In 2021, Italy attracted 301 greenfield foreign direct investment (FDI) projects, nearly double the number it attracted in 2020. In the same year, however, Germany, France and Spain attracted 1,614, 806 and 666, respectively, according to our FDI Projects Database.

The gap between Italy and Germany and France when it comes to FDI is alarming, and it does not match the difference between the countries’ economies. The FDI project gap between Italy and Spain is more worrying, however, as the Iberian country has a smaller economy than Italy's. Italy’s nominal gross domestic product (GDP) stood at $2trn (€1.95trn) in 2022, half of Germany’s ($4trn) and one-third lower than France’s ($3trn). It is much higher than Spain's, however, which stands at $1.4trn.

This disparity between Spanish and Italian FDI is less noticeable when looking at inflows and not just project numbers, however. According to the UN Conference on Trade and Development (UNCTAD)’s World Investment Report 2021, Spain attracted FDI inflows worth $9.7bn, while in Italy the figure was $8.4bn. This suggests that while Spain attracted more than double the projects, in proportion, Italy attracted more capital.

The difference with Germany and France is significant, however the FDI is measured with Italy. In 2021, Germany attracted $31.3bn in FDI inflows and France $14.2bn, dwarfing the Italian figure.

Why is Italy not more attractive when it comes to FDI?

So why does a country like Italy – which offers a good domestic market and has strengths in FDI-attractive sectors such as manufacturing, luxury goods and pharmaceuticals – lag behind comparable economies in the EU?

There are multiple reasons, observers say, most of which are deeply rooted in the country’s history and culture, as well as its judicial, legal and political systems – and it does not end there.

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“While Italy is an important economy in the eurozone, it [is not particularly] attractive to foreign investors for various reasons," says Paolo Grignani, senior economist at Oxford Economics. "First of all, growth prospects are below the European average. Italy’s economy is currently 14.5% of Europe’s total. However, we estimate that this share will go down to 12% by 2050.”

An ageing population and weak growth of GDP per capita also contribute to making Italy less appealing to multinational enterprises (MNEs).

“At present, Italy’s GDP per capita is 84% of the eurozone’s average. By 2050, we expect it to drop to 75%,” says Grignani.

Does a strong 2021 point to a more positive future?

Despite this doom and gloom, 2021 was a positive year for Italy’s FDI inflows. According to our FDI projects database, the number of greenfield inbound projects nearly doubled year on year, coming in at 301 versus 166 in 2020. According to UNCTAD’s World Investment Report 2021, FDI inflows turned positive at $8.5bn versus a negative result of -$23.6bn in 2020.

In an article on this topic, London School of Economics (LSE) professor of economic geography Riccardo Crescenzi and junior expert at the European Commission Sebastiano Comotti say that the National Recovery and Resilience Plan (NRRP) has played a key role in the recovery.

“In 2021/22 Italy has experienced a significant growth in inward foreign capital relative to pre-pandemic levels," the article reads. “Annual inflows of [new greenfield FDI] have grown by 33%. In most areas the growth rate from pre-pandemic levels has outpaced growth in European peers over the same period.

“Sectoral and functional analysis suggests that the NRRP might have been a facilitating factor, together with structural reforms currently under way.”

Giovanni da Pozzo, president of Italy’s government agency for business internationalisation, Promos Italia, echoes this partial optimism. “AT Kearney’s FDI Confidence Index has seen Italy climbing up from the 16th place in 2016 to the seventh in 2022, ahead of Switzerland, Spain, Belgium and other European countries," he says.

“The EY Europe Attractiveness Survey 2022 also reported a very positive performance of Italy’s inward FDI, which has grown the most year on year (83%), followed by Portugal (30%) and Turkey (27%). Italy’s market share also grew by 1.5%.”

Italy's structural issues

Despite an encouraging year and the reassurance that the NRRP brings to foreign investors, Italy is still punching below its weight when it comes to FDI. Structural challenges remain, observers agree, the main one being political uncertainty and volatility, which often translates to weak and volatile tax, judicial and regulatory frameworks.

“Italy presents challenges to foreign investors both at a macro level and a micro level," says Wolfango Piccoli, co-president and director of research at political risk advisory company Teneo. "On the first, Italy offers very little [in the way of] efficient economic systems, which often impacts businesses’ ability to enforce contracts, for instance.”

“At a more micro level, businesses find themselves dealing with regional and local authorities and more generally with a multi-point access network to the country, which makes getting business done complicated.”

The uncertainty, Piccoli highlights, is not just political but impacts other important parts of Italy’s economic system. One of the most delicate ones is taxation.

“An unstable and ever-changing tax framework does not allow companies to make long-term business plans," he says. "The sugar and plastic tax law, for instance, was announced in the 2020 budget but was never implemented, which makes it hard for companies in those sectors to decide to invest in Italy.”

Bureaucracy is another hurdle facing foreign investors. Speaking to Investment Monitor, LSE’s Crescenzi says: “Companies operating in Italy face high levels of bureaucracy. To complicate matters, the actions taken to make it easier for investors to come in are subject to frequent changes from one government to another, and often even within the same government’s tenure.”

The north-south divide and a strong family-led model

The Italy that emerged from the unification process in 1861 was a collection of small independents states and kingdoms. Soon after that, a clear divide between a more organised, efficient north and a more fragmented and less economically developed south became evident. It is still a reality today.

The country’s FDI picture strongly reflects such a divide.

According to our FDI Projects Database, between 2019 and October 2022, Lombardy in the north, home to Milan, was by far the biggest pole of attraction with a total of 315 projects. Lazio, the region where Rome is situated, followed by some distance in second position with less than one-third the projects (92).

The following four positions are occupied by either northern or centre-northern regions: Veneto, Emilia-Romagna, Piedmont and Toscana.

“The divide between the north and the south of the country has always been a strong marker for Italy," says Teneo's Piccoli. "It got worse during the pandemic and will unfortunately continue to widen as a recession looms.”

Piccoli explains how the divide is strong and ranges from infrastructure to public administration, and it is unlikely to be addressed properly as it is embedded in the country’s history. “Even the political arena currently reflects the divide as the 5 Star Movement is still very popular in the south, and that will complicate matters in the new government,” he adds.

LSE’s Crescenzi explains how the concentration of FDI in one or a few Italian regions affects the overall performance of the country. “There is a strong imbalance between the north and the south of the country, with Rome being an exception in the centre," he says. "This negatively impacts the overall FDI performance. If one only takes Lombardy or Piedmont, they both perform in line with similar regions in more FDI-successful European countries.”

Another structural issue affecting Italy’s appeal to foreign MNEs is its strongly family-led business model. “Italy is characterised by strong regionalisation but also by a level of seclusion due to the dominance of family-led businesses," says Crescenzi. "Both inward and outward [FDI is] affected by this.”

While there is no denying the north-south divide takes a toll on Italy’s FDI attractiveness, some encouraging examples can also be found in the south, according to Francesco Galietti, co-founder and CEO of political risk consultancy Policy Sonar.

Switzerland-headquartered STMicroelectronics has a large presence in Catania in Sicily through a large factory. The company recently confirmed its commitment to the area with a €730m investment over five years, which is expected to create 700 jobs once completed.

Private equity and other bright spots

Italy's family led model can be seen as an attractive quality by certain sectors, and within private equity, where a more concentrated proprietary structure is favourable.

Galietti believes the private equity space in Italy is showing signs of great vitality. “Family-led ownership is ideal for private equity investors and is definitely not seen as an issue," he says. "It has recently materialised in interesting investments."

The education sector, for instance, has been benefitting from this. At the end of 2021, France's CVC Capital Partners bought online university UniPegaso.

When assessing the level of Italy’s FDI attractiveness, it is important to distinguish between different types of assets, Galietti warns. “When it comes to private equity, Italy currently offers very good opportunities and we have seen lots of activity in the education sector, for instance," he says. "Highly regulated infrastructure assets are more problematic.”

Italy has a lot of potential in other areas too, according to Promos Italia’s Da Pozzo. “Italy is the European country with the highest percentage of recycling over total waste; it is the second on the Green Complexity Index, which tracks a country’s ability to export green products.

“Italy’s agriculture is among Europe’s most sustainable in terms of carbon emissions in millions of tonnes. We also have strong positions in the design and pharmaceutical sectors.”

The Meloni factor

At the end of September 2022, Italy elected the Brothers of Italy’s Giorgia Meloni as prime minister, who leads the most right-leaning Italian government since the Second World War.

While the tone of her political campaign points towards a potentially protectionist stance towards foreign investment, observers are generally cautious and are waiting to see what the government’s actions will look like.

Mostly, attention is being paid to whether and to what extent Meloni will try to renegotiate the NRRP, with some arguing that amendments are necessary and others urging caution.

“The government needs to revise down some of the NRRP’s objectives," says Piccoli. "It will be interesting to see, for instance, which direction the government will take on green investment now that it may need to go back to more traditional sources of energy.

"Overall, it would be foolish to try to stick to the original plan and objectives as the external and domestic macroeconomic backdrops have changed significantly."

While some amendments in line with an evolving and often worsening macroeconomic environment are perhaps expected, a stronger stance against the NRRP from the government would be extremely detrimental, warns the LSE’s Crescenzi.

“Adapting the plan to the new economic backdrop is physiological, but renegotiating it would defeat the purpose," he says. "Some of the plan’s elements are not connected to the macroeconomic landscape. Any changes should be carefully weighted against any credibility and stability loss, which Italy clearly cannot afford.”

What is the way forward for Italy and its FDI landscape?

So what is the way ahead for Italy to unlock its FDI potential?

Observers generally agree that while it is important to bet on innovation in certain areas, Italy’s best chance is to bet on its traditional strengths and stay the course when it comes to carrying out the reforms that are necessary to unlock the NRRP’s funds.

“We see interesting trends in the energy sector as well as in other more traditional sectors such as automotive and pharmaceuticals, where consolidated clusters can be found, especially in the area around Rome,” says Crescenzi.

In order to attract the levels of FDI that would put it on a par with other large EU economies, Italy needs to prove it is a stable and credible country. Carrying out much-needed reforms and providing a less volatile business environment will be its best currency in an increasing unstable and uncertain macroeconomic scenario.