ITALY TRADE AND INVESTMENT STATISTICAL NOTE

International trade, foreign direct investment and global value chains ITALY TRADE AND INVESTMENT STATISTICAL NOTE 217 International trade and foreign direct investment (FDI) are the main defining features and key drivers of global value chains (GVCs). However, despite their strong complementarities, the two flows are typically presented and treated separately in the statistical information system. Drawing on new and improved measures of trade and investment, this country note provides relevant statistical information from OECD databases on trade, investment, the activities of multinational enterprises (MNEs) and global value chains (TiVA). It sheds new light on the trade-investment nexus by highlighting the interrelationships between trade and FDI, their economic impact in the context of GVCs, and the role of MNEs as the main directors of these flows. The data are as of 1 May 217. More information and country notes are available at www.oecd.org/investment/tradeinvestment-gvc.htm. One-quarter (25% in 214) of economic activity (GDP) in Italy depends on foreign markets, around the same as in Spain and the United Kingdom. MNEs play a significant role in driving exports, with Italian MNEs accounting for almost 4 of Italy s gross goods exports and local affiliates of foreign MNEs account for almost one-quarter of goods exports. Italy s outward FDI (equivalent to 25% of GDP in 215) was slightly larger than its inward FDI (19%). Under a broader notion of international orientation that captures the impact on national income of exports and sales through foreign affiliates, Italy s international orientation was equivalent to one-quarter (25%) of GDP in 214, the same as suggested by trade data alone. Considering both trade and investment through this broader perspective can also shed new light on Italy's most important partner countries and how they supply the Italian market. For example, while most partner countries supply Italian consumers mainly through trade, the Swiss do a substantial share through sales by foreign affiliates. Furthermore, considering both trade and investment the United Kingdom moves ahead of China as a more important partner due to its more extensive investment links with Italy. The top manufacturing exporting industries in Italy are machinery and equipment (MEQ), textiles (TEX) and chemicals and chemical products (CHM). The chemicals industry has a high share of value added by foreign-owned firms and a high export orientation illustrating the role inward investment can play in GVC integration. In contrast, the textiles industry has a low share of value added by foreign-owned firms, but a high export orientation showing the strength of Italian enterprises. Both the services content of its exports and the share of inward investment in the services sector for Italy are in the mid-range of OECD economies. OECD 217 www.oecd.org/investment/trade-investment-gvc.htm

Growth Rates Trade and investment in Italy Growth in trade has recovered since the global and euro crises but slowed slightly in 216 Like many European economies, Italian trade contracted significantly at the height of the global crisis and again during the euro crisis, with imports particularly shrinking in 212. Italian trade growth was below the OECD average in the pre-crisis years but export growth has tracked OECD rates since the crisis. However, in 216, export growth slowed to 2.4%. 15 1 5-5 -1-15 -2 Figure 1. Growth rates of trade and GDP for the OECD and Italy, 21-216 21 22 23 24 25 26 27 28 29 21 211 212 213 214 215 216 Italy GDP OECD GDP Italy Exports OECD Exports Italy Imports OECD Imports Source: OECD SNA Gross exports amounted to USD 554 billion in 216 (33% of GDP), and gross imports to USD 491 billion (3 of GDP). Gross trade figures however overstate the real contribution of trade to the economy. In value-added terms, exports contributed 25% of total GDP in 214, the highest recorded, but below the OECD median (grey diamond). The contribution of direct and indirect imports to domestic final demand measured 21% in 214. 35% 3 25% 2 15% 1 5% Figure 2. Trade in value added terms, imports and exports, 21-214 21 22 23 24 25 26 27 28 29 21 211 212 213 214 Imports (Foreign value added in domestic final demand) Exports (Domestic value added in foreign final demand) OECD Exports (Domestic value added in foreign final demand- median) Source: OECD-WTO Trade in Value Added Data Investment is more outward than inward Both outward (equivalent to 25%) and inward (19%) FDI stocks as shares of GDP are low relative to other OECD countries and FDI is more outward orientated (Figure 3). In 215, Italy s share of the OECD total outward FDI stock (2.4%) and its share of the total inward FDI stock (2.1%) were below its share of GDP (3.5%) (Figure 4). 2

TUR SVN IRL ITA NZL LUX BEL HUN PRT POL ISL AUS CHL CAN NLD NOR EST FRA DEU GBR ESP AUT USA SVK GRC DNK SWE FIN CHE CZE LVA % GDP % GDP Figure 3. FDI stocks and income as a share of GDP total 3 1.4 25 2 15 1 5 213 214 215 216 Inward FDI stock Outward FDI Stock Income payments Income receipts Source: OECD FDI Statistics (BMD4) 1.2 1.8.6.4.2 Figure 4. FDI stocks and GDP as a share of OECD total, 215 4. 3. 2. 1.. GDP Inward Outward Source: OECD FDI Statistics (BMD4) Foreign-owned firms directly sustained 8% of jobs in the private sector in 213. Reflecting the relatively small size of inward investment compared to other OECD economies, foreign-owned enterprises accounted for 8% of jobs in the private sector in 213 and 14% of private sector value added produced in Italy, excluding the agriculture and finance sectors. and are more export intensive than domestically owned firms On average, foreign-owned firms in Italy are more export intensive (share of exports in turnover) than domestically owned firms; however their export intensity is below the OECD median, partly Figure 5. Export and import intensity of domestic and foreign-owned enterprises 45% 4 35% 3 25% 2 15% 1 5% Italy OECD Italy OECD Median Median Export Intensity Domestic-owned firms Import Intensity Foreign-owned firms Source: OECD AMNE and Trade by Enterprise Characteristics (TEC) statistics (211) reflecting a relative orientation towards the large domestic market. The import intensity of foreign-owned firms (share of imports in purchases) is significantly higher for foreign-owned than domestic firms. Domestic MNEs provide important channels to penetrate foreign markets via affiliates In 215, Italy received USD 12 billion in income from its outward FDI, equivalent to approximately 1% of GDP. Italy s rate of return at 2.6% (green bar) on its outward FDI is at the lower end of OECD countries, and below its 214 rate (see chart insert). The return to foreign investors in Italy was 3.5% in 215, also at the lower end of OECD countries. 18% Figure 6. Return on investment, income receipts and payments as a share of inward and outward stocks, 215 13% 8% 3% -2% Inward FDI return Outward FDI Return Source: OECD FDI Statistics (BMD4) 3

% GDP % Goods exports and via exports Relative to other European economies Italian parent MNEs play a significant role in GVC integration, almost 4 of goods exports are by Italian parent MNEs, and domestic non- MNEs account for a further 37% of goods exports. But Italy s export orientation is low relative to OECD economies Figure 7. Goods Exports by firm type, the role of Italian MNEs 1 8 6 4 2 AUT DNK FIN FRA HUN ITA POL PRT Foreign-owned firms Domestic MNEs Domestic firms Source: OECD TEC statistics (211) Exports (in value added terms) contribute around 25% of Italian GDP, this is relatively low compared to other OECD economies, but comparable with the United Kingdom and France, which may in part reflect low levels of inward investment and their relatively low export intensity (compared to foreign affiliates operating in other countries). However, export orientation has recovered since the crisis (see chart insert). Figure 8. Export orientation, foreign affiliates value added and import content of exports, 214 8 7 6 5 4 3 2 1 LUX IRL HUN CZE SVK SVN EST LVA NLD BEL POL NOR AUT SWE DEU DNK PRT FIN ESP ITA GBR FRA JPN USA Domestic value added in foreign final demand (% of total domestic value added) Value added produced by foreign controlled enterprsies (share of domestic total) Foreign value aded in exports (% in exports) Source: OECD-WTO Trade in Value Added Data and OECD AMNE statistics Not all of the domestic value added content of exports sticks in the economy Gross export figures overstate the real economic impacts of trade to the exporting economy, but TiVA estimates can also overstate these impacts as the profits earned by foreign-owned firms through exports are repatriated if they are not reinvested. Figure 9 illustrates the importance of these flows across countries by showing the value added in exports of domestically-owned firms (blue bar), wages paid by foreign-owned firms (green bar), and profits of foreign-owned firms (grey bar), which in practice can be repatriated. Excluding these profits Italian exports contain 23% of value-added that remains in the economy. So, only 2% of GDP represents exported value added by foreign-owned firms, and 6% of Italy s exported domestic value added represents profits by foreign-owned firms reflecting low levels of inward investment and low export intensity of foreign-owned firms. The share of value added that remains in the economy has increased since 28, (insert chart). 4

% GDP % GDP 8 7 6 5 4 3 2 1 Figure 9. Exports by ownership and their contribution to income, as a share of GDP, 214 LUX SVN CZE EST SVK HUN BEL AUT LVA NLD SWE NOR DEU DNK POL PRT FIN ESP ITA GRC FRA GBR USA VA that could be repatriated Labour costs of foreign firms Value added by domestic firms Source: OECD-WTO Trade in Value Added Data and OECD AMNE statistics Taking a broader view by including the income of foreign affiliates can provide a more complete picture of the international orientation of the Italian economy Firms serve foreign markets by exporting or by selling through their foreign affiliates. Figure 1 takes a broader view of an economy s international orientation by taking account of both trade and investment. The chart begins with the domestic value added in exports that remains in the economy exports of value added by domestic firms (blue bar) and wages paid by foreign-owned firms associated with exporting (grey bar) and adds to it the profits that domestic MNEs receive from the activities of their foreign affiliates as measured by FDI income receipts (light blue bar). The income payments made to foreign parents are presented for information purposes (green bar). For Italy this broader measure (25%) is similar to the export orientation measure from TiVA because Italian FDI income is broadly balanced. Italy remains at the lower end of OECD countries using this measure, however this has increased since 28, due to increases in exports of domestic value added (see chart insert). Figure 1. Supplying markets through trade and investment: a broader perspective, 214 9 7 5 3 1-1 LUX SVN EST NLD CZE SWE HUN SVK BEL DNK AUT LVA NOR DEU PRT POL ESP FIN ITA GRC FRA GBR USA -3 VA repatriated to parent by affiliates Labour costs of foreign firms associated with exports VA by domestic firms that serves foreign final demand VA repatriated to parent Source: OECD-WTO Trade in Value Added Data, OECD AMNE and OECD FDI (BMD4) statistics This broader perspective can also shed light on how foreign firms serve the Italian market Foreign producers supplied products and services for Italian final consumption equivalent to 26% of GDP in 214, the majority is through trade (foreign value added in Italian final demand equals approximately 21% of GDP), but value added generated by foreign affiliates in Italy for domestic (non-export) sales (Figure 11) accounts for 5% of GDP. Although some of this value added can be repatriated to parents, the share is significantly lower in Italy than in most other OECD economies (grey bar). 5

Partner share in total % Partner share in total % Figure 11. How foreign firms serve your market: a value added perspective, 214 7 6 5 4 3 2 1 EST LUX HUN LVA SVK SVN AUT POL SWE PRT FIN GBR DNK FRA NLD ITA USA Share of profits in VA of foreign-owned firms (sold domestically) Share of labour costs in VA by foreign-owned firms (sold domestically) Trade: FVA in domestic final demand Source: OECD-WTO Trade in Value Added Data, OECD AMNE and OECD TEC statistics Trade and investment by partner country Trade measured from a value added perspective better reflects the bilateral relationships Gross bilateral trade figures can disguise the true nature of trade interdependencies, particularly between final consumers in one country and producers at upstream parts of the value chain. This is evident for the bilateral relationship with the United States, Germany and France; using gross trade data overstates the role of Germany and France, which are passed by the United States when trade in value added data are used. On the import side, Russia is a more important import partner than Spain once value added is considered. Figure 12. Exports: gross and value added terms, by partner country, 214 14 12 1 8 6 Figure 13. Imports: gross and value added terms, by partner country, 214 14 12 1 8 6 4 4 2 2 USA DEU FRA GBR CHN ESP CHE RUS JPN TUR Domestic value added exports Gross exports DEU FRA USA CHN GBR RUS ESP CHE NLD IND Foreign value added Gross Imports Source: OECD-WTO TiVA Data Source: OECD-WTO TiVA Data and interdependencies are further revealed when looking at the broader notion of trade Foreign firms can serve an economy though trade or sales by foreign affiliates; bringing the trade and investment perspectives together can shed a different light on who a country's most important partners are (Figure 14). Substantial variation exists across countries in how they supply the Italian market. For example, while most partner countries supply Italian consumers mainly through trade, the Swiss do a 6

Share in manufcaturing total % in exports Millions of USD substantial share through sales by foreign affiliates. Furthermore, considering both trade and investment, the United Kingdom jumps ahead of China; this is not evident when looking at trade alone. Figure 14. Supplying the Italian market via trade and investment: Top 1 partner countries, 214 7 6 5 4 3 2 1-1 DEU FRA GBR CHN RUS ESP CHE NLD IND BEL POL Sales by foreign affiliates (VA by foreign controlled firms (sold domestically)) Trade (Foreign value added in domestic final demand) Source: OECD-WTO TiVA Data and OECD AMNE statistics Note: Data on foreign affiliate presence is not available for Poland. Trade and investment by industry Both inward and outward investment helps shape Italy s GVC integration The top manufacturing exporting industries in Italy are machinery and equipment (MEQ), textiles (TEX) and chemicals and chemical products (CHM). The import content of exports varies across these industries- -illustrating the role that importing plays in supporting exports and indicating the degree of GVC integration in these industries. The role of foreign-owned firms differs substantially across Italian industry, in part reflecting Italy s own comparative advantages and specialisation of its MNEs. 25% 2 15% 1 5% Figure 15. Top exporting manufacturing industries in Italy, 214 1 8 6 4 2 MEQ TEX CHM MTR MET FOD FBM CEQ RBP ELQ Exports Imports VA by foreign-owned firms Import content of exports (RHS) Source: OECD-WTO Trade in Value Added Data and OECD AMNE statistics. See page 1 for a description of industry codes. Exports and imports go hand in hand Across most industries there is a strong positive correlation between higher import content of exports and a higher share of their domestic value-added being exported (export orientation) illustrating the strong complementarity of exports and imports (Figure 16). 7

% GDP Domestic industry VA in foreign final demand (% of total) VA by foreign-owned firms (share of domestic total) Figure 16. Import content of exports and export orientation, 214 9 MET MTR 8 MEQ TRQ CHM 7 RBP FBM CEQ TEX ELQ 6 NMM 5 PAP WOD OTM 4 FOD 3 2 1 1 2 3 4 5 Import content of exports % Source: OECD-WTO TiVA Data and OECD AMNE statistics Figure 17. Foreign-owned firms and export orientation, 214 5 CHM 45% 4 35% ELQ TRQ MTR 3 MEQ 25% CEQ RBP 2 FOD PAP NMM MET 15% OTM 1 TEX FBM 5% WOD 2 4 6 8 1 Domestic industry VA in foreign final demand (% of total) Source: OECD-WTO TiVA Data and OECD AMNE statistics...and investment and export orientation can also go hand in hand At the same time, strong complementarities can exist between inward investment and export orientation (Figure 17). Although less strong for Italy than many other OECD countries, some industries where foreign-owned firms produce more of the value added are also those that have a higher export orientation. The textiles (TEX) industry is an exception reflecting the strong domestic MNEs. Figure 18 illustrates the trade in goods by firm ownership the main traders varies across industry reflecting that in some cases Italy is at the start of the GVC, i.e. in motor vehicles (MTR) while in the chemicals industry (CHM) foreignowned enterprises also play a significant role. Figure 18. Gross trade in goods by enterprise ownership and industry, as a per cent of GDP 3% 2% 2% 1% 1% TEX CHM MET MTR FBM PET MET TEX FOD MEQ Exports Imports Domestic non-mnes Domestic MNEs Foreign-owned enterprises Source: OECD TEC Statistics, 211 (latest data available) Service industries play an important role in the export orientation of an economy Typically, services account for a large share of the value added in the economy but conventional gross trade statistics understate this as they cannot reveal the contribution that the upstream services industry plays in the production of goods exports. Accounting for this contribution, the services content of Italy s total exports of goods and services was 56% in 214 (Figure 19), just below the OECD median. 8

Domestic services value added share of gross exports CHL MEX KOR NOR CAN SVK CZE AUS DEU JPN HUN SVN POL TUR FIN ITA USA AUT PRT ESP NZL ISL SWE EST ISR LVA FRA CHE GRC GBR BEL DNK IRL LUX 1 Figure 19. Services content of gross exports for OECD countries, 214 8 6 4 2 Foreign Services VA content in Exports Total Domestic Services VA in Exports Source: OECD-WTO TiVA Data and so inward FDI in the services sector can be an important channel for export success Greater direct foreign investment in the services sector is associated with higher services content in exports. For Italy, the share of investment in services is at mid-range of OECD economies correlated with the services content in exports. Figure 2. Share of services industries in foreignowned firms value added and domestic services value added share of gross exports, 214 6 5 4 3 2 1 GBR BEL FRA GRC DNK ESP EST ITA AUT LVA PRT POL DEU FIN NLD SWE LUX SVN HUN NOR SVK CZE 2 4 6 8 1 Share of services industries in foreign-owned firms value added Source: OECD-WTO TiVA Data and OECD AMNE statistics Links and data sources Guide to the trade and investment statistical notes www.oecd.org/investment/guide-trade-investment-statistical-country-notes.pdf Activity of Multinational Enterprises - AMNE www.oecd.org/sti/ind/amne.htm OECD Benchmark Definition of Foreign Direct Investment - 4th Edition (BMD4) (see Chapter 8 for information on the intersection of AMNE and FDI data) www.oecd.org/investment/fdibenchmarkdefinition.htm Foreign Direct Investment (FDI) Statistics www.oecd.org/investment/statistics.htm Trade by Enterprise Characteristics - TEC www.oecd.org/std/its/trade-by-enterprise-characteristics.htm Trade in Value Added - TiVA www.oecd.org/sti/ind/measuringtradeinvalue-addedanoecd-wtojointinitiative.htm 9

Table of industry codes Industry Type Ind Code Industry Description Primary Industries Manufacturing Services AGR MIN FOD TEX WOD PAP PET CHM RBP NMM MET FBM MEQ CEQ ELQ MTR TRQ OTM EGW CON WRT HTR TRN PTL FIN REA RMQ ITS BZS GOV EDU HTH OTS PVH Agriculture, hunting, forestry and fishing Mining and quarrying Food products, beverages and tobacco Textiles, textile products, leather and footwear Wood and products of wood and cork Pulp, paper, paper products, printing and publishing Coke, refined petroleum products and nuclear fuel Chemicals and chemical products Rubber and plastics products Other non-metallic mineral products Basic metals Fabricated metal products except machinery and equipment Machinery and equipment n.e.c Computer, electronic and optical products Electrical machinery and apparatus n.e.c Motor vehicles, trailers and semi-trailers Other transport equipment Manufacturing n.e.c; recycling Electricity, gas and water supply Construction Wholesale and retail trade; repairs Hotels and restaurants Transport and storage Post and telecommunications Finance and insurance Real estate activities Renting of machinery and equipment Computer and related activities Research and development & Other Business Activities Public admin. and defence; compulsory social security Education Health and social work Other community, social and personal services Private households with employed persons OECD 217. This note is published under the responsibility of the Secretary-General of the OECD. The opinions expressed and the arguments employed herein do not necessarily reflect the official views of OECD member countries. This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. Please cite this note as: OECD (217), Italy: Trade and Investment Statistical Note. 1