INVESTMENT CLIMATE STATEMENT 2007 - ITALY, PART II

UNCLAS SECTION 01 OF 08 ROME 000149 SIPDIS SIPDIS SECSTATE PLEASE PASS TO EB/IFD/OIA SECSTATE PLEASE PASS TO USTR E.O. 12958: N/A TAGS: EINV EFIN ETRD ELAB OPIC KTDB USTR PGOV IT SUBJECT: INVESTMENT CLIMATE STATEMENT 2007 - ITALY, PART II REF: ROME 147 06 STATE 178303 ¶1. This is part two of a two-part cable on Italy's investment climate. (See ref A for part one.) BILATERAL INVESTMENT AGREEMENTS -------------- ¶2. As of December 2006, Italy has bilateral investment agreements with the following countries: Albania Algeria Angola (signed, not enforced) Argentina Armenia Azerbaijan Bangladesh Barbados Belarus Belize (signed, not enforced) Bolivia Bosnia and Herzegovina Brazil (signed, not enforced) Bulgaria Cape Verde (signed, not enforced) Chad Chile China Colombia (signed, not enforced) Congo Cote d'Ivoire (signed, not enforced) Croatia Cuba Czech Republic Democratic Republic of Congo (signed, not enforced) Dominican Republic (signed, not enforced) Ecuador (signed, not enforced) Egypt Eritrea Estonia Ethiopia Gabon Georgia Ghana (signed, not enforced) Guatemala (signed, not enforced) Guinea Hong Kong, China Hungary India Indonesia Iran, Islamic Republic of Jamaica Jordan Kazakhstan Kenya Korea, DPR of (signed, not enforced) Korea, Republic of Kuwait Latvia Lebanon Libya Lithuania Macedonia, Republic of Malawi (signed, not enforced) Malaysia Malta Mauritania (signed, not enforced) Mexico Moldova, Republic of Mongolia Morocco Mozambique Nicaragua Nigeria Oman Pakistan Paraguay (signed, not enforced) Peru Philippines Poland Qatar ROME 00000149 002 OF 008 Romania Russian Federation Saudi Arabia Slovakia Slovenia South Africa Sri Lanka Sudan (signed, not enforced) Syrian Arab Republic Tunisia Turkey Uganda Ukraine United Arab Emirates Tanzania, United Republic of Uruguay Uzbekistan Venezuela Vietnam Yemen (signed, not enforced) Zambia (signed, not enforced) Zimbabwe (signed, not enforced) OPIC AND OTHER INVESTMENT INSURANCE PROGRAMS -------------- ¶3. The U.S. Overseas Private Investment Corporation (OPIC) does not operate in Italy. However, in March 2003, OPIC signed a Memorandum of Understanding with SIMEST (Societa Italiana per le Imprese all'Estero),its Italian counterpart, to expand cooperation, particularly on projects in third countries. Italy, through its Export Credit Agency, SACE, has signed a memorandum of understanding with the World Bank's Multilateral Investment Guarantee Agency (MIGA). LABOR -------------- ¶4. Unemployment in Italy is moderate at 6.1 percent (third quarter 2006),and below the average of 7.7 percent among euro zone countries (November 2006). Italy's unemployment rate is currently at the lowest level since 1992. Traditional regional disparities remain unchanged, with the southern third of the country posting a 10.7 percent unemployment rate -- compared to 3.6 percent in northern and 5.5 percent in central Italy. Despite these differences, internal migration within Italy remains modest. Labor shortages in the North are often filled by unskilled and semi-skilled immigrants. ¶5. Italy's labor force is fairly well-educated. According to a 2001 national survey, 7.9 percent of adults hold university degrees. According to the OECD 2005 Economic Review of Italy, the private internal rate of return -- which measures incentives to invest in human capital -- is much lower for higher education than the OECD average, indicating there may be limited incentive for Italians to pursue higher education. This is due to the fact that persons with higher educations do not earn substantially more than persons with upper secondary educations, and because the unemployment risk is comparable for people at both levels of education. Therefore, firms interested in investing in Italy may have difficulties finding highly specialized Italian employees. ¶6. As in many Western EU member states, there are legal obstacles to hiring and firing workers. Companies may bring in a non-EU employee only after the government-run employment office has certified that no qualified, unemployed Italian is available to fill the position. Work visas are subject to annual quotas, although intra-company transfers are exempt from quota limitations. ¶7. In recent years, the Italian labor market has become somewhat more flexible. A series of legal reforms has encouraged the hiring of part-time employees by reducing employer social security contributions for these workers. New laws have also created opportunities for outsourcing, job-sharing, and use of private employment services. New types of contracts now exist that allow for reduced labor costs. However, high costs and legal obstacles associated with laying off workers still remain a disincentive for adding employees. ¶8. Italy is an International Labor Organization member country. Terms and conditions of employment are also periodically fixed by collective labor agreements in different professions. Most Italian ROME 00000149 003 OF 008 unions are grouped into four major national confederations: the General Italian Confederation of Labor (CGIL),the Italian Confederation of Workers' Unions (CISL),the Italian Union of Labor (UIL),and the General Union of Labor (UGL). The first three organizations are affiliated with the International Confederation of Free Trade Unions (ICFTU),while the UGL has been associated with the World Confederation of Labor (WCL). The confederations negotiate national level collective bargaining agreements with employer associations, which are binding on all employers in a sector or industry. FOREIGN TRADE ZONES/FREE PORTS -------------- ¶9. There are two free trade zones in Italy, located in Trieste and Venice, both in the northeast. Goods of foreign origin may be brought in without payment of taxes or duties, as long as the material is to be used in the production or assembly of a product that will be exported. The free-trade zone law also allows a company of any nationality to employ workers of the same nationality under that country's labor laws and social security systems. Benefits of the free-trade zones include: -- Customs duties deferred for 180 days from the time that the goods leave the free trade zone to enter another EU country. -- The goods may undergo transformation free of any customs restraints. -- Absolute exemption from any duties on products coming from a third country. U.S. Companies in Italy -------------- ¶10. The largest U.S. companies in Italy, based on number of employees, are: IBM, General Electric, Pfizer, Whirlpool, Electronic Data Systems (EDS),Accenture, Lear, and United Technologies. FOREIGN DIRECT INVESTMENT STATISTICS -------------- ¶11. While Italy provides a reasonably attractive environment for investment, it lags behind many of its fellow EU member states in attracting and maintaining foreign investment. According to Bank of Italy figures, net foreign investment into Italy in 2005 totaled USD 18.7 billion (equal to 1.1 percent of GDP) -- well below that of Luxembourg (USD 87.6 billion) France (USD 47 billion),Belgium (USD 29.5 billion),Spain (USD 25.6 billion),Ireland (USD 25.5 billion); but slightly above that of Germany (USD 12.9 billion). Table 1: Italian Foreign Direct Investment Inflows by Economic Sector (Net) 2002-2005 (USD Millions) (1) (*) 2002 2003 2004 2005 Agriculture -95.6 108.5 234.8 511.8 Energy 435.2 1993.8 4463.3 10057.1 Industry 4942.9 5933.1 2016.2 6996.3 of which: Machine 1942.1 2023.9 3690.7 1314.3 Chemical 623.4 1066.8 -3535.4 441.0 Food 504.2 2483.5 362.7 2388.8 Textiles 394.5 353.4 513.0 544.1 Mineral/Metal 311.2 468.5 687.0 1315.5 Other 1167.5 -463.0 298.2 992.6 Building and Public Works 168.4 363.0 125.7 205.0 Services 8812.9 6634.2 9576.4 925.5 of which: Banking/ Insurance 4011.0 2972.2 5749.1 1207.5 Trade 525.0 410.4 36.0 653.4 Transportation/ Communication 544.0 -412.6 516.8 -11468.3 ROME 00000149 004 OF 008 Other Services (Not For Sale) 4459.3 3732.9 3664.2 3274.5 T O T A L 14263.8 15031.9 16416.2 18695.7 Table 2: Italian Direct Investment Outflows by Economic Sector (Net) 2002-2005 (USD Millions) (1) (*) 2002 2003 2004 2005 Agriculture 8.5 38.0 21.1 70.8 Energy 2376.4 3450.7 5336.7 2675.8 Industry 3321.4 1332.9 7573.9 7629.8 of which: Machine 1428.5 -1393.3 4234.8 3684.5 Chemical 321.6 721.2 1730.4 1730.4 Food 99.3 295.2 151.6 206.2 Textiles 469.2 336.6 287.0 411.2 Mineral/Metal 158.0 274.0 246.0 600.0 Other 844.8 1099.2 924.1 997.5 Building And Public Works -35.0 223.6 85.7 159.0 Services 9848.8 1935.7 5037.3 7444.7 of which: Banking/ Insurance 4140.6 5492.6 2636.0 5164.6 Trade 852.3 485.3 1060.9 923.0 Transportation/ Communication 338.7 -8217.6 -923.0 110.6 Other Services (Not For Sale) 4517.2 4175.4 2263.4 1264.6 T O T A L 15520.1 6980.9 18054.7 17980.1 Table 3a: Stock of Foreign Direct Investment in Italy by Major Investors; Year End 2003-2005 (USD Millions) (1) 2002 2003 2004 2005 United States 15373.7 19458.1 22448.3 21451.0 EU (3) 80358.0 114010.0 140651.5 145179.5 of which: France 17071.0 21294.1 24608.6 25637.5 Netherlands 17444.7 26882.4 39009.4 40079.1 United Kingdom 14692.1 22266.6 26613.9 25434.5 Germany 9959.3 13797.2 14312.3 15309.3 Luxembourg 13171.2 18354.2 22336.5 24042.5 Sweden 2431.2 2967.5 3341.8 3034.2 Belgium 2307.9 2963.7 3335.1 1982.3 Spain 936.3 1279.1 1941.0 4820.5 Other EU (4) 2344.3 4205.3 5286.9 4839.4 Switzerland 15375.8 18481.9 21872.7 20115.7 Liechtenstein 1438.4 1824.8 2105.9 1975.2 Japan 2315.2 2991.2 3595.2 3419.1 Argentina 129.4 165.2 257.4 246.8 Brazil 58.5 78.8 128.7 184.2 Other 6182.7 7806.0 9328.5 8747.3 T O T A L 121,231.7 164,816.0 200,379.4 201,318.8 Table 3b: Stock Of Foreign Direct Investment In Italy by Major Investors; Year End 2002-2005 (Percentage of Total) 2002 2003 2004 2005 United States 12.7 11.8 11.2 10.7 EU (3) 66.3 69.2 70.2 72.1 France 14.1 12.9 12.3 12.7 Netherlands 14.4 16.3 19.5 19.9 United Kingdom 12.1 13.5 13.3 12.6 Germany 8.2 8.4 7.1 7.6 Luxembourg 10.9 11.1 11.1 11.9 Sweden 2.0 1.8 1.7 1.5 Belgium 1.9 1.8 1.7 1.0 ROME 00000149 005 OF 008 Spain 0.8 0.8 1.0 2.4 Other EU (4) 1.9 2.6 2.6 2.4 Switzerland 12.7 11.2 10.9 10.0 Liechtenstein 1.2 1.1 1.1 1.0 Japan 1.9 1.8 1.8 1.7 Argentina 0.1 0.1 0.1 0.1 Brazil 0.1 0.0 0.1 0.1 Other 5.0 4.8 4.6 4.3 T O T A L 100.0 100.0 100.0 100.0 Table 4a: Stock Of Italian Direct Investment Abroad by Major Recipient; Year End 2002-2005 (USD Millions) (2) 2002 2003 2004 2005 United States 17390.4 18420.5 18851.2 19617.5 EU (3) 118190.0 150010.0 182521.4 178145.2 Netherlands 32087.7 48455.6 63268.1 65081.5 Luxembourg 24228.6 21755.9 26363.3 25154.7 France 16131.5 20921.2 24344.5 23866.6 United Kingdom 18715.0 20270.3 24158.2 22617.5 Germany 9272.4 13065.1 15758.7 15004.7 Spain 7125.3 9871.1 10882.0 9866.6 Belgium 3369.5 4569.5 5308.3 4944.5 Sweden 600.2 748.4 866.3 892.6 Other EU (4) 6659.7 10352.9 11572.4 10716.6 Switzerland 9321.5 10954.9 10559.0 10007.1 Brazil 2486.4 3473.1 3954.4 4935.1 Argentina 1633.6 2127.7 2178.3 2211.3 Japan 954.1 1137.7 1249.9 1164.1 Liechtenstein 144.1 169.0 194.4 175.9 Other 19552.1 22342.9 24901.6 26460.5 T O T A L 169672.0 208635.8 244410.2 243982.3 Table 4b: Stock of Italian Direct Investment Abroad by Major Recipient; Year End 2002-2005 (Percentage of Total) 2002 2003 2004 2005 United States 10.2 8.8 7.7 8.0 EU 69.7 71.9 74.7 73.0 of which: Luxembourg 14.3 10.4 10.8 10.3 Netherlands 18.9 23.2 25.9 26.7 France 9.5 10.0 10.0 9.8 Germany 5.5 6.3 6.4 6.1 United Kingdom 11.0 9.7 9.9 9.3 Spain 4.2 4.7 4.5 4.0 Belgium 2.0 2.2 2.2 2.0 Sweden 0.4 0.4 0.4 0.4 Other EU (3) 3.9 5.0 4.7 4.4 Switzerland 5.5 5.4 4.3 4.1 Brazil 1.5 1.7 1.6 2.0 Argentina 1.0 1.0 0.9 0.9 Japan 0.6 0.5 0.5 0.5 Liechtenstein 0.1 0.1 0.1 0.1 Other 11.4 10.6 10.2 11.4 T O T A L 100.0 100.0 100.0 100.0 Table 5a: U.S. Investment in Italy by Economic Sector End-Year 2002-2005 (USD Millions) (2) 2002 2003 2004 2005 Agriculture 29.2 36.3 40.2 41.3 Energy 434.2 545.7 627.6 576.2 Industry 9236.0 11812.3 13607.1 12958.7 of which: Machine 2098.1 2635.8 2979.7 2792.2 Transportation ROME 00000149 006 OF 008 Equipment 621.1 782.2 902.5 830.0 Chemical 2487.5 3162.7 3689.1 3447.5 Food 1306.9 1667.1 1920.3 2003.5 Textiles 179.5 230.3 273.6 260.9 Minerals/Metals 272.4 395.5 451.9 433.3 Other 2297.5 2938.7 3390.0 3191.3 Services 5647.2 7063.8 8173.4 7874.8 of which: Trade 690.0 853.6 987.0 933.9 Banking/ Insurance 2910.2 3505.6 4008.2 3771.0 Transportation/ Communication 456.2 582.0 666.5 636.4 Other Services 1590.8 2122.7 2511.7 2533.5 T O T A L 15373.7 19458.1 22448.3 21451.0 Table 5b: U.S. Investment in Italy by Economic Sector End-Year 2002-2005 (Percentage of Total) 2002 2003 2004 2005 Agriculture 0.2 0.2 0.2 0.2 Energy 2.8 2.8 2.8 2.7 Industry 60.3 60.7 60.6 60.4 of which: Machine 13.7 13.6 13.3 13.0 Transportation Equipment 4.0 4.0 4.0 3.9 Chemical 16.2 16.3 16.4 16.1 Food 8.5 8.6 8.6 9.3 Textiles 1.2 1.2 1.2 1.2 Minerals/ Metals 1.8 2.0 2.0 2.0 Other 14.9 15.0 15.1 14.9 Services 36.7 36.3 36.4 36.7 of which: Trade 4.5 4.4 4.4 4.3 Banking/ Insurance 18.9 18.0 17.9 17.6 Transportation/ Communication 3.0 3.0 3.0 3.0 Other Services 10.3 10.9 11.1 11.8 T O T A L 100.0 100.0 100.0 100.0 Table 6a: Italian Investment in the U.S. by Economic Sector -- End-Year 2002-2005 (USD Millions) (2) 2002 2003 2004 2005 Agriculture 48.0 51.3 52.3 62.6 Energy 1727.6 1816.0 1831.8 1877.2 Industry 6749.5 7061.3 7254.8 7589.1 of which: Machine 2484.3 2732.2 2777.2 2850.1 Transportation Equipment 775.6 863.6 950.8 966.9 Chemical 494.8 261.6 205.2 212.5 Food 249.5 264.1 273.6 289.3 Textiles 670.1 724.7 741.6 813.5 Minerals/ Metals 1440.5 1541.9 1589.1 1637.5 Other 634.7 673.3 717.3 819.4 Services 8865.3 9491.9 9719.6 10088.5 of which: Trade 690.0 1142.7 1177.4 1201.9 Banking/ Insurance 4179.5 4434.3 4615.7 4796.9 Transportation/ Communication 456.2 274.1 232.0 242.0 Other 3539.7 3640.8 3694.5 3847.7 T O T A L 17390.4 18420.5 18858.5 19617.5 ROME 00000149 007 OF 008 Table 6b: Italian Investment in the U.S. by Economic Sector -- End-Year 2002-2005 (Percentage of Total) 2002 2003 2004 2005 Agriculture 0.3 0.3 0.3 0.3 Energy 10.5 9.9 9.9 9.6 Industry 39.1 38.8 38.3 38.7 of which: Machine 14.7 14.3 14.8 14.5 Transportation Equipment 4.5 4.5 4.7 4.9 Chemical 2.7 2.9 1.4 1.1 Food 1.4 1.4 1.4 1.5 Textiles 3.9 3.8 3.9 4.2 Minerals/ Metals 8.2 8.3 8.4 8.3 Other 3.7 3.6 3.7 4.2 Services 50.1 51.0 51.5 51.4 of which: Trade 6.3 4.0 6.2 6.1 Banking/ Insurance 23.6 24.0 24.1 24.5 Transportation/ Communication 1.5 2.6 1.5 1.2 Other 18.7 20.4 19.7 19.6 T O T A L 100.0 100.0 100.0 100.0 Table 7: Direct Investment by Origin and Destination End-Year 2005 (USD Millions) Foreign Italian Net Investment Investment Italian in Italy Abroad Position EU 145179.5 178145.3 32965.8 of which: United Kingdom 25434.5 22617.5 -2817.0 Netherlands 40079.1 65081.5 25002.4 Germany 15309.3 15004.7 -304.6 France 25637.6 23866.6 -1771.0 Spain 4820.5 9866.6 5046.1 Luxembourg 24042.5 25154.7 1112.2 Belgium 1982.3 4944.5 2962.2 Sweden 3034.2 892.6 -2141.6 Other (4) 4839.5 10716.6 5877.1 Non-EU 56139.3 65837.1 9697.8 of which: USA 21451.0 19617.5 -1833.5 Switzerland 20115.7 10007.1 -10108.6 Liechtenstein 1975.2 175.9 -1799.3 Japan 3419.1 1164.1 -2255.0 Canada 815.8 1265.6 449.8 Argentina 246.8 2211.3 1964.5 Brazil 184.2 4935.1 4750.9 Other 7931.5 29460.6 18528.9 T O T A L 201318.8 243982.3 42663.5 (1) Annual net investment flow data compiled by Embassy Economic Section, based on Bank of Italy data and converted at the following end-year exchange rates: 2002 2003 2004 2005 Euro/Dollar 1.057 0.894 0.805 0.805 Net = New Investment Less Disinvestment. The volatility and huge changes from year to year in some sections can be explained in part by the fact that listed data are "Net": New Investment Minus Disinvestment. (2) Compiled by the Economic Section of the Embassy based on Bank of Italy data and converted at the following end year exchange rates: 2002 2003 2004 2005 ROME 00000149 008 OF 008 Euro/Dollar 0.958 0.799 0.746 0.847 (3) EU 15 data for 2002, EU 25 data for 2003-2005. (4) Austria, Denmark, Finland, Portugal, Greece, Ireland (other EU 25 countries),plus Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia. (5) Original data in euro and converted at the end-2005 exchange rate of one dollar = 0.847 euro. Sources: Italian Exchange Office And Bank Of Italy Annual Report ¶2005. ¶12. END PART TWO OF CABLE. SPOGLI