Chinese OFDI in Italy Thomas Rosenthal

Italy’s slump in attractivity Inward FDI in Italy 12,4 billion euros down 58% since 2007 the year before the crisis began. Worse period 2008: capital flight and 2012, year of the debt crisis. Source: Censis. In 2013 Italy only represents 1,6% of global stock of FDI, Spain (2,8%); Germany (3,1%); France (4,8%) UK (5,8%). Source: UNCTAD. WB “Doing Business in” report ranks Italy at 65th place in 2013 (2012: 67th). This report provides a measure of the ease of doing business across 189 economies in the world as to starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts, resolving insolvency. Chinese investors are pragmatic: browse for opportunity and take into account ease of doing business.

Reasons to operate in EU

Reasons to operate in specific EU country

Italy’s reputational deficit Reputational issue: reputation impacts the competitiveness of a country. Not only with reference to hard factors such as public debt but to softer such as society, law, politics. The factors which drive away capitals are diffuse corruption, political instability, political scandals, pervasive organized crime, red tape, the slowness of court procedures, as well as a rigid labour market. According to the Heritage Foundation: which ranks Italy 8 6th in its Economic Freedom Index “Despite repeated reform attempts, short-term legislative reforms have not been implemented effectively, and the economy remains burdened by political interference, corruption, high levels of taxation, and a rigid labor market. Due to the complexity of the regulatory framework and the high cost of conducting business, a considerable amount of economic activity remains in the informal sector.” Reputation Institute of New York - which measures esteem, admiration and respect based on 42 thousand interviews in around 50 countries - places Italy 16° (-4 positions since 2012). Italy highly ranked for lifestyle but ranked low for the drivers of economic development. As a consequence: interest for tourism and goods with high symbolic value, but not as a destination for investment.

Italy’s reputational deficit Good fundamentals (Made in Italy, manufacturing excellency, Italian way of life, landscape and culture) which remain solid but contrast with the overall judgment on our country. 5 th manufacturing power, 11 th exporter. What are Italy’s pull factors for China? Resource-seeking X but things changed in 2014 ! Market seeking √ B2B B2C Strategic asset seeking √ One of the most industrialized countries in the world (unexploited China potential) China Go-Global – and RMB not fully convertible. Renzi’s trip to restore confidence in the country.

China stock of outward FDI Source: CeSIF; CEIC; MOFCOM

Main destinations of Chinese FDI, Source: CeSIF; CEIC; MOFCOM EUROPE: 8% ASIA : 74% ITALY: 0,27% OFDI 3rd Q 2013: 88 bn USD Toward parity with FDI

Chinese OFDI flows in Italy Source: CeSIF; CEIC; MOFCOM Note: *2014 I Quarter data Annualised : as expected was a negative year.

No of FIEs in Italy: China and HK Source: Banca dati Reprint; R&P, Polimi; CeSIF

No of FIEs in Italy: China and HK Source: Banca dati Reprint; R&P, Polimi; CeSIF ChinaHong KongTotal No. Investor groups No. Chinese- invested italian companies Employees Revenues (million euros) HK participated companies drive down total employees and revenues

Sectoral distribution of Chinese FDI Source: CeSIF; Banca dati Reprint; Politecnico di Milano Number of enterprises as of end 2013 Number of employees as of end 2013

Geo distribution of Chinese FDI 37% 7% 12% 7% 16% 7% 14% Source: Banca dati Reprint; Politecnico di Milano

Selected Chinese investors

Opportunities for China and Chinese enterprises Reach Italian/EU Market reach the European Union market both for capital goods and consumer goods jump over barriers serve export growth: link between trade and investments Efficiency seeking and country risk diversification disperse the value chain and diversify risk Technology access and industrial upgrade Achieve higher margins

Opportunities for Italy and Italian companies – China inbound FDI Rebalancing economic relations with China Access to capital Increase K/L ratio Increase S/I ratio Facing the China challenge market disciplining effect: market for corporate control (i.e. takeover threat and activity in a system) as an external mechanism to restructure and seek efficiency Bring China home” Get a better understanding of China Absorb management techniques and technology A “Reverse China Strategy” and reaching third markets through global alliances“

Chinese OFDI in Italy Thomas Rosenthal