The discussions at this roundtable event got underway with the acknowledgement that the flow of foreign direct investment (FDI) is an indicator which provides a snapshot of a country’s investment attractiveness and its competitiveness. By quantitatively analyzing the proportion of foreign-held interests in the Italian productive system and qualitatively considering their distribution across sectors and their capacity to generate widespread development in different areas within the country, it is possible to gain an idea of the strengths and weaknesses of the Italian economy from an external analytical perspective that is more objective than the predominantly self-referential one to which Italians are often hostage.
Such an analysis is even more useful in the midst of the current economic crisis, which has come at the end of just over fifteen years of exponential growth in global foreign investment. In Europe, between 1990 and 2007, the proportion of FDI to total investment quadrupled, with trends that reflected the acceleration in the pace of globalization, the effects of the technological revolution, and the progressive opening up of new markets. However, the crisis has interrupted that process. The peak reached in 2007 was followed in 2008 by a very sudden fall of around 21% in total FDI. For 2009, the most optimistic forecasts point to a shrinkage, in absolute terms, of 770 million US dollars – that is, almost double the amount “lost” in 2008. Other forecasts predict that the flow of foreign direct investment will only fully recover in 2011.
Given these prospects, the participants addressed the question of how Italy is placed within the scenario depicted. Even before the crisis, the country was paying the price for its long-standing inability to stay abreast of the most advanced European economies. A comparison with the United Kingdom, France, Germany and, more recently, Spain, reveals Italy’s economy has constantly “underperformed”. Between 1990 and 2007, Italy managed on average to attract investment of USD 22 billion, with FDI accounting for around 7% of gross fixed investment. This represents less than half the European average (15%) and much less than the figure for France (18%), which, in absolute terms, has an investment attraction capacity three times that of Italy.
The crisis – which has also affected, to clearly varying degrees, every economy in the world – threatens to further exacerbate this trend. The figures speak plainly: in 2008, the fall in net annual FDI flows in Italy was 95%, while in France it was around 28%. Yet despite these statistical indications, the crisis could perhaps represent a unique opportunity for Italy to reverse this and other trends. Indeed, it necessitates a change which, in order to be effective, will need to extend to policy areas that have a significant direct or indirect impact on the attractiveness of the country’s economy.
A survey carried out by the Foreign Investors Committee of Italy’s Manufacturers’ Association (Confindustria) – presented in summary form during the roundtable discussion – provides an indicative overview of the key opinions on Italy of managers from a sample of multinational companies that have invested in Italy. It was noted by the participants that the list of matters regarding which dissatisfaction was expressed reflects, first and foremost, the factors that contribute to the country’s lag, including: slow and byzantine bureaucratic procedures, high labor costs, lack of regulatory certainty, political instability, poor infrastructure, and insufficiently competitive energy costs. On closer examination, these exogenous factors threaten Italy’s overall competitiveness, not just its attractiveness to foreign investment, and hence require reform.
The analysis of FDI flows thus overlaps with the broader question of the measures needed to modernize the country, in order to avoid the protectionist temptations that now more than ever lie in wait, and to open up the market with the aim of making it more competitive and efficient. In other words, in an Italy marked by widespread entrepreneurial activity, investment will materialize if and when the system begins to “function”. This is true both for foreign and domestic investment. One need only observe the chronic development differential between the North and South of the country and the difficulty of running a business in certain areas where safety – or more precisely, the lack of safety – is a daily issue. On the other hand, certain best practices could provide some valuable responses. For instance, in recent years the so-called “Etna Valley” industrial district, with its virtuous network of relationships between universities, businesses and institutions, has provided confirmation that ambitious internationalization and innovation targets can be achieved through planning and dialogue with social parties, despite the existence of unfavorable environmental starting conditions.
Viewed from this perspective, the solutions to the problem of foreign investment end up being the same as those needed to help restart the country’s economy. A comparison with France is once again revealing. France is characterized by a mature economy, a high tax burden and a heavy involvement of trade-union representation in workplace negotiations. Yet despite these factors, often associated with a lack of investor appeal, the French economy is attractive whilst Italy’s is much less so. The reasons for this divide, it was observed, lie in the dynamism – including in demographic terms – of French society, an industrial policy focused on promoting strategic sectors (particularly in the area of technological innovation), efficient infrastructure, and the ability to make the most of the country’s image – not just in terms of tourism. Many of these goals could also be reached by Italy at no cost. Others such as, for instance, supporting R&D investment through a tax-credit mechanism, could be pursued through relatively inexpensive selective economic policy planning. In light of these considerations, the participants concluded that the country can no longer delay dealing with the issue of its attractiveness to foreign investment or embarking on other reforms required. The current crisis calls for change and that change is needed now.