Because of a lack of domestic venture capital, the government encourages foreign industrial investment through tax concessions on a case-by-case basis. Foreign ownership, however, is limited by law and includes the following regulations: foreign investment in can be limited for "reasons essential to the national economy." As a consequence, foreign investment in banks is limited to less than 5% of an institution's capital without government consent. Although privatization is encouraging foreign investment, defense industries remain off limits to non-Italians. In an effort to increase confidence of foreign investors in Italy's economic development, the government has enacted legislation providing special incentives, particularly for investments in the south— Sicily, Sardinia, and the peninsula south of Rome. In recent years, and in accordance with EU liberalization, foreign restrictions on foreign investment in Italy have eased.
Annual foreign direct investment (FDI) into Italy was $2.6 billion, down from $3.7 billion in 1997. Total FDI stock in Italy in 1998 was about $103 billion. Annual FDI inflow jumped to almost $7 billion in 1999 and continued to increase for the next three years: to $13.4 billion in 2000, $14.9 billion in 2001, and $15.2 billion in 2002, an average of $13.7 billion a year. Total FDI stock in Italy reached about $140 billion by 2002. Italy has remained an underachiever, however, in the attraction of FDI. For the period 1988 to 1990, Italy's share of world FDI inflows was only 60% of its share of world GDP. For the period 1998 to 2000, Italy's share of world inward FDI had dropped to only 20% of its share of world GDP. About 63% of inward stock in the 1990s has come from EU countries, up from 55% in the 1980s.
In the 1980s, outward FDI had about equaled inward FDI in Italy, but in the 1990s Italy became a net outward investor. From 1999 to 2002, average annual outward FDI from Italy was $18.4 billion. As of 2001, FDI stock held by Italians in foreign countries totaled about $236 billion. Roughly 60% of Italian holdings of outward stock in the 1990s were in EU countries, the same as in the 1980s.