much closer to the previously described pattern. The reason of this peculiarity relies on the "interactive" process set up in the Eighties by users and producers of instrumental goods. The former (small businesses mainly involved in traditional sectors like shoemaking and clothes) have stimulated a very qualified demand for specialised machinery that, in turn, has promoted a "new industry" of capital goods, able to satisfy those specific needs.

Table 2 -- Percentage distribution of employees in Mechanical Industry according to firm size by number of employees. 1-5

6-9

10-49 50-99 100-499 >500

Total

1951

21.3

5.9

13.8

7.4

18.6

33.0

100.0

1961

17.8

7.1

16.1

8.5

18.4

32.1

100.0

1971

16.5

5.3

15.3

8.5

15.9

38.5

100.0

1981

12.8 11.7

18.9

7.3

17.1

32.3

100.0

1991

11.7

7.3

25.9

8.5

17.5

29.1

100.0

1951

11.6

5.9

14.4

8.2

21.2

38.7

100.0

1961

10.0

5.4

15.3

8.6

19.5

41.1

100.0

1971

9.2

4.0

13.6

9.0

15.3

48.9

100.0

1981

7.0

19.8

16.1

6.4

15.2

35.5

100.0

1991

8.5

6.4

23.0

8.2

16.6

37.3

100.0

1951

29.9

6.1

13.8

6.9

16.6

26.7

100.0

1961

25.1 10.7

19.8

9.7

18.5

16.2

100.0

1971

21.9

8.1

20.5

8.8

18.6

22.1

100.0

1981

13.7

8.0

26.7

9.6

21.2

20.8

100.0

1991

13.3

8.8

31.7

9.6

18.9

17.6

100.0

ITALY

NW

NEC

Source: ISTAT This new industry has developed thanks to a huge number of small producers competing effectively in those market segments in which incremental innovation, ingeniousness and the ability to solve specific problems are key factors of competitive advantage. It is the "fashion" industry, however, that has seen the most remarkable process of convergence towards smaller firm size (see Table 3). Following the changes that have occurred in the standard of life and consumption patterns in Italy, over the last forty years the structure of this industry has been deeply modified through the birth of a large number of small businesses, specialised in the production of differentiated goods. Their small size has revealed

itself as a definite advantage in the competitive market because it has allowed (those firms) to provide customised goods in a very efficient way. Table 3 -- Percentage distribution of employees in Fashion Industry according to firm size by number of employees. 1-5

6-9

10-49 50-99 100-499 >500

Total

1951

36.4

3.3

10.2

7.0

21.3

21.8

100.0

1961

24.7

4.8

17.5

8.5

18.2

26.3

100.0

1971

19.8

4.7

22.7

11.2

22.9

18.8

100.0

1981

17.7

8.1

33.4

11.5

20.5

8.9

100.0

1991

16.2 10.4

42.0

10.3

15.8

5.2

100.0

1951

17.7

2.7

10.9

8.8

29.8

30.1

100.0

1961

11.4

3.4

16.5

8.4

21.2

39.2

100.0

1971

11.0

3.4

19.4

11.4

26.9

28.0

100.0

1981

12.5

6.4

28.4

11.9

28.3

12.5

100.0

1991

11.9

8.7

36.9

11.7

23.3

7.6

100.0

1951

43.6

4.0

11.6

6.9

16.4

17.6

100.0

1961

31.7

7.3

22.7

10.5

17.4

10.4

100.0

1971

19.5

5.9

28.6

12.6

21.5

11.8

100.0

1981

19.2

9.0

37.2

12.1

16.3

6.2

100.0

1991

17.9 11.2

44.9

10.2

12.2

3.7

100.0

ITALY

NW

NEC

Source: ISTAT While this pattern of convergence towards the small dimension has appeared in most industries, differences have been found in the way the "minimum efficient size" has been achieved in different Italian regions. As industrial structures in the North-West (NW) and North-East-Centre (NEC) regions have traditionally been quite different since Fifties, a "true" size reduction trend has been observed only in NW regions, whose industry structure (largely based on large firms) underwent a "de-structuring" process until the Eighties. In the NEC area, on the other hand,

the convergence towards that "efficient scale" has coincided (clashed) with the birth of the industrial structure itself. in other words, it has represented the natural growth process of the industry since the beginning. In 1951 and 1961, the size distribution of firms' employees in the NW area witnessed the relevance of the large size in order to acquire and to maintain efficiency. As the class with more than 500 employees accounted for a share of 40%-45% of total employment, both for firms (Table 1) and for plants (Table 4), two hypotheses resulted reasonable: i) the "efficient" firms' size was undoubtedly large and ii) there was an almost perfect identification between the "technical" size (that is the plant size) and the "economic" size (that is the whole firm size). Starting from Seventies, there has been a relevant upturn in the trend of this class. While the share of employment in plants fell to 15% continuously until 1991, the share of employment in firms showed, on the contrary, a very small reduction. In 1991 the firms' share of employment was reduced to about 30% of total employment. In other words, "technical" size had been dramatically reduced while the "economic" one had remained almost unchanged. It could be deduced, henceforth, that the decreasing relevance of big size dimension in the NW industry has resulted in a process of "fragmentation" of the plant size (of previously vertically integrated plants), in order to gain efficiency and to be able to respond more quickly to wide and unexpected fluctuations in the demand. Table 4 -- Percentage distribution of employees in Manufacturing Industry according to plant size by number of employees. 1-5

6-9

10-49 50-99 100-499 >500

Total

1951

25.7

5.0

13.1

6.7

16.9

32.6

100.0

1961

20.1

6.7

17.3

9.0

18.8

28.0

100.0

1971

18.3

6.0

21.9

10.7

23.2

20.0

100.0

1981

15.9

7.3

25.9

10.0

21.3

19.6

100.0

1991

17.0

9.2

31.6

10.0

19.2

13.0

100.0

1951

13.2

3.6

12.2

6.7

19.4

44.8

100.0

1961

10.8

4.9

15.2

8.6

20.7

39.8

100.0

1971

12.1

5.1

21.0

11.4

27.5

22.8

100.0

1981

12.6

6.4

23.6

10.0

23.5

24.0

100.0

1991

13.3

8.3

29.9

10.5

22.3

15.6

100.0

35.7

6.6

17.0

8.6

17.6

14.4

100.0

ITALY

NW

NEC 1951

1961

25.3

9.5

23.1

11.1

18.8

12.2

100.0

1971

18.8

7.3

25.9

11.5

21.2

15.3

100.0

1981

16.9

8.6

30.7

11.3

20.4

12.1

100.0

1991

17.3 10.4

36.3

10.8

17.4

7.8

100.0

Source: ISTAT Differently from the NW, in the NEC area both the distribution of employees in firms (Table 1) and in plants (Table 4) has evolved in an almost similar way in the whole period (1951-91). This supports the hypothesis that the growth of the industry in that area has been largely based on the development of the small and medium size classes, with an almost complete identification between firm and plant. Furthermore, as we will later analyse, this size structure of the manufacturing industry has favoured the subsequent clustering of firms in groups, in order to gain further advantages related to the "economic" (non technical) efficient scale. 3. Similarities in the industry structure among Italian regions Given this preliminary result on the size distribution of manufacturing firms, the attempt to discover regularities in the trend of size reduction at regional level has led us to ask if some regions have been characterised by a similar development process of the structure of the industry. In order to discover this, we have tried to cluster all twenty Italian regions by the size distribution of the industry: that is, for each region the size distribution of firms for the whole period (1951-91) has been calculated and a cluster analysis has been carried out, by using the share of total employment in each size class as a clustering variable. The variable used in the procedure is the percentage of employees on total employment for a specific size class (1-5, 69, 10-49, 50-99, 100-499, >500) in each of twenty Italian regions for the years 1951, 1961, 1971,1981,1991. In order to better account for differences in the evolution of regional industrial structures, the analysis has been carried out distinguishing two separate periods of time: the first going from 1951 to 1961, the second from 1981 to 1991. By dividing the whole time horizon (1951-91), we can get a picture of the clusters of regions that are similar (according to their size structure) at the beginning of the period (1951-61) and at the end (1981-91); secondly, by comparing these two clusters we can obtain also "detachments" of any region from its original cluster and/or "junctions" to new ones. At the beginning of the period (1951-61) we found three clusters: the first one is composed by all southern regions and the Valle d'Aosta (see Fig 1 -- omitted). The second is divided in two sub-groups composed respectively by Trentino, Marche, Umbria, Emilia Romagna on one side and Veneto, Toscana and Friuli on the other. These two sub-groups are very close to each other and, at the same time, quite distant from the first cluster. The third cluster is composed by north-west regions (Piemonte, Liguria and Lombardia) and Lazio. Its distance from the other two cluster is relevant.

At the end of the period (1981-91, see Fig. 2 -- omitted), the previously identified clusters show some changes: on the one hand we clearly witness the compactness of the cluster composed by the regions in the NEC area (Marche, Emilia Romagna, Trentino, Veneto and Toscana); on the other hand we can see that the trend in the size distribution in industrial structure of some other regions is converging with that of the NEC cluster. This is the case with Abruzzo and Lombardia, but Campania that has left its original cluster. With regard to all other regions, we can observe a general tendency towards the reduction of the distance between groups: in other words, there is an increasing "homogeneity" of industrial structures between regions. The sharp separation between northern and southern regions is no longer so evident as it was in the Fifties. Furthermore, another (heterogeneous) cluster of regions is emerging: it has broken away from the original clusters and it is composed of two different kinds of regions: those in which the relevance of vertical disintegration has been apparent like Piemonte, Liguria and Lazio; and those in which the importance of small-medium size firms is increasing (Campania, Molise and Puglia). Both these kinds of regions (or subgroups) have in common the convergence of the industrial structure towards the "efficient scale" previously highlighted. For manufacturing industry, the identity of the NEC area becomes clearly visible at the end of the Eighties: it obviously includes all the regions of the North-East-Centre area of the country as well as a set of other regions to which geographical proximity has allowed them to follow a similar development process. In addition to these regions, whose process of industrialisation has been defined as "the Adriatic way of development", it is worth underlining that this process of industrial development based on small sized firms has also influenced those regions (like Lombardia) whose industrial structure was formed long before. 4. The groups of firms in the Italian manufacturing industry By group we mean a set of companies, legally distinct, controlled by a single economic subject (one or more persons) by means of ownership ties. Some observations are needed in order to analyse the possibility of associating the group, rather than the individual companies, to the firm. If the firm is mainly considered as a legal entity (that is for its ability to establish obligations and long term contractual relationships with third parties), the firm should be associated to the single companies forming a group. This is probably true for large groups in which the ties among the companies are of a purely financial nature, while the companies show a complete strategic and operative autonomy. The situation is quite different for groups of SMEs. In those cases the group can be seen as a specific way of organisation of the firm: financial aspects are less important, while a certain degree of strategic and operative integration among the companies is observed. That is why, in the case of groups of SMEs, we consider the group as the appropriate unit of analysis and associate it with the firm. It is nevertheless clear that we are faced with a hybrid form in which some economic features of the firm are left to the individual companies and some to the group as a whole. The economic literature on groups has focused its attention on large groups. The main aim is that of identifying the characteristics of those groups and the differences from other organisational forms (Chandler, 1982; Encaoua, Jacquemin, 1982; Goto 1982; Cable, Yasuki, 1985; Chang, Choi, 1988; Kester 1993). In general the group is considered as an efficient form of organisation in some circumstances; indeed the most common theoretical approach to the topic is that of transaction costs, under which the group is identified as an intermediate form between market and hierarchy. At the same time some scholars sustain the idea that specific institutional factors are responsible for the diffusion of groups in Continental Europe and in Asian countries. In Italy the diffusion of groups (specifically the pyramidal groups) among the larger firms has been interpreted as a way of separating ownership and control in a situation of under-development of both capital markets and other institutions of corporate governance (Barca, 1996).

Moreover, to explain the rapid diffusion of the groups among SMEs we should consider causes different from those identified for the larger firms. There are two main reasons for this: the first is that the nature of small groups is quite different than that of large groups; the second is that we must consider how the diffusion of this organisational form relates to the general development observed in industrial districts, which are the typical form of organisation of Italian manufacturing firms. 4.1 The diffusion of groups in the manufacturing sector One of the main difficulties in detecting the consistency of the phenomenon of groups is that they do not exist as a unit of inquiry in official statistics. For this reason, to investigate the phenomenon we must rely on survey studies, which are quite different in methodology, scope and objectives. The only two surveys available made at a national level are those of the Bank of Italy and of the Mediocredito Centrale (Barca et al., 1994; Mediocredito Centrale, 1997. We will briefly outline their results concerning the diffusion of groups in the manufacturing industry. According to the survey carried out by the Bank of Italy in the early nineties, groups are the predominant organisational form among medium sized (100 to 500 employees) and larger firms (Table 5). Table 5 -- Firms belonging to a group by size of firms in 1994. Class of employees Companies belonging to a group (%) 50-99

35.1

100-199

63.1

200-499

78.4

500-999

85.4

>1000

79.7

Total 50 -

73.1

Total 10 -

46.8 Source: Barca (1996), p. 93.

If we consider the size structure of the manufacturing industry taking into account the groups rather than the individual companies (Table 6), we observe a reduction in the importance of small and medium sized firms (10 to 500 employees), and a rise in the share of the firms (those with more than 5000 employees).

Table 6 -- Percentage distribution of employees in the manufacturing by class of employees: 1994. Class of employees

Companies*

Groups**

Difference

10-19

18.9

17.8

-2

20-49

19.9

17.9

-2,0

50-99

11.7

10.5

-3

100-199

10.8

7.9

-2

200-499

11.9

9.7

-4

500-999

6.7

5.8

0

1000-1999

4.9

5.9

1,0

2000-4999

5.1

6.6

6

5000 -

10.0

17.9

15

Total

154,0

163,0

* Single companies; ** Groups or single companies when not belonging to a group. Source: Barca et al. (1994), p. 139 From the survey carried out by Mediocredito Centrale on a representative sample of Italian manufacturing firms, it emerges that nearly all companies with more than 500 employees belong to a group. The percentage declines steadily with firm size, although more than one third of medium sized firms (51-250 employees) declared belonging to a group (Table 7).

Table 7 -- Firms belonging to a group per sector of activity and size. Percentage values. Class of employees

Traditional Scale Specialised High tech sectors Intensive suppliers Sectors

Total

11-20

3.6

4.6

5.7

21.1

4.6

21-50

11.3

15.9

16.0

12.5

13.6

51-250

30.8

41.7

33.4

51.7

35.5

251-500

65.5

72.4

73.3

75.9

70.3

500-

86.8

93.2

98.3

100.0

93.1

Total

100.0%

100.0%

100.0%

100.0%

100.0%

Source: Mediocredio Centrale (1997) In Table 8 some features of the groups to which the firms interviewed belong are presented. The average companies per group is 37; this figure is strongly influenced by some very high values: indeed the median is 7 companies per group. The average size of the group in terms of employees is 8 to 50 times that of its companies. Table 8 -- Companies and employees of groups by class of employees of the firms declaring to belong to a group -- 1994. Companies per group

Total employee of the group

Average employees per company of the group

Average

Median

Average

Median

11-20

8.1

4

286.5

100

34.8

21-50

20.2

4

1500.8

200

57.8

51-250

27.6

6

3715.0

375

107.3

251-500

42.4

10

9763.0

1000

178.5

Oltre 500

76.9

22

19016.0

3106

426.4

Totale

36.8

7

7024.6

600

165.8

Source: Elaboration from Mediocredito Centrale Survey in Italian Manufacturing Firms. Summing up the results of the two surveys, we can affirm that if we consider the group rather than the company as the economic unit (firm), it is evident that the size structure of the Italian manufacturing industry is less "fragmented" than it first appears.

4.2 The interpretation of the phenomenon The economic literature has put forward three main explanations for the diffusion of groups among SMEs: 1. the first considers the group as a specific way of growth of SMEs; 2. the second considers the group as the result of the institutional setting prevailing in Italy; 3. the third considers the group as an efficient organisational form. We will briefly examine the first two interpretations and discuss the third in more detail, since we consider it the most appropriate for understanding the phenomenon. Unfortunately, as previously mentioned, at the moment we do not have adequate evidence to clearly discriminate among the three explanations. According to the first hypothesis the diffusion of groups among SMEs is the result of the managerial weakness of the entrepreneurs controlling the firms (typically the members of a family). For this reason, when growing in size, they prefer to replicate the same entrepreneurial "formula" (the companies of the group) rather than develop a complex organisation (Lorenzoni, 1990, pp. 103-104). In the second case, the development of groups is explained by the aim of the firms to exploit some benefits associated with the small dimension of its legal units. Among those benefits, the most cited are: the possibility of avoiding the labour or fiscal law; the possibility of being entitled to financial benefits reserved for small firms; the greater flexibility in the use of labour in small companies. In these two interpretations a "negative" connotation of the group form is implicit: while growing in size small firms are constrained, by internal of external factors, to split themselves into several legal units rather than growing through a single, more complex, organisation. This being the case groups of SMEs are expected to reduce their importance over time as soon as those constraints are reduced or removed. Although the two explanations mentioned above deserve some consideration, we do not think they are able to explain the large diffusion of the phenomenon and its features. This is why we will enlarge on the third explanation, considering the group as an efficient form of organisation given the technology and the market context prevailing in recent decades. Efficiency reasons are essentially associated with the advantages achieved through the diversification of activities and the adoption of decentralised organisational forms. Small and medium sized enterprises operate in industrial sectors characterised by a high degree of demand variety (horizontal differentiation) and variability (rapid change over time). In these circumstances the growth by vertical integration would reduce the flexibility of the firm; on the contrary we observe an increasing specialisation along the "productive filiere" (Balloni, 1996). The increasing demand variability induces the firms to grow by differentiating or diversifying their products. This is why we observe a process of "organisational differentiation", that is the creation of independent units, even in SMEs. Chandler has demonstrated that there is a clear correlation between the degree of diversification of the firm's activities and its organisational form (Chandler, 1962). Rumelt has extended the analysis, considering five organisational forms: functional, functional with divisions, multidivisional by products, multidivisional by geographical area, holding company (Rumelt, 1974, p. 33-40). Rumelt has also confirmed that there is a high degree of coherence between the intensity and characteristics of diversification and the organisational form chosen by firms. Specifically, referring to a sample of large American firms, he found that the "multidivisional by products" form is chosen by ninety percent of firms operating in related businesses, while the holding company is adopted only by firms operating in unrelated businesses.

Given the fact that in their growth process SMEs face the problem of differentiating or diversifying their activities, it remains to be seen why the result of such a process is the group rather than a multidivisional form. We think that the reasons for this are associated with some advantages in the internal management of the firm and in its relationships with external subjects. The members of the board of a company have a greater level of responsibility and autonomy than the head of a division. The legal autonomy makes the yardstick competition among the companies of the group easier and allows directors and managers to acquire significant stakes in the companies in which they have specific responsibility. The contractual autonomy of the companies in their relationships with suppliers and customers is another important advantage of the group form. Every company is free to adapt its contractual relationships (for example the payment conditions with customers and suppliers) to the specific needs of the business. This aspect is particularly important for the firms operating in industrial districts. As previously mentioned, in their growth process firms tend to rely on an extended network of suppliers; it is essential for the firms involved in the network to adapt their relationships to the changing needs of the business. This is done by setting and maintaining informal contracts, based on trust relationships between the parts. It would be quite difficult to implement such relationships should a manager as head of a division be involved. On the contrary this is easier for the director of a company who has full responsibility for its obligations. The empirical evidence regarding the internal organisation of the groups of small firms are quite scanty (IRER, 1988, Banco Ambrosiano Veneto, 1994; Balloni, Iacobucci, 1997). We made some computations on the Mediocredito database about the feature of the groups of SMEs to which the companies interviewed belonged to. We limited our analysis to the groups not exceeding 500 employees. Table 9 confirms the fact that the phenomenon of groups among SMEs is a recent one: more than 80% of the groups where set-up during the eighties and the first half of the nineties. This percentage is more than 90% for the smaller groups. Table 9 -- Groups by class of employees and year of set up. Percentage of groups. Class of employees

Period of birth Before 1950 1950-59 1960-69 1970-79 1980-89 1990-94 Total

11-20 21-50

66.7

33.3

100

9.1

63.6

27.3

100

51-250

0.4

0.4

3.3

9.8

50.4

35.7

100

251-500

0.6

0.6

3.4

9.5

51.4

34.6

100

Total

0.4

0.4

3.1

9.6

51.6

34.8

100

Source: Comptation on Mediocredito Centrale database

When asked to identify the advantages associated with the group form, the companies interviewed indicated as predominant those associated with the efficiency in internal organisation (economies in control and co-ordination costs) and those deriving from the diversification of activities (Table 10). The advantages associated with the control of suppliers are of less importance; this confirms that the development of groups is not associated with a process of vertical integration. Table 10 -- Advantages of the group form. Percentage of groups (multiple answers were possible). Degree of importance

Type of advantage

High

Medium

Diminishing control and co-ordination costs

31.3

29.5

Diversification of firm's activities

25.4

26.1

Adding related activities

17.0

22.8

Control of suppliers

9.8

13.8

Control of the distribution

17.0

15.2

Tax advantages

10.5

17.0

Source: Computation on Mediocredito Centrale database In general there is a high degree of autonomy of the company interviewed from its group in all the main management functions (Table 11), although a large array of situations is observed, ranging from complete autonomy to complete centralisation. Table 11 -- Companies belonging to groups by degree of autonomy in some management activities. Centralised

Limited Complete Total Autonomy Autonomy

Sales -- Marketing

23.2

24.8

52.0

100

R&D

25.1

23.4

51.5

100

Administration

24.3

24.9

50.8

100

Finance

31.5

24.5

44.0

100

This fact confirms the high variety in group "architecture", as per number of companies, degree of diversification, functional relationship among the companies, etc.

Indeed the flexibility of the group form, and its ability to adapt to different organisational needs, seems to be another important reason for its diffusion among SMEs, while the M-form would require a more rigid organisational setting. 5. Conclusions In the paper we have shown how a strong trend in firm size reduction has been observed in most of industrial sectors of the Italian manufacturing industry, as well as in the NW and NEC regions of the Country. The robustness of this process is a signal of the decreasing relevance of the "technology constraint" in manufacturing activities. Both NW and NEC regions have shared a similar development process in which economies of scale and vertical integration are not playing a crucial role any longer. However the observed reduction in the "efficient size" can be misleading if we do not take into account for many relevant features other than the technical one. We must consider the ownership ties which link firms into groups: i.e. sets of companies controlled by the same economic subject. Indeed, groups are the predominant organisational form in medium sized firms and they are widely diffused also among small firms. We consider the group as an efficient form of organisation given technology and market trends observed in recent decades. Efficiency reasons are essentially associated with the diversification of activities and the adoption of decentralised organisational forms. This is confirmed by survey results in which interviewed companies have indicated the economies in control and co-ordination costs and the diversification of activities to be the main reasons for the adoption of the group form. However more research work is needed in order to better understand the causes of the phenomenon and its consequences on both the efficiency of firms and the development of local systems of production. References Balloni V. (1996), Squilibri strutturali e nuovi assetti dell'industria italiana, Edizioni Scientifiche Italiane, Napoli. Balloni V., Iacobucci D. (1997), Cambiamenti in atto nell'organizzazione dell'industria marchigiana, Economia Marche (1), 29-66. Banco Ambrosiano Veneto, Federazione dell'Industria del Veneto (1994), Struttura e dinamica dell'industria nel veneto 1989-1992, Franco Angeli, Milano. Barca F. et. Al. (1994), Assetti proprietari e mercato delle imprese. Vol. I. Proprietà, modelli di controllo e riallocazione delle imprese industriali italiane, Il Mulino, Bologna. Barca F. (1996), On Corporate Governance in Italy: Issue, Facts and Agenda, Fondazione ENI Enrico Mattei Working Paper Series (Nota di lavoro 10.96). Cable J., Yasuki H. (1985), Internal Organization, Business Groups and Corporate Performance, International Journal of Industrial Organization, 3, 401-420. Chandler A.D. (1962), Strategy and Structure: Chapters in the History of the Industrial Enterprise, MIT Press, Cambridge.

Chandler A.D. (1982), M-Form: Industrial Groups, American Style, European Economic Review, (19), march. Chang S.J., Choi U. (1988), Strategy, Structure and Performance of Korean Business Groups: A Transactions Cost Approach, Journal of Industrial Economics, 37(2), 141-158. Encaoua D., Jacquemin A. (1982), Organizaional. Efficiency and Monopoly Power: The Case of French Industrial Groups, European Economic Review, (19), 25-51. Goto A. (1982), Business Groups in a Market Economy, European Economic Review, (19), 53-70. IReR (1988), L'innovazione organizzativa nell'industria minore. Lo sviluppo per gruppo industriale, Franco Angeli, Milano. Kester W.C. (1993), Industrial Groups as Systems of Contractual Governance, Oxford Review of Economic Policy, 8(3), 24-44. Lorenzoni G. (1990), L'architettura di sviluppo delle imprese minori. Costellazioni e piccoli gruppi, Il Mulino, Bologna. Mediocredito Centrale Osservatorio sulle piccole e medie imprese (1997), Indagine sulle imprese manifatturiere. Sesto rapporto sull'industria italiana e sulla politica industriale, Roma. Rumelt R.P. (1974), Strategy, Structure and Economic Performance, Harvard Business School Press, Boston, MA. Stigler G. (1958), The Economies of Scale, The Journal of Law and Economics, (October). About the Authors Marco Cucculelli: Assistant Professor of Industrial Economics at the Faculty of Political Sciences of the University of Urbino. Donato Iacobucci: Assistant Professor of Economy of the Firm at the Faculty of Political Sciences of the University of Urbino. Contact person: Donato Iacobucci, Istituto di Analisi Economica, Facoltà di Scienze Politiche Università degli Studi di Urbino Piazza Gherardi, 1 - 61029 Urbino, Italy Tel: 0722-329687 Fax: 0722-328604 E-mail: [email protected]