According to the 2017 ICE Report “Italia Multinazionale”, in 2016 Italy registered an increase in inward direct foreign investments (flows) of 50%, reaching 29 billion USD and the 13th position in the world ranking, gaining 5 positions compared to the previous year. Meanwhile, outward FDI (flows), increased by 12.4%, reaching 23 billion USD and losing 1 position (17th) compared to the previous year. Internationalization-wise, however, Italy is still lagging behind its major European partners, such as France, Germany, UK and Spain. If we look at the FDI stock to GDP ratio, in the table below, the picture is not favorable.
It is clear that Italy is still not an attractive country for FDIs, due to bureaucracy issues and recurring opposition of trade unions and local politicians to international deals. At the same time, the majority of Italian companies seems incapable of investing in foreign ventures. Although in 2017 there were a few exhibitions of power, such as the Luxottica-Essilor, Fincantieri-Stx and Ferrero-Ferrara Candy deals, Italian companies’ direct internationalization is still underdeveloped, with the 3 major pain points being the service sector, southern Italy companies and investments outside of Europe. According to MET, Monitoraggio Economia e Territorio, an Italian industrial policy research firm, in their 2017 Report, only 20% of Italian companies can be considered as global companies, capable of exporting, investing and innovating, while 60% shows small signs of international activities and the remaining 20% apparently has been frozen in time, completely neglecting business opportunities coming from abroad.
Exports, on the other hand, keep growing, acting as the main engine of the Italian economy, while national demand struggles to recover. Indeed, exports contributed for 4.8% to the Italian GDP growth between 2010 and 2016, while the other components, such as household consumption, government consumption, investments and imports all had a negative contribution during the same time period. According to the 2017 Italian Trade Agency Report, Italian exports of goods in 2016 exceeded 417 billion EUR and exports of services exceeded 91 billion EUR. While in 2016 exports increased especially in the Euro-zone (+3.1%), the first months of 2017 saw a huge growth of exports bound to China (+27.4%), Russia (+24%), Japan (+12.6%), India (+10.2%) and USA (+9.4%), with an astounding performance of chemical products (+39.8%), automotive (+13.6%) and pharmaceutical products (+12.3%).
However, the main destination of exports still remains Europe (66.7%), followed by North America (9.8%), East Asia (8.9%), Middle East (4.5%), Africa (3.9%), Central and South America (3.1%), Oceania (1.8%) and Central Asia (1.3%). This data show that Italy still struggles to reach higher quotas in distant countries, while Italian exports to nearby countries, especially Balkans and North Africa, are dominant. In fact, the top 10 countries of destination of Italian exports are all European, excluding China at the 9th place.
Italy is the 8th manufacturing country in the world, specialized in industrial machinery and automation and this is reflected in the composition of its exports. In 2016, Italian exports were mainly composed of machinery (26% of total exports), transportation (11%), chemical products (9.9%), metals (9.1%) and textiles (7%).
In the period between 2010 and 2016, Italian export sectors can be divided in three groups based on their performance compared to the rest of the world:
These trends seem to outline an evolution of the Italian internationalization model, where personal and home consumer goods are becoming weaker while specialized technologies are getting stronger, especially in the machinery and industrial automation sectors.
Furthermore, according to SACE, an insurance and financial service provider which supports Italian companies in their internationalization processes, Italian exports are expected to grow by more than 4% per year between 2018 and 2020, with the leading destinations being USA (+5.5%) and China (+6.2%). The sectors driving this growth are expected to be chemical products, automotive and F&B.
Based on the picture outlined above, it can be said that Italy is good at exporting – holding indeed the 9th spot in the world ranking – but bad at direct internationalization. Unfortunately, just exporting is not enough. As shown in the 2017 MET Report, companies that directly invest into foreign countries are much stronger innovators compared to companies that limit themselves to exports. 66.6% of the companies that perform FDI are product innovators, against only 31.8% of the companies that only export, while 49% against 22.4% are process innovators and 60% against 31% performs R&D activities. Given the fact that innovation is paramount in order to even just stay afloat in nowadays economic environment, Italy as a system should find a way to facilitate outward FDIs and boosts its companies’ innovation capabilities.
This situation is intrinsic to the Italian business ecosystem, consisting mainly of SMEs and family owned companies, which represent the core of the production capacity of the country. Said companies often struggle to compete in the global market, due to their small dimension, low access to financing options and a lack of the right mindset. Some steps in the right direction have been taken, with the approval in October 2017 of the Corporate Governance Code for non-listed family companies. The Code is a tool of self-regulation that will help companies that will adopt it to increase their performance and transparency, thus gaining access to wider financing options, beyond the banking system, and acquiring resources that could be used for international expansion.
Of course, international expansion is a complex process. Exporting should be the first step, followed by direct internationalization, which might consist in a light presence (representative offices or distribution centres) or in a heavy presence (production and R&D facilities). To successfully enter a new market, geopolitical scenarios, regulation, company size and product fit must all be taken into account. This is not an easy feat, especially for the smaller companies that should, therefore, turn for help to internationalization experts such as ITA – the Italian Trade Agency and the Chambers of Commerce and Business Associations abroad, that are able to provide customized services leveraging their knowledge and network in specific countries.
While focusing on European markets, such as Germany, France, Spain, UK or even central and eastern Europe countries might be a safe bet, thanks to their cultural and spatial affinity, emerging markets offer great opportunities for Italian companies. Although the Italian presence in South-east Asia, and specifically in Malaysia, is still underdeveloped, the last few years saw a surge of Italy’s activity in the region. In 2016, the Malaysian government approved 236 million dollars investments from Italy and Italian exports exceeded 1 billion dollars (+11% from the previous year). Malaysia is steadily configuring itself as a regional production and distribution Hub and Italian companies looking to invest in the country will find all the help they need to succeed from the cooperation of IMBA and ITA, from customized market studies to support in the establishment of a manufacturing facility.