Beyond the red tape

Pains and gains of doing business in Italy

Paolo Necchi
January 26, 2006

Here are some of the most salient points:

 

You’ve probably heard it’s difficult to start a business here? Well, it’s true, or so says the World Bank’s recent survey where Italy ranked 70th out of 155 countries when judged on a set of cross-country indicators regarding business practices. Does this mean that Tonga, Botswana or Nepal, which got better ratings, offer better opportunities for investors? Not really. In fact, the 2006 survey, one of the most comprehensive on international competitiveness, only measured how simple it is to do business, and not how many business opportunities there actually are in the ranking countries. Certainly, investors take account of other factors as well, such as economic prospects, infrastructures, geo-graphical location, raw materials and natural resources’ availability, financial, currency, social and political stability, workforce quality, domestic market size and accessibility. China, for example, which was ranked only 91st, is attracting massive investments because other factors are taken into consideration.

 

So what does the survey tell us exactly? Italy is still the seventh largest economy in the world after the US, Japan, Germany, France, the UK and China.  It’s not, in fact, too far from France and the UK. It just has an urgent need to remove all the bureaucratic and institutional hurdles which hinder its economic growth. According to economic experts, current laws and reforms together with the new corporate law and the recent school and pension system reforms should help to make the Italian economy more competitive. But as of today, just how does Italy’s performance rate in comparison with the other six largest economies?

 

Starting a Business: the World Bank’s survey shows that setting up a new firm in Italy is less time-consuming than in most of the other largest economies, even though more costly.

 

Dealing with Licences: (building a warehouse and obtaining utility connections): Italy is the slowest of the seven largest economies, excluding China, and the most expensive.

 

Hiring and Firing Workers: Italy’s rigidity of employment index is high but in line with Germany’s and well below France’s. Italy’s labour market has undergone a significant transformation in the last few years which has created a more flexible workforce. A referendum to abrogate an article which prevents companies with more than 15 employees from firing their staff, unless a “justified reason” arises, failed badly.

 

Registering Property: Italy is one of the fastest and the second cheapest behind the US. Yet, there could have been an under-estimation of Italy’s transfer taxes, which in Italy take the form of registration taxes. Besides, in Italy, when property is bought directly from a construction firm, the buyer, instead of paying the registration tax, must pay the VAT (Value Added Tax) which is not included in the World Bank’s measurements.

 

Getting Credit: Italy got the highest score as far as creditworthiness information is concerned, but its bankruptcy law spoiled the overall performance. Please see comments at “Closing a Business”.

Protecting Investors: Italy is the worst performer, excluding China. Nevertheless, last December, following a series of financial scandals, a new law aimed at protecting investors was passed.

 

Paying Taxes: China has the most time-consuming procedure for paying taxes and Italy is second only to China. However, much more serious is fact that Italy has the heaviest tax burden which is estimated at an astonishing 59.8% of gross profit. This explains the extent of Italy’s informal economy.

 

Trading Across Borders: Germany, the world’s biggest exporter, has the swiftest bureaucratic import-export procedures. Italy, despite its export-oriented tradition, the slowest.

 

Enforcing Contracts: Enforcing contracts in Italy is an utter nightmare. In Japan (60 days) or in France (75 days) it is relatively straightforward, but in Italy it takes 1,139 days (second worst performer, after Guatemala, of the 155 countries sampled).

 

Closing a Business: (in case of bankruptcy): it does not take much time in Italy but the recovery rate (40%), compared with Japan’s 92.7% and the UK’s 85.3%, is very low. A new bankruptcy law, which has been recently passed, should improve the situation.

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