Art, design, creativity and aesthetics have been the hallmarks of Italian culture since ancient times. But today Italy finds itself in some ways behind the curve of the ongoing technological innovation revolution. That leads to the question: What is Italy doing to regain its footing in this innovation competition? Recently, Knowledge@Wharton looked at the state of innovation in Italy with two people intimately familiar with the subject: Riccardo Illy of the famous Italian food and beverage seller Gruppo illy, and Marco Mari of the Italia Innovation Program.

An edited transcript of the conversation appears below.

Knowledge@Wharton: I had the opportunity to spend some time in Italy this summer, teaching at the Italia Innovation Program, and it was a fantastic opportunity to see some of the great brands in Italy challenging teams to innovate. And of course, Illy was one of the super-famous ones there, given how global you are. You’re in 140 countries, am I right?

Riccardo Illy: 145.

Knowledge@Wharton: Part of our goal today is to get your perspective on innovation, since you have been a CEO and held other leadership roles at illycaffè, and you’ve also been in public roles, among them the mayor of Trieste and the chairman of the Transpadane European Railway Line. What is your philosophy around innovation and new products, new markets?

Ricardo Illy: I have to clarify a few points. I am a chairman of Gruppo illy, which is a holding company, controlling illycaffè, which is the roasting company present in about 145 countries, and which is the main component of the group. And then we control Dammann Frères, which is a legendary tea company based in France. And Domori, which is a chocolate company based in Italy. And then we have a winery in Tuscany called Mastrojanni, and we have Agrimontana producing jams and candied fruit in Italy — we have a 40% stake in them. And finally, Grom, which is a gelato producer, based again in Italy, and we have only 5% of the capital of this small company.

“My idea is that, first of all, if you don’t innovate, you die in an economy which is global and which is more and more intertwined, and more and more sophisticated, with consumers that are, let’s say, improving their needs continually.” –Riccardo Illy

As you discussed, I was the mayor of Trieste, and then for two years a member of the parliament, and then for five years, president of the Assembly of European Regions.

Regarding the company, I entered illycaffè in 1977 at the lowest level, and I concluded, let’s say, in 1993 when I became mayor. I was chief executive officer of the company, but I passed the mantle to my younger brother, Andrea, who is now in charge.

In 2004, we incorporated Gruppo illy and we started our diversification. All of the companies we are invested in are involved in innovation. So I have made research and development, producing new products, new processes and so on, a priority.

Also, being the mayor of a city like Trieste, where there are quite important universities, with at that time 25,000 students, several scientific centers, and the first and most important science park in Italy — AREA Science Park. And finally, a synchrotron that is the twin of the one that you have in Berkley, California. And recently, just next door to the synchrotron, a free electron laser was built. So let’s say that innovation is really at home in the city.

Even when I was only a mayor, I had to try not only to promote, but also to exploit the scientific institutions existing in Trieste, in order to attract companies and to let new companies start and grow. And then, when I became president of the region in 2003, innovation was one of the main parts of our program. We also organized the InnovAction Lab — thanks to an idea that was developed at the University of Di Bergamo. The idea was to put together innovation and action, hence the name — “InnovAction.”

The idea was to involve not only entrepreneurs, but also workers and students and families, and it was quite a huge success, because many thousands of people participated in the exhibition. We also started a prize for the most innovative company, which we issued for three or four years. And finally, we had a law for promoting innovation in the region, and we implemented it, we improved it during my administration. So we were able to really promote innovation in other sectors.

My idea is that, first of all, if you don’t innovate, you die in an economy which is global and which is more and more intertwined and more and more sophisticated, with consumers that are — let’s say, improving their needs continually. The company that is not able to innovate will simply die in a short time. And following this, innovation can be developed in two main paths: One is the process for producing products, and the other is the product or the service itself.

In the product, you can innovate both with technological features, but also by adding aesthetic features. This is what we are doing in our companies. So, for example, at illycaffè, we use only one species of coffee, which is the best one — Arabica — and we roast it, we process it and we package it in order to not only maintain, but even to enhance the quality in terms of taste and flavors of the green coffee we are buying. And by the way, we produce only one blend.

We have a slow-roasting company using a special packaging system — we make a vacuum in the package, but then, we substitute the air that we took away with an inert gas, normally nitrogen. And to do that, we use some special packages that we normally produce ourselves. So we have a big tin with 3 kilos of coffee beans, which is produced in our own factory.

“The Italian investors are quite risk-averse. That’s the reality.” Riccardo Illy

In chocolate, we use only the best species of cocoa beans, which are Criollo — very rare, we produce it in Venezuela ourselves — and Trinitario. The two together represent less than 10% of the world’s total cocoa production.

Then, we roast in a special way, and we refine in a special way. Instead of using the traditional conching machine, we reduce the temperature and the time of conching in order to secure all the best flavors of these top quality cocoas. So finally, we get superior quality. But this was just to make an example. In Italy, you have many examples — in furniture, in design, in fashion and in food, of course, including the wines — where the quality of the innovation is the driver. Then, of course, we also have some let’s say “technological innovation” existing in Italy.

Knowledge@Wharton: In 2010, Forbes did a study across six important design countries, including Italy, of course, where new product introductions were seen as the key driver of innovation. In Italy, new products ranked fourth in importance. But the most important driver of growth was seen as improving quality. So it looks like the focus on quality is the key driver in the culture there.

Illy: This is right, but I consider quality improvement one of the ways in which you can innovate.

Of course, to produce a higher quality, you need to innovate in the process. I mention that we use a special process for packaging our coffee, and another to refine our chocolate. So you get the superior quality of the product through an innovation in the process. I think it’s a mistake to separate the two things. Higher quality is one of the ways in which you can innovate a product, with the other one being technological innovation.

Knowledge@Wharton: Does this sort of vision of innovation result in a bit of a challenge in getting funds? Because when we look at some of the OECD numbers, the biggest challenge in Italy for entrepreneurs and startups is actually accessing capital. You’re among the lowest in the OECD countries in getting funding for new ideas. What is it about Italy’s culture that produces good design and smart innovators, but makes it so difficult to access funds?

Marco Mari: It is part of the system. We don’t have a venture capital system quite established. But it’s not just a matter of money. It’s more a matter of the cultural investment of the team.

Here in Italy, yes, it’s hard, and I think even the innovator doesn’t speak the language to convince an investor to make those high-risk kind of investments. Maybe — this is something that I’m just thinking now, after hearing what Riccardo Illy said — maybe it’s because we are more linked to quality-improvement innovation. Maybe that has less risk. But I think that you need to start from a heritage and a high base level of quality, and then improve. So it’s a different kind of investment.

I think that also, what we are trying to do with the Italian Innovation Program, the Collateral Initiative, is guide Italian innovators, the youngsters who would like to start up something, and show them they should focus on how they can exploit the heritage and the quality that Italy already has. And maybe also seek capital, not just here in Italy, but around the world, by saying, “Hey, we have this heritage. We can start improving and disrupting those markets, but at the same time, this heritage is kind of a giant whose shoulder we can sit on.”

“In my opinion, the problem of innovation today is that everybody is investing in incremental innovations. And almost nobody is investing in disruptive innovations.” –Riccardo Illy

Knowledge@Wharton: Is there an education effort about risk — a process to make people more thoughtful about how to take risks correctly? You have a legacy of products, but how do you get people to make the bigger decisions?

Illy: If I understand, you were asking if the attitude toward risk is one of the problems, and I would say yes. The Italian investors are quite risk-averse. That’s the reality. Twitter This is one of the reasons venture capital didn’t develop very much in Italy.

Yet when I used to be mayor, I participated in a venture capital fund that funded one of the small companies that developed in our scientific environment in Trieste. Then, as president of the region, I participated in a fund for venture capital. But the idea that you invest in 10 companies, and that nine will lose money, but that you will make profit in one covering the nine losses — in Italy, it’s quite strange. People do not accept this idea — not only the public administration, but even in the private sector. So it’s really a concept difficult to develop in Italy, also because in Italy, we consider failure something really very negative.

When you start a company in the United States and you fail, you will find someone saying, “You are a good guy, you had the courage to start, you tried, it went wrong the first time, you will succeed the second one.” In Italy, if you fail, you normally will be condemned for life. Twitter That’s a reason … it is difficult to invest in companies where you already know that nine of the 10 times you are going to lose the money and the company is going to fail.

Nevertheless, I am an advisor in LUISS EnLabs, which is a kind of start-up incubator developed by the university LUISS (Libera Università Internazionale degli Studi Sociali) in Rome, which is a private university. This organization is sustaining new initiatives mainly in the electronic sector, in the digital sector.

Personally, I’m an advisor to a company called wineOwine, which is selling the wines of the thousands of small wineries that exist in Italy that sometimes produce only maybe 10,000 bottles a year. It’s very difficult for these wineries to sell their production, because they are too big to sell it directly to the consumer, but too small to have their own sales organizations. And so through wineOwine, they found the right way to distribute, of course, through the Internet. WineOwine has already raised capital twice; they are now in their second phase. And they have raised capital quite easily, so it is not impossible in Italy.

But I think that the concept of venture capital, where you are losing money in the majority of the companies you are investing in, is really difficult to be developed here. But direct investment in small companies that have a good potential for growth — I think that is possible. We have to find a different way to connect the investors with the companies. Probably a direct connection, not through a venture capital fund.

Mari: Yes, and I can add, as well, a great example where the idea of a startup of a company is connected directly to the classic Italian industries. The company can access a smaller amount of capital, but it can be easier here to find the market. It could be a kind of a halfway approach.

Knowledge@Wharton: I’d like to turn the conversation a little bit to the concept of talent and orientation to design. Riccardo, you mentioned the idea of working on aesthetics. Do you feel like Italy is producing the talent that it needs to make that next jump out of the current state of the market?

Illy: I think that in Italy, we have, let’s say, aesthetics in the genes. The ancient Romans were committed in aesthetics. Fortunately, we were able to save some paintings, statues and other things that can really show that, even at that time, aesthetics was so important.

Also, in the following centuries, the Italian people always were able to produce paintings, statues, and the best furniture and jewels, clothes, shoes and whatever can be linked to aesthetics. And we have one of the most important heritages in art — I think the most important — of all the countries in the world. That means that a person who is living in Italy, lives in art daily — in architecture, in art, in music, in literature, and so on. This brings the possibility to enhance that sensibility we have towards aesthetics, both in terms of the ability to appreciate the best products, but also, in terms of being able to produce them.

There are, for example, some fabrics that are produced only in Italy. Some Italian companies tried — when labor costs were much more competitive in Asia — to bring this production to Asia, but they weren’t able to get the same quality of the fabrics. Finally, they came back to Italy to produce them. Also, several French brands like Louis Vuitton or Hermes are producing shoes and even bags in Italy, due to this capability of the Italian craftsman to produce top quality. In my view, we should do even more to transmit these abilities to the next generation.

Not all of it is visible, for example. In the museums, you can see only a small part of the art existing in Italy. I think that we should make a bigger effort to let these pieces of art be seen by the tourists in one hand, but also by the Italian people, starting with the students, in order to guarantee that the next generation will have the same attitudes towards aesthetics.

We also have another competitive advantage in the Italian population, which is creativity. You see it in the mechanical sector, but also in chemical, in more technological activities, and also in scientific research. Normally, Italians with much less capital are able to produce bigger results. If we had the means that you have in the United States, I think that Italian production, Italian creativity, would be much, much bigger.

Just as an example, you see that in the production of machines for packaging, and also for automation — so, robots — the Italian companies are really the leaders. This is not due to any special ability to invest in new technology and research, but thanks to our creativity. Often, you find machines that are not patented at all. And when you ask, “Why didn’t you patent your innovative machine?” the answer is, “By the time other companies from foreign countries copy my machine, I will have the next and maybe the next generation after of it.” So they are always in the forefront of innovation.

Mari: I think I can add on this, about design. I had a conversation with David Kelley, the founder of [global design company] IDEO, a year ago about industrial design, and I think for the last 40 years, we’ve lived in cycles. Now, as Ricardo mentioned, Italy was the place for industrial design, for industrial machines. But after the failure of Olivetti, which was the biggest electronic company we’ve had here in Italy, I think Italy missed the next wave, and the cycle of interaction design in the digital arena. But from Olivetti, as a legacy, as a heritage, there were a lot of interaction designers who went abroad to the U.S.

“We are approaching another cycle of design and interaction design, and it’s totally linked to the Internet of Things and to manufacturing.” –Marco Mari

But we’re lucky to say that Italians like Massimo Banzi are established here in Italy. And that’s interesting, because I think now we are approaching another cycle of design and interaction design, and it’s totally linked to the Internet of Things and to manufacturing. The center of the conversation about how people can interact with the new things in innovation is moving back to the “thing.” So I think that Italy can have a role, it could be a player in this kind of trend.

I just discovered while talking with Riccardo Illy before the call that here in Trieste is based a quite big company named Telit that is investing a lot in the Internet of Things. So Arduino (an open-source platform that revolutionized the IoT industry, and it’s based in Ivrea, the same place where Olivetti was founded) and this company and others could be very interesting to follow in the next year. For other players, it will be a challenge to see how the Italian talents, not just the foreign talents, can catch these trends.

Knowledge@Wharton: It’s great you bring up Olivetti, but let’s not forget the other great businesses that have started in Northern Italy, especially in the Veneto region. You have Luxottica, you have big car companies, a significant amount of innovation. So the question is: Right now, there are certain disruptors in play — the Internet of Things and the idea of customer-focused innovation are two. What are some of the other big disruptors that you think Italy and its regional players should be thinking about to drive their next rounds of innovation?

Illy: The problem of innovation today is that everybody is investing in incremental innovations. And almost nobody is investing in disruptive innovations.

I would say the last disruptive innovation was digitalization. And previously, it was electronic systems. But the transistor was invented before World War II, and consider that today, we are not yet able to cure the flu, which affects almost everybody, at enormous social and economic cost, and takes many lives, every year. We are not able to cure cancer, or Alzheimer’s or other degenerative illnesses.

Or consider batteries. We are not yet able to store electricity in an effective and efficient way, even if 10 years ago, new battery technologies were announced, but they never arrived in the marketplace. In scientific research, we have the tendency to make exciting announcements about innovation that are not followed by product deliveries.

Public administration should make a clear decision to let private companies invest in incremental innovation that costs less and is less risky. It can be an effort by and directly for the companies, because they have sufficient money and they can follow this kind of small risk.

But the public administration should invest 100% in disruptive innovation — to accelerate our passage into a new era of electricity, compared to the existing era of fossil fuels. This is important both for economic reasons and for environmental reasons. But I do not find any country in the world, not even the United States, where the government has made this central decision just to invest in disruptive innovation. That means to fight cancer, to fight other diseases like the Alzheimer’s, to invent new batteries, and finally, to produce new photovoltaic cells that go over the 20% efficiency level that exists today.

Knowledge@Wharton: I think the last big government-designed disruptor we can all remember is the Internet, which was funded by the U.S. government, through DARPA, and which in just a few years changed the way we live.

Mari: Yes.

Illy: Exactly, you’re right.

Knowledge@Wharton: So as we wrap up, are there specific opportunities that you see ahead? One big question — as somebody who looks at Italy from the outside — relates to the fact that Northern Italian GDP is about twice that of southern Italy. Inside of Italy, does the fact that you almost have to two economic systems get discussed? And how can innovation help out there?

Illy: Good question, but first of all, I would say that this problem — which is, for sure, one of the big Italian problems — exists also in the United States.

If you look at the per capita GDP in all the American states, you will find big differences between one and the other. Also, in Germany, to make another example — or in France — from region to region, you will find big differences. I would say that the human capital in Southern Italy is maybe even better than in the North, because in my opinion, they are as well able to use the brain as we are in the North, but they are better at using their hearts, so their creativity can be even higher than ours. The problem is that the environmental conditions — especially, I would say, the conditions of the public administration in southern Italy, security and so on — are so bad that investing in or starting a company in this area is really risky. So there are really few people willing do it.

And that’s a political problem. Many governments said they really wanted to fight the Mafia and the Camorra in southern Italy, and to change the ability of the state to take control of the southern part of the country. But up till now, no one did it. We see that the Premier [Prime Minister Matteo Renzi) we have now is making so many reforms — and so, I think we can have at least one hope that he will also be able to not only recover, but to exploit, the huge human potential that exists in Southern Italy.

Knowledge@Wharton: I was happy to hear about how the Italia Innovation Program came up with some great new product ideas, and digital ideas and concepts. As you step back and think about programs like that, where you bring in students and have them come up with new ideas for existing companies, what is the next step? Do you think that you will be working with some of the executives in actually helping them implement it?

Mari: Yes, I think that creating this intercultural exchange was a great and very fun way to create within a wide range of companies an awareness about the leverage that innovation can provide for them. So yes, we as an organization are promoting executive education initiatives. The executives can be the leading actors of this kind of exchange — not just an educational effort to make the world more passionate about Italian innovation, but also trying with other innovation service providers to follow up with ideas and to see real implementation.

Basically, we are trying to create a system and connect more with Italian institutions that are already doing that. We partnered with the Polytechnical of Milano this year to bring some service designers into the program, and we would like to do more of that. It’s not just a connection; it’s more cultural. We are trying to stretch inside a lot of actors and, for sure, the institution should be involved in that. So we will try to do it.

Illy: In conclusion, I think it’s worthwhile to mention the Gaetano Marzotto Prize, which is a quite important monetary prize. It’s 300,000 euros for first prize, going to the most innovative Italian company. It’s a very important initiative, both for promoting the idea of innovation and the idea that everybody should innovate — on the other hand, also, to help he who has already decided to invest and to commit himself in innovation.

We are both in contact — Marco and myself — with the organization and, personally, I appreciate very much what they are doing. I think they can be helpful in pushing and in spreading the idea of innovation.

Mari: Yes, it’s a prize. They don’t take equity, so it’s a genuine push to advance these ideas and these researchers, a lot of whom are Ph.D. students who came up with new inventions in biotech and other things that are strongly ecological.