Italy’s Hidden Strength: The Micro-Foundations of Competitiveness (III)

Executive Summary

Italy’s industrial strengths are shifting – and so must its policy. Italy’s export performance still defines its industrial identity — but that identity is aging. Core advantages in machinery, pharmaceuticals, and chemicals remain concentrated in the North, yet many traditional strongholds (textiles, leather, non-metallic minerals) are losing ground. Export growth is becoming more concentrated among a shrinking set of firms. The country risks locking into a narrow geography and technology base at a time when resilience and inclusiveness are essential.

But another Italy is growing. High-Growth Firms (HGFs) — the 1% of firms driving over 80% of net job creation — are emerging across sectors and regions, including in the South. Unlike established exporters, HGFs are distributed more evenly across the country and span both high- and low-tech activities. They point to latent comparative advantages — early signals of where Italy’s industrial future may lie, from mid-tech manufacturing in Teramo to dynamic services in Bari and Catania.

Italy needs a dual-track industrial policy. One track must strengthen current comparative advantages by supporting exporters’ innovation and scale. The other must cultivate emerging specialisations, building new industrial capabilities in sectors and regions currently outside the core.

Regional specialisation is the key to inclusive growth. Italy’s productive geography is fractured, but not all regions need to compete at the frontier. Some areas are well-positioned to scale technological capabilities; others can create value in lower-tech segments. Administrative capacity and subnational variation matter: regional governments have autonomy to develop growth strategies, but these are often path-dependent and reinforced by weak central coordination. A tailored approach to value-chain positioning — rather than seeking technological parity across regions — is the most effective path forward.

Key Recommendations

1. Abandon one-size-fits-all approaches. Italy’s production structure is too asymmetric for horizontal policies. Sector- and place-based differentiation must be at the heart of national strategy.
2. Use HGFs as forward-looking industrial indicators. Their spatial and sectoral distribution reveals Italy’s hidden growth potential and should guide investment, financing, and capability-building efforts.
3. Embed Italy’s regions in distinct roles within global value chains. Not all can compete at the frontier, but all can create value. Policy must recognise where each region can contribute — from inputs and niches to services and assembly.

The broader implication is that Italy’s industrial future is still open, but only if policy adapts. By moving from a backward-looking defence of incumbent sectors to a forward-looking identification of latent strengths, industrial policy can convert microeconomic dynamism into resilience and inclusive growth.

This paper concludes a trilogy on Italy’s growth model and industrial transformation. Building on the analysis of Italy’s dual economy (Part I) and two decades of industrial policy (Part II), it examines the firm-level and regional dynamics that will shape the country’s future industrial path.