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Ministry of Economy and Finance

Department of the Treasury

N°1 - February 2012

Economic Focus

ISSN 1972-4128

Market Monitoring: an application to Italy of the European Commission methodology

Di: Fabrizio Botti *, Maria Rita Ebano **

ABSTRACT

Market monitoring consists of a horizontal screening aimed at identifying a relatively limited number of sectors offering the greatest potential for growth and adjustment and which present signs of poor market performance in terms of integration, competition and innovation. This paper describes the development of the methodology at European level and its application to EU and Member States. We describe the features of the methodology and the main steps that have brought to its revision. Finally, we tested the methodology by applying it to Italy using the short list of indicators identified by the Commission in the revised exercise. The preliminary results show a convergence of signals of market malfunctioning between Italy and EU.

INTRODUCTION AND BACKGROUND

The European Union (EU) and its Member States have been engaged in a process of institutional integration over a long period (about 50 years for the founding countries) involving the removal of commercial barriers, the integration of input markets and the monetary integration.

Since the launch of the Single Market Programme, European Institutions expectations were that the consolidation of the Internal Market and the resulting enhanced EU economic integration would notably impact on economic performance at micro-level through different channels: intra-EU competition, price-setting behaviour of firms, and industrial structures (European Commission, 1996; Fontagné et al., 1997).

Progresses were made in the field of coordination of national economic policies in the following years until the launch of the European Monetary Union (EMU) in 1999 that was expected to foster significant trade deepening according to the endogeneity of Optimal Currency Areas (OCA) debate (Rose 2001 and 2004; Frankel and Rose, 2002) .

* University of Perugia and LUISS Guido Carli, Faculty of Economics, Italy. E-mail: fabrizio.botti@unipg.it

** Italian Ministry of Economy and Finance, Department of the Treasury, Economic and Financial Analysis and Planning Directorate. Roma, Italy. E-mail: maria.ebano@tesoro.it

Economic Focus:

The “Economic Focus” series promotes the dissemination of thematic notes produced in the Department of the Treasury (DT) of the Italian Ministry of Economy and Finance (MEF). The views expressed in the Economic Focus are those of the authors and do

not necessarily reflect those of the MEF and the DT.

JEL: D40, L1

Keywords: market monitoring; integration;

competition; innovation

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Over this long time interval, EU countries experienced a deeper economic integration as witnessed by an increase in reciprocal trade and in non-intra EU trade. The remarkable growth of intra-regional trade among Member States over the whole process of institutional integration exceeded the expected currency unions’ effect showing evidence of a mutual interaction between regional institutional and trade integration before monetary union (Itai et al., 2007). More generally, the European Union progressive phases of regional integration supported the identification of a two-way relationship between economic and institutional integration (Baldwin, 2008).

However, a complete review of existing evidence on changes produced by the European institutional integration process shows a mixed picture: while the Internal Market has effectively promoted economic integration, competition improvements are still inadequate and relatively ineffective in terms of drivers of innovation (Itai et al., 2007; Ilzkovitz et al., 2007). Some factors have hindered the achievement of expected objectives: the slow and sometimes incomplete implementation of EU Directives, the inadequacy of some instruments, the persistence of barriers to cross-border trade and investments and the slow development of an internal market of knowledge.

In order to clearly identify critical factors and remove most of the remaining cross-border barriers, the European Commission decided to launch in 2006 a Single Market Review to redefine the strategy and to give the process a new impetus. The new Single Market Strategy, developed by the Commission in its Communication “A Single Market for 21st century Europe”, proposes a new method of governance based on a bottom-up approach to policy making and on a better knowledge of market functioning. According to its provisions, the Single Market should serve the interests of consumers and citizens by ensuring lower prices, increase choice and greater product safety, create market conditions that stimulate innovation, and be accompanied by policies helping people adapt to and benefit from change. Three main consequences are expected to stem from the initiative: the flexibility of policy and regulatory environment to respond to economic changes, concentrating actions where they have more impact, increasing partnership between EC and Member States to improve the governance of the Single Market and increase its national ownership.

The Commission emphasized the need of a shift from removing barriers to trade to making sure that markets function better and benefit consumers and businesses. In this context a new tool was developed to improve the governance of the Single Market by allowing for the identification of those markets where there are concrete problems and where policies will have maximum impact: the “Market Monitoring” methodology, developed by the Commission as a process aiming at understanding the obstacles that prevent markets from well-functioning (evaluated both in terms of allocative and productive efficiency and in terms of innovation and dynamic efficiency) through a close monitoring of product-market and sectors.

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The Market Monitoring exercise involves three main aspects:

1. improving the knowledge of market functioning and

performance both in terms of efficiency and flexibility;

2. identifying the existence of market malfunctioning within

the Single Market in terms of effective competition;

3. identifying the causes of market malfunctioning - due both

to producers’ market strategies and regulatory

environment - and considering appropriate instruments to

tackle it according to identified causes.

The market monitoring is an evidence-based tool that allows for the better identification and prioritisation of inefficient markets where adjustments can deliver gains in terms of growth and jobs. This is meant for taking actions precisely targeted in areas where the biggest impact is likely to occur and where markets do not currently deliver.

THE ORIGINAL DESIGN OF THE MARKET MONITORING METHODOLOGY AND

ITS DEVELOPMENTS

A products market and sector monitoring methodology was originally launched by the Commission in 2007 and then extensively revised according to reactions and comments made by the Member States. In the following paragraphs, the two main versions of the methodology are presented and their design and results examined at both EU and Member States level.

The first attempt to define and implement a market monitoring methodology (2007-2008): the screening at sectoral level

Both the Commission and Member States already had a wide experience with market monitoring, despite most previous experiences were not used systematically for policy shaping and implementation, and the methodologies applied were not sufficiently covering all the aspects of market malfunctioning. Assuming that an in-depth market monitoring is time and resource intensive, the Commission has elaborated in 2007, as part of the Single Market Review, a product market and sector monitoring methodology based on a two-stage approach: a screening phase followed by the analysis of selected markets/sectors. The characteristics of the two-stage approach are depicted in Figure 1.

The Commission launched the monitoring exercise as a new tool for evidence-based policy making with the aim to devise a comprehensive strategy to alleviate any market malfunctioning in a wide range of European and national policy context: first of all in the context of the Lisbon Strategy to improve the multi-lateral surveillance, or in order to better target the actions taken under the European Economic Recovery Plan.

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Fig. 1 The two-stage approach to product market and sector monitoring

Source: European Commission, 2007a.

The first stage of the monitoring exercise involves a screening activity aimed at selecting markets that deserve special attention for further analysis given their economic and policy importance and potential signs of malfunctioning, which should be monitored in more details in a second stage of the analysis, preferably at the market level. Those selected for the second stage in-depth monitoring should be a manageable number of key sectors. Multiple selection criteria adopted should also provide a first indication of the nature of sectors’ problems in order to efficiently allocate limited resources and time on well-defined objectives.

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The first screening analysis focused exclusively on market-based sectors and covered 46 sectors (see Table A of the Annex for the list of analysed sectors)

1. The aim of the original screening exercise was

to identify, on the basis of a set of key indicators, sectors which are economically important for the Member States or relevant for the adjustment capacity of their economy and which show preliminary signs of malfunctioning, mainly on the basis of their labour productivity growth performance compared to a benchmark.

The “Economic importance” is identified according to sectors’ contribution to economic growth and jobs in the EU and it is assessed from a static as well as from a dynamic perspective. The static perspective refers to sectors relative share of total value added, employment and consumption expenditure with respect to the EU-25 in 2004. The dynamic perspective looks at export growth rates compared to the world average in a given time interval. The indicator used for manufacturing and traded sectors is the average annual world export growth rate between 1999 and 2005. For the non-traded services sectors the reference indicator is the share of each sector in total EU-25 inward and outward FDI stock in 2004.

Sectors are also selected on the basis of their “contribution to the adjustment capacity of the EU economy” to changing economic

conditions according to three major parameters: (i) interlinkages with the rest of the economy (i.e. the extent to which the sector supplies essential inputs to the rest of the economy) using Input-Output; (ii) adoption and diffusion of new technologies; (iii) transmission of price adjustments using frequency of price changes in different sectors in the euro area from 1994 to 2003.

Lastly, possible “Signs of market malfunctioning” are estimated on the basis of economic efficiency (EU labour productivity growth compared with the US) and consumer and business satisfaction (Consumer Satisfaction Surveys).

First results of the screening exercise at the EU and Member States level

On the basis of this methodology, in November 2007, the European Commission selected 23 sectors showing problems of market malfunctioning from an economic and a consumer point of view, and at the same time either important for economic growth and jobs creation or for improving the adjustment capacity of the European economy. Selected sectors represented about 44% of European value added and 50% of European employment, and were almost evenly distributed between manufacturing and services (the complete picture of selected sectors is showed in Table B of the Annex). As for manufacturing, identified sectors are mostly involved in the production of intermediary and investment goods: distribution (retail, wholesale,

1 The sectors have been selected using the NACE 2 digit level while data on productivity, ICT and value added are taken from the EUKLEMS database.

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hotels and restaurants) activities, financial services as well as network industries like "Electricity, gas and water supply", "Inland transportation", "Post and telecommunications", and a residual and comprehensive services sector (“Other business services”) including many professional services, e. g. engineering consultancy, or legal and architectural services.

Price stickiness criterion was not used due to lack of comparable data across all sectors. Nevertheless, existing evidence reports higher price stickiness in the euro area for some selected sectors, especially “Fabricated metal", "Sale, maintenance and repair of motor vehicles", "Retail trade" and "Hotels and restaurants". Retail sector is particularly important also because it represents the transmission channel of price changes stemming from demand and supply both in the EU and abroad

2.

The Commission services replicated the sector screening exercise at Member States level using a similar methodology based on a limited number of sectoral indicators, apart from relying on an alternative benchmark to assess sectors’ relative productivity performance (as measured by the average productivity growth rate over the period 1995-2005). EU25 countries have been split into four groups according to their GDP per capita in PPS (as showed in Table C of the Annex), and the performance of each country has been compared to the average performance of its corresponding peer group. Different benchmarks obviously affect the performance of a country in terms of potential market malfunctioning (as showed in Table D of the Annex), as in the case of France, ranging from 26 sectors (45.5% of the total value added) identified using the US benchmark to 15 and 12 sectors (27.9%/20.1% of total value added) selected respectively with the EU15 benchmark and the GDP benchmark.

First results of the screening exercise carried out by the European Commission at EU and Member States level need to be treated with a certain degree of caution because of difficulties to analyse markets directly, insufficient disaggregation of the available sectoral data and inherent problems with measuring productivity, e.g. low productivity levels and low employment dynamics may either signal sector malfunctioning, or only an ongoing adjustment in declining sectors. Moreover an important issue stemming from the original approach is that the investigation is limited to supply side and should be complemented with an analysis from the demand-side. At this stage the consumer perspective could not be adequately taken into account due to the lack of data.

2 For more details on sectors and degree of price changes see European Commission 2007b. The evidence reported by the Commission refers to the frequency of changes of consumer prices in the euro area. Further analysis namely using producer prices and survey data can be found at the web site of European Central Bank Inflation Persistence Network. See: http://www.ecb.int/home/html/researcher_ipn.en.html.

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TOWARDS A REVISED METHODOLOGY (2009)

At the end of 2009 the Commission launched a consultation exercise on the Europe 2020 Strategy, a common agenda that should enable the EU to make a full recovery from the crisis while sustaining the transition to a smart and green economy. A central element of the growth agenda in the Europe 2020 is the full exploitation of the Single Market in order to suit the demands of tomorrow’s economy and to ensure that citizens reap its full benefits. In this context the market monitoring methodology has been recognized as a crucial tool to provide sound evidence-based grounds for the development of adequate policy options.

For these reasons and for its potential use in the context of the new Strategy, the market monitoring methodology underwent an extensive review by the Lisbon Methodology (LIME) Working Group of the Economic Policy Committee

3. The LIME has worked intensively over

the 2009 to improve the first screening phase of the market monitoring methodology in accordance with comments from Member States and supported the Commission to compile a revised methodology.

The main features of the new methodology

The revised methodology is a combination of the two steps of the original screening exercise: the sectorial screening, and the complementary analysis of the causes of potential market malfunctioning.

According to the new methodological framework, the horizontal screening of sectors is made along two dimensions: economic importance and market performance. Sectors are selected using a limited set of indicators and ranked according different degrees of priority. In the screening phase problematic sectors are identified on the basis of a two dimensions selection diagram, as described in Figure 2 below.

Sectors falling in quadrant A are those in most need of attention being both economically important and poorly performing. Sectors in quadrant B are also badly performing but are of less economic importance than those in quadrant A. Best performing sectors, according to the diagram, are those in quadrants C and D but sectors in quadrant D have relatively high economic importance.

3 The Economic Policy Committee (EPC) was set up by a Council decision on 18 February 1974. It contributes to the Ecofin Council's work of coordinating the economic policies of the Members States and of the Community and provides advice to the Commission and the Council. It provides economic analyses, opinions on methodologies and draft formulations for policy recommendations, in particular on structural policies for improving growth potential and employment in the Community.

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Fig. 2 Selection diagram

Source: European Commission, 2010.

Economic importance is assessed through a composite indicator based on value added (VA), consumption and investment shares. Value added share is the portion of a sector on total gross value added at current basic prices

4. Consumption share is the percentage

of each sector on total final consumption expenditure by households. Investment share is the proportion of each sector in total Gross Fixed Capital Formation (GFCF). The source for both structure of consumption and investment shares are the Eurostat Input-Output tables

5. The final consumption demand by households and Gross

Fixed Capital Investment vectors were aggregated using PPS for GDP. With respect to GFCF, data do not refer to investment by each sector, but to the breakdown of total GFCF into the different types of investment goods and services. Values obtained for value added, consumption, and investment share are normalised and the average is taken so as to have a composite indicator for economic importance.

Market performance is captured by indicators of three policy areas: competition, integration and innovation. Three indicators with equal weights are associated to each area.

Competition is proxied by mark-ups, concentration rates (C4) and the "total number of different firms" (TNF) index. Mark-ups estimates are

4 Data collected from the EU KLEMS database, March 2008 release and correspond to data for the year 2005. 5 Available at http://epp.eurostat.ec.europa.eu/portal/page/portal/esa95_supply_use_input_tables/data/workbooks.

TOP PRIORITY LOWEST PRIORITY

INTERMEDIATE

PRIORITY

LOW PRIORITY

ECONOMIC IMPORTANCE

MARKET PERFORMANCE

A D

B C

0

0

More economically important

Less economically important

Relatively under-performing

Performing relatively well

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taken from Christopoulou and Vermeulen (2008) and obtained by applying the methodology developed by Roeger (1995) to the EU KLEMS dataset assuming profit maximisation, cost minimisation and constant returns to scale. Concentration rates are computed through the four-firm concentration ratio (C4), i.e. the cumulative market share of the four largest firms in a sector. The market share of company j in sector i is defined as the ratio of the company's turnover (reported at market prices) in sector i to total sector turnover (i.e. the sum of the turnover of all the companies in the sector).

6 The "total number of

different firms index" (TNF) is defined here as the ratio of the number of firms that have belonged to the group of the four largest firms in the five years between 2003 and 2007 over the maximum number of different firms (i.e. 20) that could have potentially been included in this group during the same time interval according to the methodology used in London Economics (2007) and data extracted from the Orbis database.

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The degree of integration of covered sectors is assessed by the number of merger and acquisitions (M&A), price dispersion rates and an openness indicator. Openess is defined as the percentage of total production that is exported and imported broken down by sector.

8 The

M&A indicator corresponds to the number of intra-EU cross-border deals over the total (domestic and cross-border) number of deals.

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The indicator was calculated as an average across the period 2003 to 2008 for EU-25. Price dispersion is calculated as the coefficient of variation of prices for a given sector, i.e. the ratio of the standard deviation and average price across EU countries. Consumer price data according to the COICOP classification developed by Eurostat are used

10. The fact that these price data refer to final goods sold to

consumers11

is one important drawback of this dataset. Another is that since the data refer to retail consumer prices, they are not appropriate for assessing the price dispersion of intermediate goods. In fact, some of the NACE sectors do not have an equivalent in the COICOP price category, for example "Basic metals" (27) and "Recycling" (37).

6 The C4 ratio is upwardly biased, as data collected from the Orbis database (2007) do not cover small companies. Other drawbacks are associated to the Orbis database design: each company in the database is assigned to a particular NACE sector even if active in several industries. 7 Orbis database, 2004-2008. 8 Data collected from the Eurostat input-output tables and aggregated using PPS for GDP. Input-output tables are not available for all Member States hence this figure can only be calculated for those reporting sufficient information in input-output tables. 9

The data are taken from the Thomson Financial Services database on mergers and acquisitions activity and cover only intra-EU M&A activity. 10

A correspondence between the COICOP price categories and the NACE classification has been established in order to maintain comparability of results in the whole screening phase. The availability of price data according to the COICOP classification does not allow us to obtain prices at the disaggregated product level. As a consequence, several COICOP categories correspond to one NACE sector only. This is why the average of the COICOP price categories for a given NACE sector was taken to represent the price for that sector. Data cover 1999-2008 for the EU-27. For more information see http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search_database 11 Therefore including the mark-up added by the retail outlets as well as taxes such as VAT.

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Finally, innovation is proxied by ICT, labour quality and labour productivity growth. The ICT indicator measures the contribution to value added growth of ICT capital services in percentage points. The quality of labour index is defined as the contribution of the changes in the composition of the labour force in terms of skill categories of workers (high, medium, low) to value added growth in percentage points. Labour productivity growth (LPG) is defined as gross value added per hour worked by sector.

12

The above-described indicators have been normalised, the average taken for each policy area and then combined into a composite indicator by an overall average with equal weights in order to obtain an economic importance and a market performance index. The diagram in Figure 3 summarizes the indicators used in the screening phase.

Fig. 3 Screening phase set of indicators

Converging results between original and revised market monitoring methodology for the EU

The results of the screening stage, carried out at the EU level, are shown in Figures 4 and 5 respectively for manufacturing and services. Sectors in quadrant A are deemed to be a priority but a few sectors in quadrant B could also be selected.

As for manufacturing, sectors which are most economically important but perform the most poorly are machinery n.e.c., food products and

12 For the ICT, quality of labour, and LPG indexes, data are extracted from the EU KLEMS database for the EU-25. The indicator is normalized and computed as an average over the period 1995 to 2005 in order to minimize business cycle influences.

Economic importance

Competition Integration - VA share - Consumption share - Investment share

Market performance

Innovation

- Mark-ups - C4 - TNF

- M&A - Price dispersion - Openness

- ICT - Labour quality - Productivity growth

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beverages, motor vehicles, fabricated metal products and furniture; recycling.

Fig.4 An application of the revised methodology at EU level: results for manufacturing sectors13

Economic important service sectors performing relatively poorly in the EU, as shown in Figure 5, are construction, retail trade, hotels and

Fig. 5 An application of the revised methodology at EU level: results for service sectors

13 The x-axis represents the average normalised values of the market performance indicators; the y-axis represents the average normalised values of the economic importance indicator.

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restaurants and other business activities, which includes legal, accounting, taxation, consultancy, architectural and advertising activities.

The application of the revised methodology produced slightly different results compared to the original effort. As shown in the Table 1 below, of the twenty four sectors selected in the original screening nine are also identified in quadrant A (more economically important and relatively underperforming sectors) of the revised screening.

Overall, twelve of the twenty four original selection fall into quadrants A or B (less economically important and relatively underperforming sectors). Also, six of the eleven worst performing sectors (“xx” means that these sectors are selected when all 3 criteria of economic importance, adjustment capacity and potential malfunctioning are applied) in the original screening fall into either quadrants A or B. In general it is clear that the revised methodology allows for a more limited selection of sectors.

THE APPLICATION OF THE REVISED METHODOLOGY TO ITALY

The replication of the revised market monitoring methodology at country level encountered greater technical challenges and also conceptual issues have been raised by involved Member States during the two rounds of consultation with the Commission. The availability and time coverage of data are the most common constraints experienced when replicating the exercise at Member States level. Such difficulties lead to the adoption of an extended set of alternative indicators (long list of indicators) tailored to national context.

In the process of reaching a commonly agreed methodology based on Member States feedbacks, a market monitoring exercise has been implemented on the Italian case following the revised methodology and the core set of indicators (short list of indicators) adopted by the Commission at the EU level. It should be emphasized that this phase corresponds to the horizontal screening aiming at identifying a relatively limited number of sectors offering the greatest potential gains from intervention. The following in-depth investigation of the selected sectors will not be included in the present paper.

General features of the Italian markets

The Commission market monitoring exercise has been replicated using available data for Italy with minor adjustments to overcome data gaps. In particular, the integration index has been revised by including “foreign control of enterprises” instead of the M&A indicator, given the unavailability and potential biases associated to data on M&A deals. M&A may capture only partially the level of integration in tradable sectors, given the potential substitutability between arms’ length trade and the setting up of production capacity abroad. The access to the recommended Thompson Financial Services database is also

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Table 1 A comparison of the original and revised methodology

Code NACE Industry Classification Original

screening*

Revised screening - quadrant

A B C D

15 Food products and beverages x x

16 Tobacco products x

17 Textiles x

18 Wearing apparel; dressing and dyeing of fur x

19 Leather, leather products and footwear x

20 Wood and products of wood and cork x

21 Pulp, paper and paper products x

22 Printing, publishing and reproduction xx x

23 Coke, refined petroleum products and nuclear fuel x

24 Chemicals and chemical products x

25 Rubber and plastic products x x

26 Other non-metallic mineral products x

27 Basic metals x x

28 Fabricated metal products x x

29 Machinery n.e.c. xx x

30 Office, accounting and computing machinery x x

31 Electrical machinery and apparatus n.e.c. xx x

32 Radio, television and communication equipment xx x

33 Medical, precision and optical instruments x

34 Motor vehicles, trailers and semi-trailers x x

35 Other transport equipment x

36t37 Furniture; Recycling xx x

E Electricity, gas and water supply x x

F Construction x

50 Sale, maintenance and repair of motor vehicles and motorcycles; retail sale of automotive fuel

x x

51 Wholesale trade and commission trade, except of motor vehicles and motorcycles

xx x

52 Retail trade, except of motor vehicles and motorcycles; repair of household goods

xx x

H Hotels and Restaurants x x

60 Inland transport x x

61 Water transport x

62 Air transport x

63 Supporting and auxiliary transport activities; activities of travel agencies

x x

64 Post and Telecommunications xx x

65 Financial intermediation, except insurance and pension funding xx x

66 Insurance and pension funding, except compulsory social security xx x

67 Activities related to financial intermediation x

71 Renting of machinery and equipment x

72 Computer and related activities x

73 Research and development x

74 Other business activities xx x

90 Sewage and refuse disposal, sanitation and similar activities x

91 Activities of membership organisations n.e.c. x

92 Recreational, cultural and sporting activities x x

93 Other service activities x x

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restricted and substantial biases are associated to its use as it accounts for the number of deals rather than the value of them. In order to enhance the explanatory role of the integration index in terms of potential entry of firms in foreign markets, the “Foreign control of enterprises” indicator was adopted. The latter is provided by Eurostat on 22 Member States and corresponds to the ratio of Italian enterprises controlled by a EU25 institutional unit over the total number of Italian enterprises by NACE sector.

14 Indicators suggested

by the Commission in the innovation policy area have been used, but some limitations remain due to data coverage.

According to the summary of the main results of the market monitoring exercise presented in Tables 2 and 3 below, respectively for services and manufacturing, it is possible to draw some general features of the current Italian markets framework. In general, service sectors represent on average a greater share of the total gross value added, final consumption and GFCF in Italy if compared to manufacturing sectors. Among the former are also most frequently reported evidence of market underperfomance (15 sectors over 22 relatively underperform) especially in terms of competition and innovation indicators.

The analysis of the level of integration of national sectors shows that the share of exports and imports on total production is greater in manufacturing sectors where is always over 30%, with the exception of “Printing, publishing and reproduction” and “Other non-metallic mineral products” sectors. Foreign control of Italian enterprises is almost equally around 10% on average in both manufactures and services sectors during the time interval 2003-05 and is remarkably higher in “Manufacture of chemicals and chemical products”, “Manufacture of radio, television and communication equipment and apparatus”, “Post and Telecommunications” and “Renting of machinery and equipment without operator and of personal and household goods”.

Concerning competition variables, Italian evidence shows poorer performance of services sectors in terms of mark-ups, particularly in the following sectors: “Insurance and pension funding, except compulsory social security”, “Renting of machinery and equipment”, “Computer and related activities”, and ” Research and development”. A higher concentration in terms of C4 indicator is equally found in services, where for “Tobacco products” (99%) and Post and Telecommunications (89%) the share of the four largest firms covers almost the entire sector in terms of turnover.

As regard innovation indicators, the average contribution of ICT capital services to value added growth in Italy was greater in services sectors (12%) with respect to manufacturing (2%), where the decrease in the weight of technological changes in “Coke, refined petroleum products and nuclear fuel” and “Chemicals and chemical

14 Eurostat, “Foreign control of enterprises - breakdown by economic activity and a selection of controlling countries”, 2003-05.

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Table. 2 The application of the market monitoring exercise to Italy: service sectors

products” was significant during 2001-2005. As for normalized values of the ICT indicator, also “Construction”, “Hotels and Restaurants” and “Retail trade, except of motor vehicles and motorcycles; repair of household goods” are underperforming.

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Table 3 The application of the market monitoring exercise to Italy: manufacturing sectors

Labour productivity declined by 3.7% on average in Italian manufacturing sectors considered during the 1995-2005 time interval (a negative growth concerned half ot the sectors). Despite an overall positive growth of services sectors labour productivity (+3.3%), mostly driven by the remarkable growth in the Post and Telecommunications sector (+150.9%), 13 on 22 NACE sectors experienced a negative trend during the ten-years time frame. This explains the poor performance of most of the Italian sector in term of the labour productivity indicator.

In the next two paragraphs further specifications on the selection of Italian sectors in the screening phase, separately for manufacturing and services, will be presented in combination with a closer look to economic importance and market performance indexes.

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Selection of sectors for the screening phase

According to the core selection diagram depicted in paragraph 3.1, it is possible to jointly identify Italian sectors economic importance and market performance relatively to the corresponding overall manufacturing or services results, as showed in figures 6 and 7 below.

Manufacturing sectors which are more economically important in Italy - based on value added, consumption and investment shares – are:

- Food and beverages;

- Wearing apparel, dressing and dyeing of fur;

- Coke, refined petroleum products and nuclear fuel

- Chemicals and chemical products

- Fabricated metal products

- Machinery

- Motor vehicles

- Furniture and recycling

Of these sectors only tree perform badly and could be selected in this screening stage: wearing apparel; coke, refined petroleum products and nuclear fuel; furniture and recycling.

The wearing sector is economically important mainly for its high share in the total final consumption expenditure by household. The sector is badly performing due to integration problems especially related to high price dispersion and lack of foreign participation.

The same applies for the coke and petroleum products whose consumption share is elevated but whose value added share is also high. The sector is underperforming because of poor integration especially in terms of price dispersion and openness. It also reveals many problems in terms of competition given an above average concentration ratio and high mark-up. The innovation index is also problematic especially given the low labour productivity growth.

Finally the combined sectors of furniture and recycling show a positive value of consumption share combined with a high investment share. They are poorly performing due to below average foreign participation and openness of the sectors.

The selection diagram in Figure 7 allow to identify the relatively more economically important services sectors in Italy:

- Construction;

- Sale, maintenance and repair of motor vehicles and

motorcycles; retail sale of automotive fuel;

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- Wholesale trade and commission trade;

- Retail trade; repair of household goods;

- Hotels and restaurant;

- Inland transport;

- Other business activities.

Five out of seven services sectors could be selected in this screening stage having also revealed low performances, namely construction; sale, maintenance and repair of motor vehicles and motorcycles, retail sale of automotive fuel; wholesale trade; hotels and restaurants; other business activities.

Construction exhibits the highest economic importance index among all the explored sectors, especially in terms of value added and investment share, but, at the same time, significantly underperforms along the dimensions of market performance examined. In terms of innovation, construction shows a relatively poor quality of labour, a limited value added contribution of ICT investments, and a problematic openness indicator. This is confirmed by a recent survey of the Italian Statistic Institute (ISTAT) on manufacturing, construction and services firms that have introduced in the market or in the productive process at least one innovation (innovative firms). The survey revealed that the construction sector exhibit the lowest percentage of innovative firms (20.3% compared to 41,1% for the overall manufacturing) and the lowest level of innovative expenses per employee (€ 2,200 compared to € 7,900) according to 2008 data. Among the competition set of indicators, negative market performance remarkably affects mark-ups, consistently with existing literature: Italian average mark-ups over a longer time interval (1994-2004) is the highest among OECD countries according to Bouis and Klein (2009) estimates based on Roeger (1995) methodology.

Sale, maintenance and repair of motor vehicles is an economically important sector in Italy due to its role in the consumption share. However it has competition problems (in terms of mark-up and concentration ratio) and below average innovation rates due to poor quality of labour and ICT investments.

Wholesale trade accounts for high value added and consumption shares and it is badly performing mainly due to its openness problems.

Hotels and restaurants also have large household consumption shares and the performance problems are linked to a lack of innovation (in terms of quality of labour and ICT contribution to sector value added) and very limited competition.

Finally, other business activities are economically important due to high value added shares but labour productivity as well as openness are very low.

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Fig. 6 Selection diagram for market monitoring results in the Italian manufacturing sectors

Fig. 7 Selection diagram for market monitoring results in the Italian service sectors

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The screening stage of the methodology considers only sectors in quadrant A. However, it should be noted that sectors falling in quadrant B also deserve a special attention and may deserve an in–depth analysis due to their poor market performance despite their less economic importance.

In fact, among sectors to be found in this quadrant are: tobacco products; electricity, gas and water supply; air transport; insurance and pension funding; research and development. Some of these, such as electricity, gas and water supply may deserve further attention given their high score int erms of economic importance (their position is very close to the quadrant A).

If we compare the Italian results of the exercise with the results emerged at EU level is possible to identify a convergence of top priority sectors, namely:

- Furniture; recycling;

- Construction;

- Hotels and restaurants;

- Other business activities;

Moreover, some of the differences between Italy and EU are mostly associated to the openness index which is obviously more relevant in a continental perspective.

The highlighted convergence of signals of market malfunctioning between Italy and EU allows for a distinct prioritisation of interventions at the EU level and facilitate the phase of in-depth analysis.

CONCLUDING REMARKS AND FUTURE DEVELOPMENTS

Market monitoring is an evidence–based tool allowing for a better identification and prioritasion of inefficient markets where adjustments can deliver gains in terms of growth and jobs.

One key objective of the market monitoring exercise is to identify a relatively limited number of sectors offering the greatest potential for growth and adjustment and which present signs of poor market performance in terms of selected integration, competition and innovation indexes.

Market performance indicators appeared to be more problematic while replicating the monitoring exercise at the national level, mainly for the lack of comparable and publicly available data. Most of the issues with measuring market performance for Italy emerged in analysing the competition and integration policy areas.

The indicators selected by the Commission for the competition dimension of market performance are theoretically ambiguous and

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may sometimes contradict each other (see for example mark ups and concentration ratios). The spatial dimension of competition is especially not captured as the actual geographical market goes well beyond the national level for some domains of activity where the role of foreign firms entry and market contestability is particularly relevant. The four firms concentration ratio (C4) indicator does not cover small companies and thus shows upwardly biased results for Italy where the productive structure is strongly based on Small and Medium Enterprises (SME). The mark-ups indicator is affected by important limitations especially when examining R&D-intensive sectors or risky markets where some degree of market power is necessary. In general, all measures based on market shares or number of firms, such as the C4 and TNF, may fail to catch the selection effect: when competition intensifies and the least efficient firms are forced out of the market, the market shares of more efficient firms may increase for greater level of competition rather to its contrary. Ambiguous outcomes also arise with integration indicators as the M&A that covers only intra-EU activity and include number rather than value of M&A deals.

To contribute to a better understand of market malfunctioning it is necessary to work extensively on the proposed indicators. Some of them are best suited to monitor sector performance from a EU-wide perspective rather than from a national one. Market monitoring is a strategic tool to ensure that priorities are grounded in sound economics but it is crucial that it is tested at the national level. Future applications of the methodology to Italy should be devoted to widen the number of reference indicators while at the same time the actual results should be shared with other concerned institutional and research actors. A further involvement of Member states in the replication process may strengthen the results at EU level and contribute to a more efficient translation into policy actions.

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ANNEX

Table A. List of analysed sectors

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Source: European Commission, 2007b.

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Table B. Sectors selected at EU level

(*) ”B” mean backward linkages and “F” forward linkages. These are indicators obtained from the Input-Output analysis and signal if the selected sector affects on upstream and downstream sectors.

(**) ”P” and “U” means, respectively, that a sector produces or utilises ICT.

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Table C. Country groups according to GDP/capita used for the GDP Benchmark

Source: European Commission, DG ECFIN, Market Monitoring at the level of the Member States.

Methodological Aspects (2009).

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Table D. Ranking according to the number of sectors selected and according to value added of sectors selected with the different benchmarks

N°

se le cte d

Va lu e

a d d ed

N°

se le cte d

Va lu e

a d d ed

N°

sel e cte d

Val u e

a d de d

N°

sel e cte d

Val ue

a d de d

AT 23 AT 48. 5% AT 10 AT 23. 5% AT 17 AT 40.1% AT 1 0 AT 23.5%

BE 26 BE 52. 0% BE 17 BE 33. 0% BE 22 BE 37.9% BE 1 7 BE 33.0%

CY 23 CY 40. 1% CY 24 CY 43. 2% CY 26 CY 46.1% CY 2 2 CY 41.5%

CZ 16 CZ 35. 7% CZ 21 CZ 46. 4% CZ 16 CZ 37.2% CZ 1 6 CZ 37.2%

DE 24 DE 48. 5% DE 22 DE 47. 1% DE 18 DE 41.1% DE 1 7 DE 40.9%

DK 26 DK 41. 9% DK 23 DK 38. 0% DK 26 DK 47.2% DK 2 2 DK 37.4%

EE 11 EE 18. 8% EE 17 EE 24. 8% EE 23 EE 38.9% EE 1 7 EE 24.8%

ES 26 ES 61. 5% ES 23 ES 52. 5% ES 22 ES 51.9% ES 2 2 ES 51.9%

FI 25 F I 48. 4% F I 15 F I 24. 2% F I 22 F I 43.2% F I 1 4 FI 23.4%

F R 26 F R 45. 5% F R 15 F R 27. 9% FR 12 F R 20.1% FR 1 2 F R 20.1%

G R 18 GR 25. 8% G R 12 GR 14. 3% GR 21 G R 37.0% GR 1 1 G R 12.0%

HU 16 HU 39. 7% HU 20 HU 48. 6% HU 24 HU 52.9% HU 1 9 HU 45.5%

IE 18 IE 38. 0% IE 10 IE 22. 1% IE 14 IE 28.0% IE 1 0 IE 22.1%

IT 29 IT 55. 4% IT 31 IT 62. 9% IT 31 IT 62.2% IT 3 0 IT 60.6%

LT 10 LT 18. 9% L T 12 LT 29. 2% LT 14 LT 29.3% LT 1 0 LT 25.0%

LU 21 LU 48. 5% LU 19 LU 46. 8% LU 20 LU 48.6% LU 1 7 LU 44.7%

LV 10 LV 29. 7% LV 14 LV 28. 1% LV 20 LV 40.8% LV 1 3 LV 27.5%

MT 25 M T 49. 4% MT 24 M T 44. 1% MT 22 M T 46.9% MT 1 9 MT 37.4%

NL 23 NL 37. 9% NL 14 NL 23. 8% NL 17 NL 27.8% NL 1 2 NL 19.1%

PL 12 PL 26. 1% PL 11 PL 24. 4% PL 18 PL 37.0% PL 1 1 PL 24.4%

PT 27 PT 47. 2% PT 19 PT 41. 5% PT 26 PT 51.3% PT 1 8 PT 40.5%

SE 21 SE 39. 5% SE 10 SE 19. 1% SE 14 SE 23.7% SE 9 SE 18.7%

SI 13 SI 24. 7% SI 22 SI 44. 8% SI 13 SI 25.6% SI 1 1 SI 20.9%

SK 14 SK 30. 9% SK 17 SK 39. 7% SK 21 SK 44.9% SK 1 7 SK 39.7%

UK 22 UK 36. 8% UK 9 UK 15. 0% UK 10 UK 14.3% UK 8 UK 13.4%

US EU 15/NMS GD P level Al ternative

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Table E. Manufacturing and service sectors by quadrants in the EU

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2012, Fabrizio Botti, Maria Rita Ebano. The document can be downloaded from the website www.dt.tesoro.it and freely used, providing that its source and author(s) are quoted. Editorial Board: Lorenzo Codogno, Mauro Marè, Libero Monteforte, Francesco Nucci, Franco Peracchi Organisational coordination: Marina Sabatini