No. 491- Invest in Italy? Results of a recent empirical survey

During the past decade all industrial countries attracted sizeable inflows of foreign direct investment (FDI), excluding Italy and Japan: this fact has been interpreted as evidencing a deterioration in Italy’s structural competitiveness. This paper presents the results of a survey conducted by the Bank of Italy through its net of foreign representative offices, aimed at identifying the main factors that influenced the country’s attractiveness of FDI in the most recent years. The first section contains a brief survey of the literature on factors of attraction and obstacles to FDI. Italy’s position vis-à-vis other advanced countries is examined in the light of a wide variety of indicators: these latter include macroeconomic, qualitative and structural variables gathered from various sources (as well as other indicators expressly built for this paper), which are meant to outline circumstances relevant to different FDI strategies (“horizontal”, “vertical”, and “regional”). Italy enjoys two major “localization advantages”, namely: (1) a large, although somewhat stagnant domestic market, and (2) low unit labor costs, comparable to those prevailing in other “peripheral” European countries such as Spain, Portugal and Greece. In the backdrop of a general improvement of Italy’s qualitative and institutional indicators in recent years, one of the major obstacles to FDI in Italy pertains to the continuing low quality of its transport and product distribution infrastructures–a circumstance that cannot alone explain the very low level of FDI inflows. Another major impediment is represented by the dominance of small- and medium-sized enterprises in the Italian industry. On the one hand, this dimensional factor has been associated with the diffusion of ownership structures hostile to foreign mergers and acquisitions (M&A, the prevailing type of FDI in recent years); on the other hand, it may have clashed with the preferences of international investors, which are skewed towards the acquisition of medium- and large-sized enterprises. In either way, this circumstance may have strengthened the negative effects of “environmental barriers” that remain elevated anyhow in our country. The results of the survey are presented in the second section. The survey confirms some of the country’s improvements mentioned earlier; however, it also confirms the perception, on the part of foreign investors, of continuing institutional and structural backwardness, as well as the importance attached by these investors to such factors while formulating their investment plans.