U.S. INVESTORS SPEAK OUT ON DOING BUSINESS IN ITALY

UNCLAS SECTION 01 OF 02 MILAN 000013 SENSITIVE SIPDIS STATE PASS USTR E.O. 12958: N/A TAGS: EINV ETRD ECON PGOV IT SUBJECT: U.S. INVESTORS SPEAK OUT ON DOING BUSINESS IN ITALY REF: ROME 82 This cable is Sensitive but Unclassified. Please protect accordingly. ¶1. (SBU) Summary: American companies in northern Italy (which hosts nearly 80 percent of the country's foreign investment) have given us a frank view of the investment climate. The major areas of concern are structural: inflexible labor markets, a convoluted legal framework and slow legal process, overregulation, and an obstructionist bureaucracy. Italy is losing its appeal as an investment destination to neighbors, but more to rising competitors in Eastern Europe and Asia. The problems are not all from within Italy, though, with local managers complaining about poor investment decisionmaking in their own headquarters and aggressive tactics by third-country governments to promote their co-nationals. In fact, most agree, Italy remains a relatively attractive market with a highly-skilled technical workforce that comes up with some of the best ideas in the world. The GOI could improve the country's appeal by promoting this skilled workforce -- and their ideas -- and by offering incentives that help overcome the structural barriers (that all agree won't be fixed in the short run). Though the responsibility for structural change lies solely with the GOI, the lack of an effective American Chamber of Commerce here makes it difficult for American firms to present a consistent and constructive message. End summary. Structural Problems are Severe ¶2. (SBU) As part of the preparation of the 2010 Investment Climate Statement (reftel),we held a series of frank conversations with U.S. business representatives in northern Italy -- where about 77 percent of foreign investment resides. U.S. investment in Italy, about $32 billion at the end of 2008, lags behind that in other Western European countries. Some U.S. firms already in Italy continued to make new investments in 2009, while others cut back on their operations. However, we saw few notable new investors enter the country during this troubled year. Though the global economy's woes are certainly to blame for the slowdown, our contacts made clear that there were systemic problems here that make Italy a tough sell. ¶3. (SBU) Companies agree that one of the worst obstacles to investment in Italy remains the inflexibility of the labor market. Italian law and political pressure makes it difficult, and expensive, to lay off workers. Investors also point out the challenges of dealing with bureaucratic lethargy and obstructionism -- both at the regional and national levels. A confusing and often contradictory commercial legal framework (with new laws and regulations not always reconciled with existing ones) allows the multiple layers of bureaucracy wide latitude for interpretation and make it difficult for investors to develop a national strategy. Overregulation is another area of concern to investors as is the slowness of the legal system and heavy taxation (in both cases not discriminatory against foreign investors, but worse than in neighboring countries). Finally, several firms mentioned to us shortcomings like insufficient infrastructure, inefficient Customs procedures, and a high cost of energy. ¶4. (SBU) Despite the challenges, however, there is no consensus that Italy has a significantly worse investment climate than other Western European markets. Still, the businesspeople told us that potential investors aren't likely choosing between, say, France and Italy but between Italy and Eastern Europe or Asia. In conversations with Italian officials in the Northeast, we've heard complaints about Slovenia and southern Austria "stealing" away investment (both foreign and domestic) by offering incentives that the Italian government does not. A Silver Lining ¶5. (SBU) When asked whether, if they had to do it all again, they would have invested in Italy, the responses were also mixed. In general, manufacturers and high-tech firms agreed that they probably would have. Service providers, particularly in the financial sector, thought that perhaps it would have been better just to sell products in Italy (as the market is a promising one) but to base operations outside (in Switzerland for instance). MILAN 00000013 002 OF 002 ¶6. (SBU) Indeed, the news is not all dire. The more bullish manufacturers and high-tech firms laud the quality of Italy's technical workers and design. They note that the pool of skilled, technical labor is "remarkable" here, especially since the shake-up over the last several years of Italy's homegrown IT and high-tech giants (Telecom Italia, Olivetti, etc.) has weakened domestic demand for such talent. The small and medium-enterprise (SME) backbone of the Italian economy (more than 90 percent of the economy producing 85 percent of the GDP) is a tremendous source of good ideas -- both for design and production. Some point out, though, that while the quality and quantity of the labor force is high here, it is also rather expensive (though more in terms of benefits and taxes than in terms of actual wages). The expense, combined with the overall inflexibility of the labor market, reduces competitiveness. ¶7. (SBU) Obstacles to foreign investment do not come solely from within Italy, however. Many companies mention external issues as well such as short-sighted decisions from their own U.S.-based managers who undervalue positive aspects of Italy in making decisions on investment and cutbacks. This has become more problematic in the last year or so as U.S. multinationals have made wholesale cuts around the world. Some also note the challenges of competing with other foreign firms that are backed aggressively by their governments (China and France are the most commonly mentioned) to get the tastiest investment morsels -- especially those that involve privatization or government procurement. Comment: No Need to Fix Everything at Once ¶8. (SBU) Even with the multitude of difficulties they face, most U.S. companies with whom we spoke remain hopeful. Trimming of staff or operations is tied to economic realities and resulting global cutbacks more than Italy-specific problems. They freely admit that structural problems (labor market, bureaucracy, etc.) are likely unfixable in the short/medium term. However, they have a number of shorter-term ideas for how the GOI could improve conditions for foreign investors. For example, they hope that the GOI will do more to underwrite the SMEs and create high-tech R&D jobs that are the source of ideas and a top-notch labor pool. They also wonder why the GOI (or regional governments) couldn't use incentives to offset some of the structural problems that make Italy a medium-risk/low-reward option. Though the responsibility for structural change lies solely with the GOI, the lack of an effective American Chamber of Commerce here makes it more difficult for American firms to present a consistent and constructive message. Perez