Management 2013, 3(3): 174-183 DOI: 10.5923/j.mm.20130303.06 Innovative Capacity of Italian Manufacturing Firms Alberto Ferraris Department of M anagement, University of Turin, 10134, Italy Abstract In the current scenario of high technological competitiveness and environmental complexity, the innovation capacity of manufacturing firms is one of the principal key driver for competing on the global markets. The context is increasingly dominated by strong and growing competition between companies from all over the world so, manufacturing firms are forced to move the focus of competitive advantage on innovation. This paper focuses on innovative capacity of Italian manufacturing firms over the period 2007-2009 from three different points of view. First, the investments in technological equipment, plant, machinery and ICT; second, the R&D expenditures; third, the way that firms finance their innovation activity and investments. Analyzing a sample of 524 European manufacturing firms from these three different points of view, several findings emerge from the comparison of firms in different countries. Most Italian companies have a good basic ICT supply, but they invest relatively less than the average in new infrastructure, machinery and equipment. Investments in innovation and R&D are stronger, although funding strategies are unbalanced towards traditional debt instruments and they are more undifferentiated considering the final objectives of the investment. The research concludes with interesting managerial implications which provide a conceptual interpretation of the phenomena and prescribe actions to policy makers. Keywords Manufacturing Firms, Innovative Capacity, Sources of Financing 1. Introduction The global economic situation seems to have different speeds. The IMF (International Monetary Fund) describes the current situation as a two-speed recovery phase, with a part of the world running and the other one gradually starting to walk again. The developed countries GDP grew by 2.5% in 2010 and 2.7% in 2011 while the GDP of emerging countries grew at a faster rate of 6.5% in 2010 and 7.1% in 2011. In the current recovery and growth framework there are mainly two obvious risks: on the one hand, those related to the fears about fiscal balance of some countries; on the other hand, those related to the dynamics of commodity prices, which seem to evolve faster in developing countries than in the developed ones because of the higher growth rate of GDP. In this context, the Italian economy seems to recover more slowly than the European countries. The GDP, in fact, increased by 1.3% in real terms in 2011 (after a decline by 5.2% in 2009), with a private consumption increase of just 0.6%. The difficulties in the labor market, which still did not convincingly turnaround after the crisis, cause a weak consumer demand. So, with reference to the situation of enterprises, the * Corresponding author: alberto. ferraris@unito.it (Alberto Ferraris) Published online at http://journal.sapub.org/mm Copyright © 2013 Scientific & Academic Publishing. All Rights Reserved starting point is given by the dynamics of manufacturing; after the sharp decline in 2009 and the gradual recovery observed in most of 2010, the dynamics of manufacturing seems to have lost impulse in the latest period (2011). It is possible to better understand the dynamics of manufacturing firms after the crisis, investigating two different aspects: the production index and the confidence indicator[1]. The international comparison with the other EU countries (especially compared to Germany) does not provide comforting indication; it is clear the different ―rhythm‖ of Italy. In fact, it is evident not only in the historical period before the crisis, but also in the expansion phase that followed. If Germany, for example, registered an increase by 23.9% in the production index from the lowest point of March 2009 to January 2011, Italy shows in the same period a growth by just 9.8%. Another relevant way to examine the economic current framework is to take the confidence indicator into consideration. EU Commission data[2] suggest that all the EU countries touched the lowest point during the crisis in April, 2009. Considering the pre-crisis levels, German companies are more confident today than during the peak of the previous economic cycle (end of 2006 - first half of 2007); French companies have more or less the same confidence, while Italy and even more Spain are still far apart. The distance in March 2011 between the lowest level (Spain according to the data in this case) and the highest one (Germany) is 25 percentages points, the biggest difference