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

UNCLAS SECTION 01 OF 02 MILAN 000013

SENSITIVE
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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).


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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