international business ITALY

I. Italy business environment and culture

Italy is currently recovering from the global economic crisis and is taking steps toward a positive GDP. Boosted by low oil prices, a more competitive euro, and an easy monetary policy, Italy is expected to have a positive GDP next year with annual growth of 1%(Ratings and Criteria Center). With upcoming tax cuts and labor reform, consumption is expected to grow steadily and push the service based economy forward.

In terms of the political environment, Italy is presented with a few challenges that tend to hinder the business environment. First, the labor market is highly inefficient because of stringent hiring and firing policies amongst other issues. Labor reform has been recently passed and will include incentives to hire youths to curb the 40% youth unemployment rate. Second, Italy struggles to control private action from the mafia that causes further market inefficiencies. A third hurdle for Italy is the rampant tax evasion that results in higher taxes that are essentially expected to not be paid in full. Finally and arguably most important when considering foreign investment is the debt crisis which is now 135% of GDP. Defaulting on their enormous debt would have profound impacts on the Italian market and society as a whole.

However, Italy has a Foreign Investment Index (based on economic stability, growth, economic risk, and business and investment climate) of 8/10. For comparison, the United States has a 9/10. Italy is widely considered to be a highly transparent country with a favorable business environment. They have a skilled labor force with a very large pool of qualified applicants to choose from. For Walmart, there is a large need for intro level workers that would stay on staff for a long time. This need could be served by the enormous population of youths looking for work.

In general, Italy’s legal system is sound and will protect foreign investment. However, there are a few specific instances of the legal system falling short. First, Italy’s intellectual property laws are not strictly enforced. Second, the tax evasion in Italy has driven corporate taxes upward of nearly 65% to compensate (Doing Business). Finally, the private action by the mafia is still unchecked in parts of the country (Santander). That being said, there are opportunities to receive tax breaks in the poorer southern region of the country and the mafia’s influence is relatively very limited. With these few manageable legal issues aside, Italy has a strong legal system capable of protecting potential investors.

When looking at Italy as a whole, it is clear that the economic environment is the strongest of the three. Projections for the country’s economy are very strong and indicate confidence in the business market place as a whole. Much of this confidence is based off increasing consumption amongst consumers which is a strong indicator of economic performance as a whole. Taken in context with the various political and legal issues, much of the decision on whether or not to enter the Italian market will be based on how much of an impact those issues might have on the market Walmart looks to penetrate.

II. Italy in the global economy

Italy is the third largest economy in the euro-zone (the19th of the 28 EU member states that have adopted the Euro), but its exceptionally high public debt and structural barriers to growth have left it vulnerable to scrutiny by financial markets. In the international ranking of developed economies, Italy holds the 8th position in terms of nominal GDP ($2,147 billion, International Monetary Fund statistics, 2014). The eurozone debt crisis had a huge effect on Italy. This crisis was a result of several eurozone member states being unable to repay their government debt without the assistance of third parties (such as the IMF).The crisis had such a detrimental effect on Italy due to the fact that it was led byto a strong reduction in domestic demand. The economic situation is now slowly improving, due to the launch of the Quantitative Easing programme by the European Central Bank, the depreciation of the euro, and lower oil prices. All factors that have boosted consumer spending and domestic demand. Projected growth rates by the main international financial institutions indicate a minor n increase ofin GDP of about 0.6-0.7% in 2015 and of 1.1-1.4% in 2016(gov.uk), supported by an increase in exports and domestic demand.

In terms of “ease of doing business”, Italy ranks 56th out of 189 nations( World Bank’s ‘Doing Business Index’) for 2014 and lags behind the largest economies for Foreign Direct Investment attractiveness. Despite this, “there are over 13,000 foreign businesses (800 of them are large companies) and FDI reached a total value of US$ 403,746 million in 2013.” (gov.uk) Foreign direct investment in Italy mainly stems from the United States and other European countries (like the UK, a key trading partner) but also is seeing a recent surge in investment from Asian countries.

III. Walmart’s global strategic position

Walmart is the world’s largest retailer and intends to exponentially enlarge its retail network through the expansion of stores in the international market. In 2015 the company invested (US)$3,936 million in its Walmart International segment. It opened 183 new stores in international market including 91 stores in Mexico, 29 stores in Central America, 24 stores in Chile, 17 stores in Africa, 16 stores in the UK, six stores in China, five stores in Canada and one store each in Argentina and Brazil. Additionally Walmart is expanding its supercentres in Canada, thus expanding its multiple access points for the Canadian consumers.

IV. Recommended penetration strategy

As we have seen, the economic situation in Italy is indeed looking toward a hopeful future, but nonetheless is still recovering from the recession. As a result, there is a “price conscious” trend amongst consumers that is giving rise to the popularity of private label products. Traditionally, Italian culture has placed great value on food quality. This sentiment is still just as prominent, but has now incorporated a more price aware attitude. If Walmart can continue its own tradition of low priced high quality goods in the food market, it will succeed amongst Italians.

In addition, Italians also value fashion as seen with massive fashion gatherings like the Milan Expo. With this newfound appreciation of private label products and brands, Walmart can expand their product line into the discount (but fashionable) apparel section as well.

Walmart has a strong international presence elsewhere. Thus, they ought to apply similar penetration strategies that have been proven to work globally with a few customizations for Italy. All strategies used should aim at capitalizing on the company’s strengths, minimizing its weaknesses, capturing available opportunities, and limiting threats. First, Walmart should continue its use of slow entry into new markets as it did in North America. Next, Walmart ought to utilize a penetration model of joint venture just as they used in China and India. This could include acquiring already established and well-known retail outlets in Italy or partnering with them. Through these partnerships, Walmart can gain a better understanding of local values and norms.

Walmart should seriously consider penetrating the Italian market because of the first mover advantage they could benefit from. In Italy, there is no “one stop shop” for consumers retail needs. If a consumer needs medicine or sunscreen, they must stop at a farmacia. If they need food, they must go to a market. If they need inexpensive clothes, they must go to a mall or open air market. There is not a chain that provides all these goods in one convenient location.

SOURCES:

http://www.eubusiness.com/europe/italy

https://www.cia.gov/library/publications/the-world-factbook/geos/it.html

http://callisto.ggsrv.com/imgsrv/FastFetch/UBER1/309223_GDRT35083FSA

https://en.santandertrade.com/establish-overseas/italy/foreign-investment

http://electra.lmu.edu:2397/FileHandler.ashx?issue_id=723617656&mode=pdf

https://www.cia.gov/library/publications/the-world-factbook/geos/it.html

http://www.doingbusiness.org/data/exploreeconomies/italy#paying-taxes

http://electra.lmu.edu:2347/Intelligence/CWTopic?Type=text&CountryID=84&Topic=INFIN&Global=True

http://www3.ambest.com/ratings/cr/reports/Italy.pdf

https://www.gov.uk/government/publications/overseas-business-risk-italy/overseas-business-risk-italy