MFG 3013INTERNATIONAL BUSINESS

GROUP PROJECT MARKET ENTRY STRATEGY PROJECT (MESP)ITALY

1.0 INTRODUCTIONOur group chooses Italy as the country for the group project because Italy is a special country that is acknowledged as the birthplace of Western culture that we can find many art and monuments everywhere around the country. It is also famous worldwide for its delicious cuisine, its trendy fashion industry, luxury sports cars and motorcycles, diverse regional cultures and dialects, as well as for its beautiful coast, alpine lakes and mountain ranges. We already made some research about the market entry strategy for Italy. There are ten elements that we should consider before enter into Italian market: 2.0 CHAPTER 1: BACKGROUND OF ITALY2.1 National FlagFAITH

CHARITYHOPES

Figure 2.1: Italys national flagThe current Italian flag consists of three equal vertical bands of color which are green, white, and redwhich known as tricolor design. The modern flag of Italy wasnt made the countrys official flag until 1948. However, the three colors in the flag have being use since the late 1700s representing the variouscity-states and kingdoms that made up the country we know as Italy today.There are poetic meanings assigned to the colors of Italys flag, but they were only associated with the flag after the fact that the flag wasnt given its colors with those meanings in mind. From figure 2.1 above we will read that the fern green stands for hopes, bright white represents faith while flame scarlet symbolizes charity or that the green is for the hills, the white is for the mountains, and the red for the bloody wars for independence. Rather than poetry, however, its the historical merging of governments that we have to thank for the meanings behind the three colors of the Italy flag.2.1.1 History of Italys flag

2.2 Geography of ItalyGeographically, Italy is a large country with approximately 1,130 kilometers long. It has a total area of approximately 301,238 square kilometers of which 294,020km2(113,522sq.mi) is land and 7,210km2 (2,784sq.mi) is water. Italy's land borders are with Switzerland, France, Austria and Slovenia. There are two independent states within Italy's borders which are San Marino and VaticanCity.2.3 PopulationThe population ofItalywas estimated at61,070,224as of July 1 2014. On the other hand, thepopulation densityin Italy is203 people per km2. Italy's population is equivalent to0.84%of thetotal world population. From the list ofcountries by population, Italy ranks number23. 69%of the population in Italy isurban(42,101,235 people in 2014). In addition, themedian agein Italy is44.7 years.2.4 Climate Italy is a country of extremely varied landscapes and consequently experiences a similarly varied climate. Between the north and south there can be a considerable difference in temperature, particularly during the winter. In Milan it could be 2C and snowing, while at the same time 8C in Rome and 20C in Palermo. The differences are less extreme in the summer.The coastal regions, where most of the large towns are located, have a typical Mediterranean climate with mild winters and hot and generally dry summers. The length and intensity of the summer dry season increases towards the south. The coastal areas throughout Italy experience largely similar conditions from north to south with mild winters and hot, dry summers. The western side of the country experiencesmorerain than the eastern side which is windier, especially north of Pescara where Italy is subject to the strong.In contrast to the settled days of summer, the weather throughout Italy can be very changeable in the autumn, winter and spring. This unpredictable weather can continue until the end of May and can start any time after the beginning of September. The winter months tend to alternate between clouds and rain and warmer, sunnier weather.

In the extreme north, the climate can drop to below freezing in the winter and rise to 30 in the summer. This is a similar climate to that of Alpine Switzerland and Austria, although the Italian side tends to experience more precipitation and also slightly warmer weather in both summer and winter. In this area, summer tends to be the rainiest season and thunderstorms are frequent in spring, summer, and autumn. Lower down, the lake area in Lombardy tends to experience the mildest winter weather and the warmest, sunniest summers. Sunshine levels here are around 3 to 4 hours a day in the winter and around 9 hours a day in the summer.The south of the country, particularlySardiniaand Sicily, can get very hotindeed, with long periods of settled weather and continuous sunshine. During the daytime, sea breezes can lower the temperatures on the coast, but in the evening and overnight it can be extremely hot and humid, especially inland. As can be imagined, the south of Italy has the least rain and the most hours of sunshine of any other area in Italy. In Sardinia and Sicily, there is an average of 4 hours of sunshine a day during the winter and 9 hours a day in the summer.2.5 Natural ResourcesNatural resources of Italy including coal, mercury, zinc, potash, marble, barite, asbestos, pumice, fluorspar, feldspar, pyrite (sulfur), natural gas and crude oil reserves, fish, arable land.2.6 Production of ItalyOlives are one of the country's most lucrative exports. In 1999 production reached a record 7.243 million quintals (a quintal is a unit of weight equal to 100 kilograms, or about 220 pounds), confirming that Italy as the leading producer in the world. There are some natural factors that bring to this production which is the hot climate of Mediterranean that makes the southern region of Italy well suited for olive production, with most olives produced in Puglia.

3.0 CHAPTER 2: CULTURE IN ITALY 3.1 Components of Culture manners and customs1. Meeting Etiquette Greetings are enthusiastic yet rather formal. The usual handshake with direct eye contact and a smile suffices between strangers. Once a relationship develops, air-kissing on both cheeks, starting with the left is often added as well as a pat on the back between men. Wait until invited to move to a first name basis. Italians are guided by first impressions, so it is important that you demonstrate propriety and respect when greeting people, especially when meeting them for the first time. Many Italians use calling cards in social situations. These are slightly larger than traditional business cards and include the person's name, address, title or academic honors, and their telephone number. If you are staying in Italy for a long period of time, it is a good to have calling cards made. 2. Gift Giving Etiquette Do not give red flowers as they indicate secrecy. Do not give yellow flowers as they indicate jealousy If you bring wine, make sure it is a good vintage. Quality, rather than quantity, is important. Do not wrap gifts in black, as is traditionally a mourning color. Open then gift in time of receiving in front of giver.

Values among Italian. Appearances matter in Italy. The way you dress can indicate your social status, your family's background, and your education level. First impressions are lasting impressions in Italy. The concept of 'bella figura' or good image is important to Italians. They unconsciously assess another person's age and social standing in the first few seconds of meeting them, often before any words are exchanged. Clothes are important to Italians. They are extremely fashion conscious and judge people on their appearance. You will be judged on your clothes, shoes, accessories and the way you carry yourself. Bella figura is more than dressing well. It extends to the aura your project too - i.e. confidence and style

Italian attitude toward time, work, and cultural change The manner of dress for work leans toward the formal and conservative.Italians pay particular attention to dress and grooming. One is strongly advised against going to work in jeans and addressing employees by their first name (unless you are invited to).This could be disapproved of in the workplace. Italians are rather lax when it comes to absenteeism and delivery of work product after the agreed upon date (provided that evidence or a plausible justification is offered). Punctuality in arriving at work, and above all for meetings, is important. However, when you are invited for dinner, delay your arrival about twenty minutes, and in the case of a party or special occasion you may delay your arrival by about thirty to sixty minutes.

Religions The primary religion in Italy is Roman Catholic.

Languages in Italy Italianis the official language of Italy, and 93% of population is native Italian speakers. Around 50% of population speaks a regional dialect as mother tongue. Many dialects are mutually unintelligible and thus considered by linguists as separate languages, but are not officially recognized. Friulian, one of these dialects, is spoken by 600,000 people in the north east of Italy, which is 1% of the entire population. Other northern minority languages include Latin, Slovene, German, which enjoys equal recognition with Italian in the province of Alto-Adige, and French, which is legally recognized in the Alpine region of the Val d'Aosta.Albanian is spoken by 0.2% of the population, mainly in the southern part of Italy, as too are Croatian and Greek. Catalanis spoken in one city, Alghero, on the island of Sardinia, by around 0.07% of the population. On the rest of the island, Sardinian is spoken by over 1m, which comes to 1.7% of the Italian population.

Ethnicities and distinct subcultures Italy is forms by distinct subcultures:LombardsandGothsin the north; Greeks, Saracens, and Spaniards in Sicily and the south; Latins in and around Rome; andEtruscansand others in central Italy. For centuries, however, Italy has enjoyed a high degree of ethnic homogeneity. The chief minority groups are theGerman-speakingpeople in theAlto Adige(South Tyrol) region and theSlavsof theTriestearea.

Italys social structure

Chart 3.1: Social Structure in ItalyBased on the chart 3.1 above the highest level of hierarchy of social class rank in Italy is bourgeoisie (10% of the working population) whichincludes high-classentrepreneurs, managers, politicians, and self-employed people. The second level of hierarchy is white-collar middle class (17% of the working population) whichincludes middle class workers not employed in manual work. The next level is urban petite bourgeoisie (14% of the working population),which is mainly made up of shopkeepers, small-business entrepreneurs, self-employed artisans. The next level is rural petite bourgeoisie (10% of the working population) consists of small entrepreneurs or estate owners who operate in the countryside, mainly in agriculture and forestry. For the next is urban working class (37% of the working population) refers to the people employed in manual work and lastly is rural working class (9% of the working population) consists of people operating in the primary industry, such as farmers, loggers and fishermen.

3.2 Education in ItalyFree state education is available to children of all nationalities who are resident in Italy.Children attending the Italian education system can start with the Scuola dell'Infanzia also known as Scuola Materna (nursery school), which is non-compulsory, from the age of three. Every child is entitled to a place.Scuola Primaria (Primary School) At age six, children starts their formal, compulsory education with the Scuola Primaria also known as Scuola Elementare (Primary School). In order to comply with a European standard for school leaving age, it is possible to enter the Scuola Primaria at any time after the age of five and a half. At Scuola Primaria children learn to read and write and study a wide range of subjects including maths, geography, Italian, English and science. They also have music lessons, computer studies and social studies. Religious instruction is optional. Scuola Primaria lasts for five years. Classes are small with between 10 and 25 pupils. Pupils no longer take a leaving exam at the Scuola Primaria. At the age of eleven they begin their Secondary education.Scuola Media (Middle School)Scuola Secondaria di Primo Grado (First Grade Secondary School) All children aged between eleven and fourteen must attend the Scuola Secondaria di Primo Grado (First Grade Secondary School). Students must attend at least thirty hours of formal lessons per week, although many schools provide additional activities in the afternoons such as computer studies, music lessons and sports activities. Formal lessons cover a broad range of subjects following a National Curriculum set by the Ministero della Pubblica Istruzione, MPI (Ministry of Public Education). At the end of each term, students receive a school report. At the end of the third year, students sit a written exam in the subjects of Italian, mathematics, science and a foreign language. There is an oral examination of the other subjects. Successful students are awarded the Licenza di Scuola Media (Licenza Media). They then move to the Scuola Secondaria di Secondo Grado (Second Grade Secondary School)Scuola Superiore(High School)Scuola Secondaria di Secondo Grado (Second Grade Secondary School) - There are two types of Scuola Secondaria di Secondo Grado in Italy: the Liceo (like a British grammar school), which is more academic in nature, and an Istituto, which is essentially a vocational school. For the first two years all students use the same state-mandated curriculum of Italian language and literature, science, mathematics, foreign language, religion, geography, history, social studies and physical education. Specialised courses, called 'Indirizzi' begin in the third year.Liceo Classico (Classical High School):This lasts for five years and prepares the student for university level studies. Latin, Greek and Italian literature form an important part of the curriculum. During the last three years philosophy and history of art are also studied.Liceo Scientifico (Scientific High School) - Lasts for five years with an emphasis on physics, chemistry and natural sciences. The student also continues to study Latin and one modern language.Liceo Artistico (Fine Arts High School):Studies can last four to five years and prepare for university studies in painting, sculpture or architecture.Istituto Magistrale (Teacher Training School):Studies last for five years and prepare future primary school teachers. There is also a three year training course for nursery school teachers, but this diploma does not entitle students to then enroll at a university.Istituto d'Arte (Artistic Schools):Studies last three years and prepare for work within an artistic field and leading to an arts qualification (diploma di Maestro d'Arte).Istituti Tecnici (Technical Institutes):Studies last five years and prepare for both university studies and for a vocation. There is a majority of students in technical schools that prepare students to work in a technical or administrative capacity in agriculture, industry or commerce.Istituti Professionali (Professional Institutes):These studies lead, in three or five years, to achievement of a vocational qualification.In order to receive the Diploma di Scuola Superiore also known as the Diploma di Maturit (Secondary school diploma), students must pass written and oral exams. The first written exam requires an essay, written in Italian, on an aspect of literature, history, society or science. The second written exam requires the student to write a paper relating to their chosen specialization. The third exam is more general and includes questions regarding contemporary issues and the student's chosen foreign language.After completing the written exams, students must take an oral exam in front of a board of six teachers. This exam covers aspects of their final year at school. Successful students receive various types of Diploma according to the type of school attended. The Diploma di Scuola Superiore is generally recognized as a university entrance qualification, although some universities have additional entrance requirements.University is available to all students if they have completed five years of secondary school and received an upper secondary school diploma. It is possible for students who have attended vocational schools to attend university. If a student attended a four-year secondary school program, an additional year of schooling is necessary to qualify for university.Those attending university after completing their Diploma di Scuola Superiore go for three years (four years for teaching qualifications) to achieve their Laurea (Bachelor's Degree).Vocational education is called the Formazione Professionale. The first part of this lasts for three years, after which they are awarded the Qualifica Professionale. The second part, which lasts for a further two years, leads to the Licenza professionale also known as the Maturit professionale.

4.0 CHAPTER 3: POLITICS AND LAW IN ITALY

4.1 Political Systems Italy has its own hierarchy. The party that could be on top is Head of State / Executive Branch, which is the President of the country and for now be held by Sergio Mattarella. He is the one who responsible in heading the armed forces and overlooking the working of Parliament and the entire country. The next layer is Legislative Branch that deals with law making and drafting responsibility. It branch is sub divided into sections, namely, Parliament, Italian Senate and Italian Chamber of deputies and all these sub have its own elected members and can be dissolve by President. Lastly, the third layer is Judicial Branch that combined the Inquisitorial civil law and adversarial civil law system from the roots in the Napoleonic codes, statues and the Roman law. Here the Adversarial system has been adopted for appeal courts since 1988.[footnoteRef:1] [1: http://www.hierarchystructure.com/political-hierarchy-in-italy/]

4.2 Legal systemsItalian law is based on Roman law, particularly its civil law, and on French Napoleonic law. The Italian judicial system consists of a series of courts and a body of judges who are civil servants; Criminal Courts, Civil Courts, Administrative Courts and the judicial system is unified, every court being part of the national network. Furthermore, its structure is divided into three tiers:a. Inferior courts of original and general jurisdictionb. Intermediate appellate courts which hear cases on appeal from lower courtsc. Courts of last resort which hear appeals from lower appellate courts on the interpretation of law.4.3 The Effectiveness of the Legal System The legal system in Italy is not really effective because the Italian legal system is inordinately complicated and most lawyers (avvocato) and judges (giudici) are baffled by the conflicts between different laws, many dating back centuries, and EU directives serve to complicate matters further[footnoteRef:2]. [2: https://www.justlanded.com/english/Italy/Articles/Visas-Permits/Legal-System]

4.4 Potential MarketThe country can be a potential market even though the political and legal conditions in Italy is quite unstable, it still have a its own potential market which the market be appealing such as in industries of food, branded merchandise and item, tourism and many more.

4.5 Level of CorruptionThe level of corruption in Italy is high. In 2014 annual Corruption Perception Index (CPI) Report, Transparency International (TI) placed Italy in 69thposition alongside Ghana and Macedonia, which the higher the rank, the less corrupt it is perceived to be by international managers. The research also shows that mostly the corruption occurred in political parties.

4.6 Legislation PendingA draft legislative decree, currently pending consideration by the Italian parliamentary commissions, would allow companies with international operations to enter into five-year binding agreements with the Italian tax administration concerning the treatment of the following cross-border issues:1. Transfer pricing2. Inbound and outbound transfers of corporate residence, and determination of value of transferred assets3. Existence of a permanent establishment and attribution of profits4. Domestic and treaty-related taxation of cross-border payments of interest, dividends, and royaltiesThe proposed provisions would also apply for purposes of the Italian regional tax on productive activities (IRAP).The draft legislative decree would revise the rule for deductions of expenses related to transactions with counterparties that are residents of or established in low tax jurisdictionsthat is, black list jurisdictions.Currently, such expenses are disallowed as deductions if the taxpayer cannot provide sufficient evidence of either the business substance of the counterparty to the transaction or the genuine business reason for the transaction together with proof of its actual execution. The pending draft legislative decree would allow for expenses from such transactions to be deductible if the transfer pricing is at arms length (otherwise, the current rules for the most part would generally apply)[footnoteRef:3]. [3: April 2015 report, prepared by the KPMG member firm in Italy: Delegation Law for the reform of the Italian Tax System.]

5.0 CHAPTER 4: ECONOMICS AND MARKET IN ITALY5.1 Economic system in Italy, Development of economy, Economic TransitionAs we know, Italy has a diversified industrial economy which commonly we called it as a mixed economy. Economy in Italy will divide into two parts which are in the North and South Italy. In the North Italy, there is a developed industry that mostly dominated by the private company that builds many big companies. In South Italy, it is a less developed country, high subsidiaries, where almost all the residents there depending on the agricultural activities as their source of income. This is also led to high unemployment in the South Italy. Most of the Italian economy is driven by the manufacturing sector which produces high quality of consumer goods by small and medium sized enterprises (SMEs) and many of them are family-owned. Furthermore, Italy also has an underground economy, which contributes almost 17% of GDP. These activities are most common within the agriculture, construction, and service sectors. Italy is the third-largest economy in the euro-zone, but due to the high public debt and has barrier to growth have rendered it vulnerable to scrutiny by financial markets.

Graph 5.1: Italys economic freedom

As show in the graph 5.1, Italys economic freedom score is 61.7, making its economy the 80th freest in the 2015 Index. Its overall score has increased by 0.8 point since last year. This improvement is from the 5 of 10 economic freedoms they achieved. The 5 of economic freedoms are property rights, freedom from corruption, labor freedom, and monetary freedom, outweighing declines in business freedom, management of government spending, and fiscal freedom. Despite the euro zones challenging economic environment, economic freedom in Italy has increase by 1.4 points since 2011, maintaining the countrys moderately free rating. The improvements showed in labor and investment freedom in Italy have led increase in the sectorial gains[footnoteRef:4]. [4: http://www.heritage.org/index/country/italy]

However, Italy must have more substantial reforms to give a positive economic condition in future. A rigid labor market delays hiring and firing the workers, causing supply and demand mismatches. Government spending that consumes about 50 percent of the domestic economy has crowds out the productive investment. Growth is hindered by a property rights regime and rule of law that are weakly established by European standards. In the freedom of Italy, there is also has many problem which we called it as a crisis economic happened in Italy many years ago.

Italy was one of the six member states that established the European Economic Community (EEC), one of the predecessors of the Europe. After the 1950s, Italy changed it economy from a weak agriculture-based economy into one of the worlds most industrialized nations due to the World War II. It has a highly developed infrastructure and was ranked number 10 in The Economists Quality of Life 2010 Index. However, Italy at the time knowingly as the sick man of Europe due to economic stagnation, political instability, and challenges in pursuing reform programs listed in their country. The country grew only at a 1.26% rate from 1992 to 2008 in terms of real GDP, just prior to the global downturn. While Italy has developed a reputation for producing high quality luxury goods, the small size of Italian businesses prevented the country for benefiting from recent reforms. Due to its strong financial sector, which was not heavily exposed to property developments, Italy was not as badly affected by the global financial crisis as other countries.

Nevertheless, the country economy experienced the worst recession since WWII, but since 2009 has slowly restructured their economy particularly in industrial production. Italy is still exposing to negative market sentiment due to the concerns over its sovereign debt. It has a debt-to-GDP ratio of over 100% since 2008. The new technocrat government adopted a strict on austerity aimed at reducing this ratio. The International Monetary Fund highlights Italy show that Italy has a slow growth and has inflation differential with other Euro area countries and it has negative impact on the countrys competitiveness as the countrys most pressing problems. A number of reforms that listed in Italy have been recommended in order to raise Italys longer-term growth potential including fiscal, pension and labor market reform.

As the country faces challenges in geographic terms, as it has mountainous terrains that make agriculture difficult but industrial sector such as automobiles and machinery industry dominate theItalian trade. Due to the same reason, the Italian trade depends on the manufacturing sector.To be more advanced in knowledge, we must know that Italy also has been called as The Boot, which bring the meaning Italy as a bordering France, Switzerland, Austria and Slovenia and it occupies theninth positionin the top of thelargest exporters in Europe. As we can see nowadays, Italy popular around the world with its unique brands such as Armani, Valentino, Versace, Benetton, Prada, FIAT, Lancia, Alfa Romeo, Maserati and Lamborghini. With these products,Italyhas managed to create a niche in the global marketplace, especially where there is a high demand for premium products and superior goods.

6.0 CHAPTER 5: INTERNATIONAL TRADE AND GROSS DOMESTIC PRODUCT IN ITALY6.1 Exports and Imports in Italy

The import goods in Italy are the minerals, nonferrous minerals, energy products, chemicals and there are also textiles, clothing, and food and beverages that will be the top imports in Italy. Italy also imports goods from energy sector such as oil because it has very low oil deposits. It also has a very strong lack of minerals and metals, so it is compulsory for Italy to import them in order to manufacture goods. Italy has a very good advantage which is it has highly skilled workforce and great amounts of capital in regards to their manufactured foods, but the disadvantage is that is has lack of natural resources for energy and minerals, therefore is has a strong need of importing a majority of these products. The countries that Italy imports from are Germany, France, China, Netherlands and Spain. Products import by Italy is shown in the table 6.1 below. Fuels17%

Motor Vehicles10%

Raw Minerals10%

Chemicals9%

Foods7%

Electronic Devices8%

Table 6.1: Product import by Italy

The main exports inItalyare machinery that represents 18 percent of total exports, metals and metal products, worth 13 percent, clothing and footwear, motor vehicles, including luxury vehicles, motorcycles and scooters.Italyalso imports pharmaceuticals and other chemicals, and food. Around 56 percent of Italys products are exported to other European Union countries, but the most important ones are Germany, France, United States, Switzerland, and Spain. In 2008,Italyexperienced a decrease in the total global trade volumes, but that did not affect the economy that maintained a strong position, being ranked eighth in the world for export volumes. 6.2 GDP patterns in Italy

Figure 6.1: GDPNow we move to GDP in Italy. This statistic in figure 6.1 above shows the gross domestic product (GDP) in Italy from 2010 to 2014, with projections up until 2020. GDP refers to the total market value of all goods and services that are produced within a country per year. It is an important indicator of the economic strength of a country. In 2011, the GDP in Italy was about 2.28 trillion U.S. dollars[footnoteRef:5]. [5: http://www.tradingeconomics.com/italy/gdp-growth]

After increasing significantly year-over-year, Italys gross domestic product (GDP) has gone through several fluctuations since the global economic crisis in 2008 due to inefficiency with spending and incompetent leadership in Europe country. When analyzing thecountrys budget balance, which we look into the overall difference between revenues and spending, Italy has a negative balance every year over the past decade. However, their budget balance has improved every year since 2011. Since the country spent more than they earned,national debt continued to rise every year continued into 2014. Italys dependency on funding from other countries will lead to further debt, unless it finds a way to decrease spending or increase revenues.Despite the countrys ongoing recession, Italys GDP ranked the country in the top 10countries with the largest gross domestic productin 2014, ahead of economically developed countries such as Canada and Australia. This implies that Italys economical struggles are more a result of inefficient spending rather than a lack of production.

Almost70% of the Italian GDPis achieved in the service sector.Tourismplays a very important role for theeconomy in Italy and contributes nearly 10% to this sector. In recent years, some40 million touristsvisited the country every year. Nevertheless, the country, like many other European destinations, is still struggling with a decline in overnight stays after the tourist boom of the last decade[footnoteRef:6]. [6: https://www.gfmag.com/global-data/country-data/italy-gdp-country-report]

7.0 CHAPTER 6: BUSINESS-GOVERNMENT TRADE RELATION IN ITALY7.1 Government intervene in tradeGovernment intervene is a regulatory actions taken by a government in order to affect or interfere with decisions made by individuals, groups, or organizations regarding social and economic matters.According to the www.heritage.org, the percentage of trade freedom in open market at Italy is 88%, so the government intervene in international trade is 12% as at year 2015[footnoteRef:7]. The 12% intervention includes the methods used by the government to promote exports and to restrict imports. [7: www.heritage.org]

7.2 Promote exports 7.2.1 Public agency that promote export[footnoteRef:8] [8: Export Development and Promotion: The Role of Public Organizations edited by F.H. Rolf Seringhaus, Philip J. Rosson, 1991]

The Italian Trade Agency or Istituto nazionale per il Commercio Estero (ICE) is the government organisation in Italy which promotes the internationalisation of the Italian companies especially in the export activities that in line with the strategies of the Ministry for Economic Development. ICE provides information, support and advice to Italian and foreign companies to promote exports.In addition to its Rome headquarters, ICE operates worldwide from a large network of Trade Promotion Offices linked to Italian embassies and consulates and working closely with local authorities and businesses.[footnoteRef:9] [9: http://www.italtrade.com/about/about_us.htm]

ICE provides a wide range of services overseas helping Italian and foreign businesses to connect with each other: identification of possible business partners bilateral trade meetings with Italian companies trade delegation visits to Italy official participation in local fairs and exhibitions forums and seminars with Italian experts

7.2.2 Free trade zone within its bordersThere are two free trade zones or bonded warehouse in Italy located in Trieste and Venice. Goods of foreign origin may be brought in without payment of taxed or duties, as long as the material are to be used in the production or assembly of a product that will be exported.

Maps 7.1: Location of Venice and TriesteThe advantage of using a free trade zone or a bonded warehouse is having an European base of supply to assure customers prompt delivery and service, ability to maintain inventory at low cost, and a minimum of customs paperwork. In Free-trade zones exporters are able to:1) Defer duties and taxes for 180 days from the time that the goods leave the free-trade zone to enter another Europeans Union(EU) country2) Transform goods free of any customs restraints3) Obtain exemption from any duties on products coming from a third country.

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.

Italy also has numerous general warehouses that are located throughout Italy in all the port areas and cities. There are no limitations as to the type or origin of merchandise that can be stored in free trade zones, bonded or customs warehouses. The time limit for such storage is 5 years. Merchandise that deteriorates while in storage can be destroyed without the payment of a duty. 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.

7.3 Restrict imports7.3.1 Import customs procedures in Italy Customs ProceduresImport procedures are subject to a declaration on-line or on paper. As part of the "SAFE" standards advocated by the World Customs Organization (WCO), the European Union has set up a new system of import controls, the "Import Control System" (ICS), which aims to secure the flow of goods at the time of their entry into the customs territory of the EU. This control system, part of the Community Program eCustomer, has been in effect since January 1, 2011. Since then, operators are required to pass an Entry Summary Declaration (ENS) to the customs of the country of entry, prior to the introduction of goods into the customs territory of the European Union.Non-agricultural goods entering EU territory must adhere to customs formalities (summary declaration). This declaration must be carried out by the person bringing the goods to the territory. This procedure could take: - 45 days in the case of goods carried by sea; - 20 days in the case of goods carried other than by sea.Material can enter temporarily without customs fees if it will be used to manufacture products for export. In this case the import gives a guarantee (from an insurance company or bank) for the amount of duties and taxes. This guarantee will be reimbursed when the final product is exported. This process also applies to goods planned to be re-exported.Goods in transit only need a single EU transit document. Inward processing is free of customs treatment. Only goods sold in the EU market are eligible to import duty and taxes. For outward processing, duties and taxes apply only to the value added during the process. Only firms located in Italy or in the EU take advantage of this measure. Specific Import ProceduresThe simplified procedure is applied in the case of:- Repairs to goods; - Work for foreign backers; - Private commercial transactions; - Goods whose value is not above 300 thousand EUR. Importing SamplesThe inscription "no a la vente" (not for sale) is compulsory on commercial samples. Samples and advertising materials without commercial value are duty and tax free if they are useless for sale. Samples with commercial value can enter the country for a year but need a security (cash or bond) of 10% of the commercial value (tax and duty). These samples must be used in the country for demonstration purposes only. They must also complete the following conditions:-A certificate of origin-A list with a description of each sample (weight and value), preferably in Italian-A statement declaring the intention to use the samples for demonstration purposes only and to re-export without sale. This document must to be notarized by an Italian consulate.Samples with a price higher than 2,582 need the services of a local freight forwarder.

7.3.2 Customs duties and taxes on importsCustoms threshold (from which tariffs are required)EUR 150

Average Customs Duty (Excluding Agricultural Products)

While the principle of free movement of goods forms the internal part of the Customs Union, the CCT forms the external part as it enables uniform Customs duties to be applied to products from third party countries, whichever Member State is the country of destination. Duties for countries outside Europe are not very high, especially for industrial products (4.2% on average for the general tariff).

Products Having a Higher Customs Tariff

However, the sectors of fabrics and items of clothing (high duties and quotas) and foodstuffs (average duty 17.3% and many tariff quotas, CAP) still experience protection measures.

Preferential RatesGranted to imports from countries with which the European Union has signed trade agreements.

Customs ClassificationItaly uses the harmonized system.

Method of Calculation of DutiesCustoms duty is calculated Ad Valorem on the CIF value of the goods, in accordance with the Common Customs Tariff (CCT) for all the countries of the Union.

Method of Payment of Customs DutiesPaid in cash to the Customs Relations Office.

Import Taxes (Excluding Consumer Taxes)None.

7.4 Reported by China for unfair trade practicesItaly has been reported by China for breaking the WTO agreement in renewable energy generation sector at Italy and other member of EU.China made the report according to Articles 4.1 and 30 of the Agreement on Subsidies and Countervailing Measures ("SCM Agreement"), and Article 8 of the Agreement on Trade-Related Investment Measures ("TRIMs Agreement") regarding certain measures affecting the renewable energy generation sector. These measures include but may not be limited to domestic content restrictions relating to the feed-in tariff programs of EU Member States including but not limited to Italy and Greece[footnoteRef:10]. [10: https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds452_e.htm]

8.0 CHAPTER 7: FOREIGN DIRECT INVESTMENT IN ITALY

8.1 Position of Foreign Direct Investment

Compared to its European neighbors, Italy attracts little foreign direct investment (FDI) but nevertheless ranks 11th among global investors (UNCTAD, 2014 World Investment Report).FDI flow are especially volatile and fall and rise in reaction to the circumstances created by the economic crises. After recovering in 2011, they again fell sharply. In 2013, FDI influx to Italy recovered, reaching EUR 12 billion. However, this still represents a 58% decrease compared to their pre-crisis levels in 2007.A privatization program implemented by the government, along with the liberalization of the energy sector and telecommunications markets, offer interesting opportunities to investors. Italian investment abroad exceeds foreign investment in Italy. In spite of recent reforms, various interest groups, including organized crime, are still heavily involved in the country's economic life. The taxation system and heavy bureaucracy also hinder FDI. Nevertheless, Italy is considered a highly transparent country with a favorable business climate.8.1.1 FDI Inflows by Countries and Industry

Note: * The UNCTAD Inward FDI Performance Index is Based on a Ratio of the Country's Share in Global FDI Inflows and its Share in Global GDP. ** The UNCTAD Inward FDI Potential Index is based on 12 Economic and Structural Variables Such as GDP, Foreign Trade, FDI, Infrastructures, Energy Use, R&D, Education, and Country Risk. *** Green Field Investments Are a Form of Foreign Direct Investment Where a Parent Company Starts a New Venture in a Foreign Country By Constructing New Operational Facilities From the Ground Up. **** Gross Fixed Capital Formation (GFCF) Measures the Value of Additions to Fixed Assets Purchased By Business, Government and Households Less Disposals of Fixed Assets Sold Off or Scrapped.

Main Foreign CompaniesIn 2004, the UNCTAD counted 1 843 foreign companies in Italy (i.e. companies, at least 10% of whose capital is held by a foreign entity).

8.2 Position of nations balance-of-payments

* (1) According to the sixth edition of the Balance of Payments Manual, Secondary Income includes most of the items which were previously classified as "Current Transfers"

In the twelve months to March 2015 the current account balance recorded a surplus of 36.7 billion (2.3 per cent of GDP), from 19.8 billion in the previous twelve months. The large improvement confirms a trend started in mid-2011, driven by the increase in the merchandise trade balance, the surplus of which reached 54.2 billion (3.4 per cent of GDP).

8.3 Possible surplus and deficit and affecting the nations economic performance

8.3.1 Factors Causing Italian Debt Crisis Poor Performance of Economic GrowthSince 1990, Italy has experienced sluggish growth. With only small increase in real GDP it has proved difficult to reduce the debt to GDP ratio.Unfortunately, Italy is caught in a familiar trap. Being in the Eurozone: Italy is facing rising bond yields and pressure to pursue austerity measures. Spending cuts and higher taxes are depressing demand further No independent monetary policy to offset fiscal austerity. ECB unwilling / unable to act as lender of last resort mean markets fear liquidity crisis in Italy. No ability to devalue and restore competitiveness No real fiscal transfers to stimulate spending

Long Term Tax Collection ProblemsItaly has a poor track record on tax collection and wasteful government spending. In particular, the size of the black economy means that substantial parts of economic activity remain untaxed.Economists estimate that around 540 billion euros (434 billion) is lost through Italys black economy through tax evasion by individuals and companies the figure is around 35 per cent of the countrys GDP and last year more than 12 billion euros were recovered.

CompetitivenessItaly has lagged behind the EU average for competitiveness.The other issue is the long-term decline in Italian competitiveness. Wage costs have risen faster than Germany and this has contributed to slow export growth. However,without option of devaluation, the process of restoring competitiveness is liable to be very slow, relying on internal devaluation and wage cuts. This article argues that for countries with high debt to GDP, internal devaluation is liable to lead to even higher public sector debt (The Vox).For a country with a debt to GDP ratio as high as 100%, an internal devaluation of 20% (a common estimate of what is needed to restore competitiveness in the South of Europe) amounts to a corresponding increase in the value of its debt in real terms.

Fall in Confidence and expectationsItaly has suffered from a 70% fall in inward investment since 2007; this is due to concerns over Italy as a place to invest. Factors such as: Higher labour costs. Italy scores low in the World Bank indicator of how easy it is to do business 80th.

8.4 Position of capital account balance

Net capital account records acquisitions and disposals of non-produced non-financial assets, such as land sold to embassies and sales of leases and licenses, as well as capital transfers, including government debt forgiveness. The use of the term capital account in this context is designed to be consistent with the System of National Accounts, which distinguishes between capital transactions and financial transactions. Data are in current U.S. dollars.

Source:World Development Indicators (WDI), April 2015

9.0 CHAPTER 8: REGIONAL ECONOMIC INTEGRATION OF ITALY

9.1 Regional Integration with European UnionItaly has participated in European Union (EU) and has been a member state since 1 January 1958.

Austria(1995)Belgium(1958)Bulgaria(2007)Croatia(2013)Cyprus(2004)

Czech Republic(2004)Denmark(1973)Estonia(2004)Finland(1995)France(1958)

Germany(1958)Greece(1981)Hungary(2004)Ireland(1973)Italy(1958)

Latvia(2004)Lithuania(2004)Luxembourg(1958)Malta(2004)Netherlands(1958)

Poland(2004)Portugal(1986)Romania(2007)Slovakia(2004)Slovenia(2004)

Spain(1986)Sweden(1995)United Kingdom(1973)

Table 9.1: Members of EU[footnoteRef:11] [11: http://europa.eu/about-eu/countries/index_en.htm]

9.2 Driven of Integration Italy integration with EU has been driven by Economic and monetary union (EMU) that refers to the close coordination of the economic policies of the Member States at European level, with 18 European Union (EU) countries having gone further in adopting the euro as their currency. Under this policy, Member States are committed to avoid excessive budget deficits (Stability and Growth Pact). The relevant background to EMU can be found in the Treaty on the Functioning of the European Union (Title VIII on economic and monetary policy). With this policy, the situation in 2008 that occurred sovereign debt crisis, economic and fiscal governance across the EU has been substantially reinforced, particularly in the euro area. Meanwhile, there is no exact objective in terms of political, however, briefly speaking, Italy needs a union to harmonize laws and adopt common policies on an increasing political issues like corruption, taxes and so on. Lastly, for the social objectives, Italy needs integration with the European society due to factors such as technological progress, globalization and an ageing population. Unfortunately the integration come off because of the crucial problems and heavily impacted by the economic and financial crisis in 2008. Some of the policies like European employment, social affairs and equal opportunities policies have the goals to improve living conditions by encouraging employment, sustainable growth and greater social interrelation.The EU is a catalyst in social change, pursuing to increase employment and worker mobility, improve the quality of jobs and working conditions, inform and consult workers, solve poverty and social exclusion, promote equal opportunities and oppose discrimination, as well as improve social protection systems[footnoteRef:12]. [12: http://eur-lex.europa.eu/browse/summaries.html]

9.3 International Companies in Italy As we know, the level of regional integration of EU is Economic Union. It means that the countries remove barriers to trade and the movement of labor and capital among members set a common trade policy against nonmembers and coordinate their economic policies. Italy have both that are domestic international companies and foreign international companies. The domestic companies of Italy such as Gucci, Alfa Romeo can cope with the foreign international companies like General Electric, AT & T, Boeing, Pfizer, and McDonalds by share the same Euro currencies between the countries that easier the transaction between them. Furthermore, the export and import will be less procedure and agreement because in the same union meanwhile the information they sharing likes the culture, population and target market also can be delivered easily. From the research, the companies in Italy succeed in coping their business because of Italy is among the seven most industrialized nation in the world, with a highly developed production industry whereas its economy is among the broadest in the world that focus on cars, electronics, fashion products and machinery while the raw materials are usually imported. The companies always find the initiative to cope their business likes in the EU policy, they help the business by redrawing its policy to ensure a strong, diversified, resource-efficient and competitive industrial base to meet the challenges of the global market. The GDP in Italy is quite high which is the market demand are high. However, the companies need to concern in the debt. Meanwhile the information they sharing likes the culture, population and target market also can be delivered easily.

10.0 CHAPTER 9: INTERNATIONAL FINANCIAL MARKET IN ITALY 10.1 Milan is an important financial centerMilan is the main industrial, commercial, and financial center of Italy and an outstandingglobal city. Its business district hosts the Borsa Italiana(Italy's main stock exchange) and the headquarters of the largest national banks and companies[footnoteRef:13]. [13: http://en.wikipedia.org/wiki/Milan]

10.2 Volume of Italian government bonds In 2014 the volumes of Italian government bonds traded was increasing. In detail, from 863.1 billion in 2013 they increased to 1,429.2 billion in 2014. Compared to 2012, when the trade in Italian government bonds reached 536 billion, the volumes have almost tripled. The increase in trade is due to the growing interest from international investors in the Italian public debt in a context of decreasing interest rates. For example, the Italy Government Bond 10Y increased to 1.84 percent in May from 1.52 percent in April of 2015.[footnoteRef:14] [14: http://www.italy24.ilsole24ore.com/art/markets/2015-02-09/trade-government-bonds-tops-14-bln-2014-121852.php?uuid=AB5JBirC]

10.3 The performance of Italy Stock Market The Italy Stock Market (FTSE MIB) increased from 19569 Index points in January to 22175 Index points in March of 2015. Stock Market in Italy averaged from March until June and the peak Index points is 22290.08 on the first June. The Index point starts to fall from September until the end of the 2014.10.4 The exchange rate 1 Euro equal to 1.09 US dollars in 28 May of 2015. 1 Euro equal to 4.06 Malaysian Ringgit in 28 May 2015.Exchange rates are determined by supply and demand. For example, if there was greater demand for Italian goods then there would tend to be an appreciation (increase in value) of the euro (). If markets were worried about the future of the Italy economy, they would tend to sell euro, leading to a fall in the value of the euro (). If inflation in the Italy is relatively lower than elsewhere, then Italy exports will become more competitive and there will be an increase in demand for Euro () to buy Italy goods. Also foreign goods will be less competitive and so Italy citizens will buy less import. Therefore countries with lower inflation rates tend to see an appreciation in the value of their currency.If speculators believe the euro () will rise in the future, they will demand more now to be able to make a profit. This increase in demand will cause the value to rise. Therefore movements in the exchange rate do not always reflect economic fundamentals, but are often driven by the sentiments of the financial markets. For example, if markets see news which makes an interest rate increase more likely, the value of the pound will probably rise in anticipation.Tourism is one of Italy's most important industries and a major source of foreign exchange. Italy has a large foreign trade, facilitated by its sizable commercial shipping fleet. The leading exports are engineering products, textiles and clothing, machinery, motor vehicles, transportation equipment, chemicals, food and beverages, tobacco, minerals, and nonferrous metals. The main imports are raw materials, chemicals, transportation equipment, metals, textiles and clothing, foodstuffs, and petroleum. The chief trade partners are Germany, France, Spain, and Great Britain.The Euro decreased to 1.09 US dollars in May from 1.12 in April of 2015 and was forecast to continue fall until the next year. It will influence the export and tourism activity revenue to decrease also due to the drop in currency although Italy one of the top 20 in export country[footnoteRef:15]. [15: Annual report on Exchange Arrangements and Exchange Restrictions 2014]

11.0 CHAPTER 10: INTERNATIONAL MONETARY SYSTEM IN ITALY

11.1 International Monetary FundIMF is stand for the International Monetary Fund. It is an organization of 188 countries which working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduces poverty around the world. Italys effective membership date of IMF is on March 27, 1947.Includes Italy, most of the countries participate in the regional monetary system to manage their exchange rates. The original currency used in Italy was lira. The lira (plural lire) was the currency of Italy between 1861 and 2002 and of the Albanian Kingdom between 1941 and 1943. However, Italy has changeover from the lira to the euro in order to control the inflation. Since then, Italy has entered in the exchange rate mechanism (ERM) of the European Monetary System.

11.2 Euro system: Italy Monetary Policy

11.3 Effect of inflation and interest ratesEven Italy enters into euro to control the inflation, but still they cannot run from the inflation and interest rates at all. Graph 11.1 below shows the inflation of Italy from year 1999 to 2009.

Graph 11.1: The inflation in Italy

Although the inflation rate could be reduces by using the euro, the lower inflation rate still give the side effect to the country. Some of them are:EffectsExplanation

A loss of value of money. Decrease the purchasing power of the consumers. Consumer can only purchase fewer goods and services with the same amount of money, or they have to pay an increased amount for the same goods and services.

Average price in economy increase. Effect to the manufacturing and production.This causes an increase in the cost of production and if firms are not able to pass the increased costs onto consumers, they will be making a reduced level of profits.

Difficulty to plan for the long term.As prices dont rise in a linear trend, firms have to make the difficult decision of entering into a long term contract or not. Firms generally need to know that there is stable inflation in order to plan their investments in advance e.g. purchasing new machinery.

11.4 Impact of exchange rate of Italy Import and exportDepreciation of the euro leads to higher import prices and lower export prices in foreign currency, the expenditure switching effect increases net exports and demand for domestic goods. The recent exchange rate movements benefit countries that export more to the US and the UK and are relatively open such as Ireland. The exports of Italy and Spain are estimated to respond relatively strongly to currency depreciations, though these countries are relatively closed economies.

Purchasing powerPurchasing power is relative value of different currencies. By knowing the purchasing power, it allows us to estimate what the exchange rate between two currencies would have to be in order for the exchange to be at par with the purchasing power of the two countries' currencies. Purchasing power can be directly affected by the exchange rate of the currencies. The higher exchange rates of the euro lower the purchasing power of the consumers. As an example, consumer will be less able to buy a cloth with the amount of 10 euro because the higher exchange rate increases the price of the cloth.

11.5 Forecast exchange rates of ItalyIn 2016, the Euro Exchange Rate | EUR/USD | Italy is expected to increase to 1.13. In the long-term, the Euro Exchange Rate | EUR/USD | Italy is projected to trend around 1.15, 1.20 and 1.31 in the years of 2020, 2030 and 2050 respectively. Euro Exchange Rate | EUR/USD | Italy Forecasts are projected using an autoregressive integrated moving average (ARIMA) model calibrated using an analysts expectations by model the past behavior of Euro Exchange Rate | EUR/USD | Italy using vast amounts of historical data and adjust the coefficients of the econometric model by taking into account our analysts assessments and future expectations.

12.0 CONCLUSION

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