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International Business/Italy

Introduction

Italy currently is the fourth biggest economy in the whole European Union and it comes seventh in the whole world. This is a great achievement to the country considering that only 50 years ago, the country had no much political or economical prospective. However, the American Marshal Plan together with a vast number of politicians pulled the country towards Europe, the only foundation of hope. And as the European community grew, so did Italy’s economic strength increased to the present growth it is witnessing. This paper is going to take a critical look at Italy’s economy and examine the European Union, where Italy is a member. The paper will also analyze the trade relations between Italy and the U.S, and also underscore globalization and its effect on the focus of managers in the EU countries.

The economy of Italy

The economy of Italy has undergone tremendous changes ever since the end of the Second World War from an agriculturally based economy, the Italian economy has grown in to industrial based economy, currently ranking as the seventh-biggest economy in the world. Italy is a member of the powerful G-8 (group of eight) industrialized countries, it is also a member of EU (European Union)

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as well as The OECD (Organization for Economic Cooperation and Development) (Bureau of European and Eurasian Affairs, 2008)

Italy has got a small number of natural resources. The country has no significant amounts of coal and iron. However the Italy has natural gas reserve which comprises of Italy’s most significant mineral resources. A lot of raw materials required for the manufacturing and over 80% of Italy’s energy supplies are imported to the country. The strength of Italy’s economy lies in the processing as well as manufacturing of products, mainly by small and medium sized firms owned privately by families. The main industries include precision machinery, vehicles, pharmaceuticals chemical, electrical goods, and clothing.

(Bureau of European and Eurasian Affairs, 2008)

The country continues to struggle with budget deficits, and it had an increased public debt standing at 2.0% as at November 2007. Italy joined the European monetary union in 1998 through the signing of the Stability and Growth agreement, as a stipulation of this membership. Italy is required to maintain its budget deficit under 3% levels. In 2006 June, the European Union warned Italy to ensure that it brings down the level of deficit to less than 3% by 2007. The government of Italy has continued to find it hard to bring down the budget deficit to a point that would permit fast decline of the public debt. (Bureau of European and Eurasian Affairs, 2008)

The economic growth rate of Italy averaged just 0.66% for a period of 5years starting from 2001 to 2005. Italy growth rate attained the highest mark of 1.9% in 2007 basically due to increased exports to the Euro zone market. The economic growth of Italy is expected to grow at a low rate than that of Euro zone standard. More so, the growth of Italy is expected to decline from a high of 1.9% in 2007, to less than 1% in the current year (2008) (Bureau of European and Eurasian Affairs, 2008)

Italy’s closest trading partners are other European countries with whom Italy carries out around 60.3% of its entire trade. The notable trading partners are Germany at 14.9%, France, 11% and the UK at 5.2%. (Bureau of European and Eurasian Affairs, 2008)

The effects of globalization have reduced the trading of Italy where some countries like China have reduced Italian lower-end products. The economy of Italy is as well affected by huge underground economy valued at 27% of the total GDP of the country. Unfortunately this underground production is not taxed by the government hence the government loses lots of revenue of the underground economy.

Economics indicators of Italy (as at 2007; source www.state.gov/p/eur/ci/it/)

Indicator
Particulars
GDP (purchasing power parity)
$1.8 trillion
GDP (per capita)
$31,000
GDP (growth rate)
1.7%
Natural resources
Natural gas and fish
Agriculture
Rice, Wheat, potatoes, olives, grapes, dairy products, beef, sugar beets
industry
Tourism, machinery, chemicals, iron and steel, clothing, footwear, motor vehicle, ceramics
Trade exports
$474.8 billion  f.o.b

The European Union

The European Union comprises only of 15 member states with merely 6% of the total world population. Yet, when it comes to trade and global economy it accounts for so much. According the reports, the EU accounts for over 20% of global imports as well as exports, this implies that the EU is the biggest world trader and economy.

The 15 members of the EU negotiate as one identity with their trading partners and also at the WTO. The EU is the:

The world’s number one exporter of products; in 2001 it exported more than 970 billion euros nearly 20% of the total amount of the whole world.
The world number one exporter of many services; accounting for ( 290 billion euros) 24% of the net total for the whole world in 2001,
Number one source of FDI (foreign direct investment) investing more than 360 billions in 2001 and it is the second biggest abode for foreign investment accounting for 176 billion euros in 2001. the USA is the first with a total of 304 billion euro being invested in USA in 2001
It is the major export market receiving exports from more than 130 countries around the world.
The European Union main aim is opening up its market for free and fair trade where every country can freely trade with each other. To achieve this EU is opening up its markets and it expects other trading partners to do the same in order to enhance trade and improve economic growth of its member states and those of trading partners.

As the global leading trading block, the EU has got a high interest in creating conditions which can make trade to flourish. In addition, the EU position in global trade gives it more responsibilities compared to the rest of other trading blocks. That is the reason as to why the EU plays a foremost role when it comes to international trade negotiations, striving for fair trade and searching to exploit globalization through the World Trade Organization (WTO)

Italy-U.S Economic Relations

Italy and the U.S have a close cooperation on key economic matters, including economic matters within the powerful G-8. With a high population coupled by high per capita income of Italy, the country the U.S a good market for its products. Italy  was the 13th  trading partner of the U.S as at 2007 with a total amount of bilateral trade reaching $44.9 billion, this entailed  $12.0 exports to Italy and imports worth $32.i billion from Italy.  The U.S trade deficit with Italy of $19.2 billion in 2007 was somewhat lower than the 20.1 billion trade deficit recorded in 2006. This imbalance can be partly explained as resulted from the strong dollar which raised its demand. However, major changes are happening in the way this trade is composed. Value-added items for example office machines and airplanes are increasingly becoming major U.S exports to Italy. From the records, U.S foreign direct investment (FDI) in Italy by the end of 2006 was more than $28.8 billion. (Bureau of European and Eurasian Affairs, 2008)

Key taxation aspects affecting U.S businesses

Italy-U.S.A tax treaty signed between the two countries has provisions to keep away from dual taxation of returns for companies operating in the two countries. Royalties arising from patents and other similar properties are exempted from tax custody under this treaty. The taxes can be freely remitted, as long as they adhere to documentation requirements. (Verdun, 2002)

In 1999, the Italian tax authorities and their U.S counterparts started a fresh tax treaty to substitute the old one. This new treaty covered royalties as well as another new Italian tax known as Regional tax of production (IRAP) (Verdun, 2002)

Marketing of products in Italy

With sound economic growth, a good infrastructure network and free market economy, Italy offers investors a sound capital return on their investments. Marketing products in Italy presents foreign marketers with new challenges; however these challengers do not offer any great difficulties. According to market reports, more than 7,500 American firms already have their presence in Italy. Out of this number, about 850 of these firms have their subsidiaries in Italy.  Markets may discover that a number of practices vary from their home country, but many will be very similar. For example, the structure of retail as well as wholesale distribution focuses on small and medium sized family-run business. In spite of this trend, the supermarket model of business has gained also of significance in the recent past. In the following section we are going to examine how products are marketing in Italy.

Retail distribution

The retail distribution system in Italy presently is faced with fresh challenges from technology and competition. Market reforms brought in beginning 1988 have demanded some level of liberalization, particularly regarding small scale retail businesses. However, compared to some other EU member countries, the retail distribution of Italy is distinguished by a vast number small businesses and low concentration. For instance, in food retailing, the collective market shares of the major five retails are only 17.5%., which is the lowest proportion in the EU. Consequently, productivity within the sector little, while the mark-ups in the sector are amongst the highest in EU countries.

Companies operating in the retail distribution business in Italy, realize that they have to invest in huge sums of capital in fresh innovative techniques, research, management, equipments and promotion.

Franchising

Despite the low numbers of franchising in Italy, in the recent past the number has risen and according to the records, as at 2005, the number of franchisers were about 785 and about 4, 250 franchisees. (Constantelos, 2004)

The Italian business people have acknowledged the idea that franchising is the best inventive method of introducing a new business model. Italian consumers have revealed to be open to the efficient and fast methods presented by franchises. However, the Italian people are not usually receptive to franchises for the services which are customarily consolidated and strong in Italy. Nonetheless, the receptivity of Italian market to the franchising idea seems to be gradually growing primarily within the services sector.

Best sales prospects

The best potential sectors for business in Italy seem to be in the services sector. Fresh activities emanating from the ‘new economy’ are currently making a step forward and concepts connected to e-commerce, internet, information technology and telecommunications are proved to be a success. Other areas which are promising and much more secure are education and training, tourism and travel, delivery services, auto mobiles, management and consulting services. In addition to that, fast food stores and hotels which a well established brand name, fashion, and personal items are as well promising areas for foreign marketers looking to sale their products to concentrate.

Legal requirements

Constantelos (2004) explains that following a number of years of concessions, Italy finally signed a law which regulates franchising business activities. The law was put in effect in May 2004. Accordingly in Italy, an agreement for franchising is governed by the common contract law principles and the agreement is considered as being a mutual agreement involving two separate business ventures forming “collaboration”, and not an “association”, between the two parties. The agreements made are subject to the laws which govern commercial agreement in common and specifically to those laws which govern sales of trademark licensing. There are some rules and regulations formulated by the Italian Franchising Association which echo standards existing in Italian business society and are usually taken in to account in legal procedures.

The expansion of the EU has inspired synchronization of trade policies, tariffs, standards and procedures as well as legal requirements. Presently, all barriers or limitations have been removed and importation of franchise business concepts from the US to Italy can go on without any hindrance. But, owing to the absence of particular Italian customs on franchising agreements, it becomes important that the franchising contracts should be written very detailed. (Constantelos, 2004)

Globalization of the world economy

Globalization is referred to as the rising interconnection of the different people and also places resulting from the advancement in the transport sector, communication sector and the information and technologies sector which further causes a convergence in the economic, political as well as the cultural dimensions. Globalization of the world economy implies that more countries, rich or poor are participating in the global economy. The process of globalization is changing the outline of world trade.

Different management focus within the European Union countries

With globalization, the world becomes a “global market place” which calls for a manager to be a global manager to have a global viewpoint. A global manager is a manager who has redefined his/her approach of thinking and has changed his/her mindset. Kets de Vries and Mead (1992) clearly states that thinking globally entails advancing models and concepts from having a one-to-one relations to having a numerous realities and relations in mind at the same time, and being able to act with skill about this complex reality. Therefore, for a manager to be competitive globally, the global manager should have openness which allows a broad global approach to form and develop

Changing focus of managers in EU

There is much debate at the moment about what a manager is supposed to focus on in this era of globalization. The arguments are revolving on whether the manager should continue with his traditional services o change with the changing patterns.

Kets de Vries and  Mead (1992) observes that, whatever the case,  managers have important role to play in the era of globalization, one thing that managers  have to do is to act faster and be in front of globalization effects to able to be efficient and effective whatever they focus at.

The figure bellow shows the changed orientation (focus) of EU managers and the level of priorities, the challenge the global managers have is their ability to centre on both issues at the same time. (Adapted from Tichy, 1992)

The present globalization effects such as free trade and fast flow of information has presented different challenges to the organizations. Globalization is changing the relationship which exists between the organizations, the market and managers.  (Kets de Vries and Mead, 1992)

In the recent past, there has been increased changes taking place on the global market place, this has seen the managers in EU change their focus considerably. The changes have been both on perspective and priorities. In the past managers were focused on budgets, marketing of products, distribution channels, employees and finance. On the other hand, with reducing market power of organizations and increasing global competition, the focus has shifted and emphasizes is being put on issues that create and result to innovative products. At the same time management has shifted its orientation and it is more focusing on organization culture, values, vision, management/leadership style and risk taking. The challenge being given to the EU managers is the capability of focusing on both the issue at the same time. (Kets de Vries and Mead, 1992)

Conclusion

Italy currently is the fourth biggest economy in the entire European Union and it comes seventh in the whole world. The economy of Italy has undergone tremendous changes ever since the end of the Second World War from an agriculturally based economy to industrial based economy currently ranking as the seventh-biggest economy. The European Union comprises only of 15 member states with merely 6% of the total world population. Yet it accounts to about 20% of the world imports and exports making it the biggest trading block and economy. Italy and the U.S have a close cooperation on key economic matters. With a high population Italy, coupled by higher per capita income it was the 13th trading partner of the U.S as at 2007. Having a sound economic growth, a good infrastructure network and free market economy, Italy offers investors a sound capital return on their investments. Marketing products in Italy presents foreign marketers with new challenges; nevertheless, these challengers do not present any great difficulties. Globalization is the rising interconnection of the different people and also places resulting from the advancement of infrastructures in the world. Globalization has changed the focus of EU mangers and now due to  global competition, the focus has shifted and the managers emphasizes creating more innovative products to exploit globalization impact. The challenges that Italy and other EU managers will continue to face in balancing their traditional roles with new their new focus.

Reference:

Baird, L. (1994): Meeting global challenges: The executive perspective.  Working paper, University of Boston, Boston, MA

Constantelos, J (2004): The Europeanization of interest group in Italy; business associations in Rome and the regions in: – Journal of European Public Policy, Vol.11; No.6, p-1021-1036

Dyson, K (2000): The Politics of the Euro-zone: Stability or Breakdown? (1st Ed); Oxford University Press Inc; New York, p, 29-32

Kets de Vries, M & Mead, C. (1992): The development of the global leader within the multinational corporation. In V. Pucik, N. M. Tichy, & C. K. Bartlett (Eds.), Globalizing

Verdun A (2002): The Euro; European Integration Theory and Economic and Monetary Union; (2nd Ed) Rowman & Littlefield Publishers Inc. Oxford, p, 5-9

Bureau of European and Eurasian Affairs (2008): Italy; Retrieved from: www.state.gov/p/eur/ci/it/

 

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