Italian SMEs: “Small is Pretty” or a Structural Problem?

Author: Leonardo Marchi

Introduction

For years, the dominance of small and medium-sized enterprises (SMEs) has been considered the norm for the Italian industrial landscape. Characterized by their modest scale and regional focus, these companies have earned the reputation of “small and pretty”—businesses that perform steadily without aspiring to scale up. The prevailing notion has been that Italian SMEs are destined to remain small, thriving within their niche markets while resisting the pressures of globalization and industrial consolidation. But is this truly their fate, or could they break out of this mold? Is there potential for Italian SMEs to grow beyond their current paradigm, or are they hindered by structural issues unique to the region?

This article explores the factors that have led Italian SMEs to their current status, focusing on the historical, economic, and cultural elements that have shaped their development. It examines whether there are opportunities for these companies to escape the constraints of size and structure, or if they are indeed limited by deep-rooted challenges. An understanding of the past and present landscape of Italian SMEs, can prove critical to assess whether SMEs can break free from their stigma of small and steady players and, perhaps, aspire to something greater in a rapidly evolving global economy.

Italian SMEs: The Current Paradigm

Small and medium-sized enterprises (SMEs) are often celebrated as the backbone of the European economy, constituting more than 99% of businesses and employing around two-thirds of the workforce. They are, on the surface, the picture of resilience and diversity. These companies vary widely in sector, structure, and ambition, but most share a similar business model that caters to local or regional markets; many are family-owned, possess limited financial resources, and depend on a small number of employees who often fulfill multiple roles within the organization. For decades, this model has been sufficient for local economies, creating stable employment and ensuring a consistent, if modest, level of economic contribution.

However, as globalization and technological advances reshape industries, Italian SMEs are increasingly facing pressure to scale up, innovate, and compete internationally. Many SMEs are struggling to adapt, their size, structure, and conservative management styles acting as crucial constraints inhibiting transformation, and while some manage to to break through these limitations, a large portion of small businesses still remain constrained by a paradigm that values stability over ambition. This has created a fragmented economic landscape, with small-scale, regionally-focused businesses operating alongside large multinationals, with little interaction between the two.

The Current Situation: What Has Got Us Here?

Rather than just being the stage of a cyclical pattern, we want to contend that the issues facing Italian SMEs, have a rather structural connotation. This article identifies three key structural problems that have stricken SMEs, especially the Italian ones, and are still contributing to the non-growth or, if you may, the below-average-growth of SMEs registered over the past two decades.

1.?????? The first of these problems is a cultural one and has its roots in Italy’s historical experience with autarky during the Fascist era, a regime which promoted self-sufficiency and economic isolation. This legacy of protectionism, reflected in the persistence of tightly family-owned businesses and limited long-term vision, has had a lasting impact, as it slowed down the country’s engagement with global markets and limited opportunities for Italian firms to learn from their international peers. Unlike economies that embraced globalization early, Italy’s SMEs often missed out on exposure to best practices and innovations from abroad, which could have strengthened their competitive capabilities.

2.?????? In light of these weaknesses, the 2008 Global Financial Crisis (GFC) certainly did not help. The Great Recession, as many scholars refer to it, exacerbated the already-evident weaknesses of Italian companies and inaugurated a new period of economic stagnation, leaving many financially drained and with limited resources to invest in growth or modernization. In this context of prolonged hardship, what was even worse was the response of the Italian government which, instead of enacting expansive policies that could stimulate the economy—financed even at cost of running budget deficits—pursued austerity measures aimed at controlling public debt. This approach irreparably neglected long-term economic health and the much-needed investments in R&D, education, and infrastructure and placed a disproportionate burden on smaller companies, which often rely on favorable economic conditions to thrive.

3.?????? Finally, one of the most pressing issues plaguing Italian companies is the skill gap caused by the government’s underinvestment in education. Many SMEs are struggling to find qualified talent capable of driving innovation and operational improvements, with the result that companies have remained technologically stagnant and incapable of creating a “managerialized” organizational structure. The lack of skilled talent, combined with a culture of risk-aversion and limited financial resources, has locked many SMEs into a cycle of low productivity and low growth.

Is There Any Chance to Break the Current Paradigm and Activate Growth?

Although this analysis paints a rather gloomy picture of the future ahead of Italian companies, offering a unique opportunity for European Private Equity investors, we, at arKap , believe there is a silver lining. SMEs have the potential to break free from their structural constraints, but relying solely on government policies is unrealistic; real change must come from within the companies themselves.

Once SMEs realize that they are the solution, it is crucial for them to begin adopting a culture of risk-taking and strategic investment. Without a willingness to invest time and resources into improving their operations and addressing weaknesses, progress will be limited. Key aspects of such strategy involve outsourcing tasks and activities for which they often lack the right knowledge and instruments, such as corporate finance decisions and selection of strategic management personnel and allying with financial advisors and consulting professionals to unlock new growth avenues.

At the same time, education remains another crucial factor. Heavy investments are needed in educational systems that align with the skills required by SMEs in a modern economy—not only technical skills but also training in management, financial literacy, and digital competencies. Companies that invest in fostering a skilled and knowledgeable workforce are better positioned to assess risk and seize opportunities, distinguishing which are worth pursuing and which are best avoided.

Lastly, Italian SMEs could benefit from a mindset shift towards long-term strategic thinking. This means encouraging family-owned businesses, which make up a large proportion of SMEs, to consider professionalizing their management structures and exploring succession planning options that prioritize growth and innovation. Training programs or advisory services focused on strategic management could help these businesses adopt modern practices that improve resilience and competitiveness.

Conclusion

Italian SMEs find themselves at a crossroads. While they remain a vital component of the country’s economy, factors like historical legacies, economic crises, and cultural aspects represent significant barriers to their growth and competitiveness on the broader European and global scale.

The future of Italian SMEs depends on their ability to embrace change, adopt growth-oriented models, and foster a culture of risk-taking and strategic investment.

Rather than relying solely on government interventions or, even worse, wining about why the government should do more — such an incredible waste of time and energy, considering how bluntly we promote the model of a market economy — SMEs must take responsibility for driving their own transformation by recognizing their weaknesses and seeking partnerships that can help unlock growth. This shift demands a mindset change, one where investing in new technologies and education of the workforce, professionalizing management structures, and collaborating with external experts becomes the norm.