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Economics and the 2008 crisis: a Keynesian view
Economics and the 2008 crisis: a Keynesian view

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Firms in Italy and Germany

Activity 17

Watch the following video, Facing the competition, which examines how firms in Italy and Germany are facing up to strong international competition. Then answer the questions below.

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Facing the competition
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Question (a)

(a) What are the different challenges faced by firms in Germany compared to firms in Italy?

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Answer

The video raises a variety of issues at both the macro and microeconomic level, so your notes may be different from those here.

The video describes the story of a strong German economy with rising exports and falling unemployment compared to a struggling Italian economy. In Italy, the video indicates some of the macro problems related to lack of productivity growth and a lack of investment. A lot of Italian firms are very small so this can be a barrier towards improving production technology and human capital. Being able to increase productivity is one strategy for competing with firms based in countries with lower wages.

Question (b)

(b) How do macroeconomic conditions relate to firm performance?

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Answer

The direct relationship between macro and micro performance is not clear in the video. Dr Nerb emphasises the role of change to Germany’s labour market – increasing flexibility of labour by allowing firms to recruit workers on a temporary basis, which is supposed to encourage reduced unemployment. However, Professor Mazzucato strongly disagrees, suggesting the real change is also due to Germany investing in research and development (R&D) and human capital to make firms perform better.

Question (c)

(c) What factors determine the success of firms? How are these factors different in Italy and Germany?

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Answer

Successful firms, whether in Germany or Italy, share similarities: instead of trying to compete directly with low-cost producers, they have differentiated their products, focusing on very high-quality goods requiring specialist expertise. So even though the macroeconomic situation in each country is different, there are similar examples shown for how firms can succeed. In this section, we will investigate some of the ways we can model how firms compete.