FDI-Italy

 

by Paul A. Laudicina, Chairman Emeritus of A.T. Kearney

Foreign direct investment (FDI) flows have only surpassed the $1.9 trillion level reached in the pre-global recession heights of 2007 once in recent years. As a result, the environment for FDI attraction has continued to be quite competitive. Less robust global economic growth and a major shift in the global paradigm for business helps explain these diminished FDI flows. Italy’s ability to attract FDI, of course, is also affected by this changed environment.

Italy is clearly doing something right. In our 2018 FDI Confidence Index, a tool to assess likely future FDI flows based on global business executives’ attitudes and intentions, Italy made a three-spot jump to 10th most attractive global investment destination, with relatively even rankings across different industries. The 2018 rise builds on Italy’s 2017 rise of three places, from 16 to 13. The country’s dramatic two-year rise into the top 10 puts Italy at its highest ranking in the Index since 2004. Even though the IMF’s economic outlook on Italy is mixed, at just 0.6 percent growth this year, the country has strong momentum in domestic demand, higher external demand, and the lowest jobless rate in more than five years.

Italian-FDI

Italy’s strong performance on the 2018 FDI Confidence Index is even more striking considering that the country was in the midst of a national election when the survey was conducted. Investors were sanguine about the political uncertainty ahead of this election, as evidenced not only by Italy’s strong performance on the Index, but also by the bond markets (typically most reactive to political risk) remaining largely unfazed in the weeks leading up to the vote. Even after the national-populist League and the anti-establishment Five Star Movement won the highest vote shares in the March 2018 elections, markets did not react strongly, with bond yields continuing to remain low and the equity market rising.

It is possible that instead of political risk, foreign investors had their sights set on Italy’s “Industria 4.0” initiative, a national plan for innovation launched in January 2017. The initiative puts an emphasis on manufacturing, and it returns industrial policy to the top of the government’s agenda. According to the Italian minister of economic development, the plan offers support to improve competitiveness, digitize new processes, boost productivity, promote new skills, and ultimately attract more FDI. It seems the proposal is already taking effect. About 409 megawatts of new photovoltaic systems were installed in Italy in 2017, an increase of 11 percent from the previous year, and further expansion of these solar power systems continued in 2018, with more than 300 megawatts of capacity installed in just the first nine months of the year. Large-scale mergers and acquisitions are also adding excitement to the Italian investment climate, including the deal between Luxottica Group SpA, the Italian manufacturer of glasses and lenses, and Essilor International SA, its French counterpart, valued at more than $25 billion.

The new global environment for business—in which further integration is being challenged by both heightened cross-border tensions and the rise of populism reducing the free movement of people, goods, capital, and ideas—presents challenges for continuing to attract FDI, however. Global trade has become increasingly fragmented, governments have become more protective of their domestic economies, and cross-border data flows have become more encumbered.

Further complicating the global business environment is the disruptive potential of transformative technologies. All of the so-called “Fourth Industrial Revolution” technologies (artificial intelligence, the internet of things, robotics, augmented and virtual reality, and 3D printing) will alter global value chains by transforming what is produced and where it is produced. In fact, the whole process from product design and production to global supply chains, distribution patterns, and consumer engagement is shifting toward a system that increasingly allows demand to be met locally. As a result, FDI decisions will no longer be driven principally by the need to access lower cost manufacturing environments as mechanized and localized production close to the end user becomes more economical and desirable.

This changed environment presents Italy with special challenges, but also with some special opportunities. The challenges are obvious: lower levels of global FDI means that those seeking to attract more FDI will need to be more competitive and aggressive in claiming a larger share of the investment that is crossing borders. This means that Italian FDI promotion activities need to be better coordinated and targeted at those sources of FDI that are especially well-suited to unique Italian attributes. And maintaining a regulatory environment that fosters stability and cross-border integration is key. For instance, speculation about the prospect of an Italian exit from the EU unnerves prospective investors, who generally favor destinations with large internal markets.

On the flip side, one important benefit of the changed global business environment for Italy is that special Italian competitive attributes assume greater importance in today’s investor calculus. These include innovative design, lifestyle, and cultural attractions. In addition, labor arbitrage, which has limited Italy’s (and other high-cost labor environments) appeal in the past, is likely to wane as a top consideration for investors in an increasingly mechanized manufacturing process.

But for Italy to capitalize on this changed environment will require strategic clarity, purposeful investor targeting, and nationally coordinated promotion leveraging these competitive attributes

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