Italy in two minds about foreign investors By Lisa Jucca MILAN (Reuters) - Italy's state investment firm is taking over one of the country's top power companies to prevent yet another part of Italy Inc from falling into foreign hands. The country's top telephone firm recently became Spanish, and its flag carrier is poised to become French. Yet cash-strapped Italy is so desperate to woo foreign funds that center-left Prime Minister Enrico Letta went to New York last month to talk up a new set of tax breaks and other perks for foreign investors. Italy has often swung between Anglo-Saxon laissez faire and French-style protectionism and Letta, whose coalition government was almost toppled by his center-right partner Silvio Berlusconi last week, must take a wide range of interests into account. Yet with Italy's dire recession having pushed asset prices to the lowest level in a decade and with the country's corporate fabric desperately seeking fresh capital, efficiency and verve, this may be a window of opportunity for interested outsiders, economists say. "Foreigners are coming in because it's cheap, and it's better to have foreigners invest in our companies than no investments at all," said Carlo Stagnaro, a director at think-thank Istituto Bruno Leoni. Right now we don't have Italians that do it well. Foreign direct investment in Italy totaled some $16 billion (12 billion euros) last year, compared with $25 billion in France and $62 billion in the United Kingdom, according to figures from the Organization for Economic Cooperation and Development (OECD). Over the years, many foreign investors have shunned Italy because of the country's widespread corruption, high labour costs and impenetrable red labor tape. Yet investors have started tiptoeing back into the euro-zone's third-largest economy after a dry spell that meant last year's figure was less than half what the country averaged in the five years preceding the global financial crisis of 2008. In one key transaction, General Electric (GE.N) bought industrial powerhouse Avio for $4.3 billion in December. Smaller deals include the sale of a 21 percent stake in refining group Saras (SRS.MI) to Russia's Rosneft by Italy's influential Moratti family, which may also soon sell its soccer club Inter Milan to an Indonesian tycoon. Two top fashion brands - Valentino and Loro Piana - were sold to foreigners. Versace is also putting a stake on the block. Though big national champions make headlines, it is largely cash-strapped, family-owned companies that are paying the price of their historic reluctance to list on the stock market or team up with rivals. There are fewer than 300 companies on the Milan stock exchange, unchanged from 100 years ago. This compares with around 1,000 in Paris and 800 in Frankfurt, and Italy's listed companies are on average much smaller than their French and German counterparts. Of 320 mergers, takeover and joint ventures involving Italian companies last year, 90 percent were smaller than 500 million euros, said co-head of Corporate Finance Advisory at UniCredit Vincenzo Tortorici. Even Italian banks - which have traditionally invested in large domestic companies to shield them from unwanted bids - are starved for capital and are selling all non-core assets. The three investors who agreed to sell out to Telefonica - Intesa Sanpaolo (ISP.MI), Mediobanca (MDBI.MI) and Generali (GASI.MI) - are all financial institutions. "Right now there is not enough domestic capital to help local groups to grow in size and internationally," said Luca Rossi, EMEA head of consultancy A.T. Kearney. The fact that the local financial market is underdeveloped adds to the problem. Italy has had a flip-flopping attitude towards foreign investors for a while. In 2011, following national outrage at the purchase by France's Lactalis of dairy group Parmalat (PLT.MI), Italy set up a strategic equity fund, FSI, to turn mid-sized firms into large companies that could create jobs and develop skills at home. The FSI, which is private equity arm of state-backed investment holding Cassa Depositi e Prestiti, has 4 billion euros to spend and has until now been largely inactive. It tried and failed to take over fashion company Valentino, according to insiders, and its portfolio was until now only made up of small investments in biopharmaceuticals firm Kedrion, broadband group Metroweb and a 4.5 percent stake in insurer Generali. On Friday, the FSI agreed to take an 85 percent stake in gas plant supplier AnsaldoEnergia, which is a unit of state-owned defense firm Finmeccanica (SIFI.MI). This cuts off South Korea's Doosan Heavy Industries (034020.KS), whose takeover plan had been opposed by local politicians and trade unions. On Monday, the government is expected to discuss financial support for airline Alitalia. Sunday's Il Messaggero newspaper said Letta was sounding out state-owned railway group Ferrovie dello Stato about taking a stake, days after Franco-Dutch carrier Air France KLM (AIRF.PA), which owns 25 percent of Alitalia, said it was considering a merger. Carlo Bellavite Pellegrini, economic professor at the Catholic University in Milan said rather than shield companies from foreign ownership, it is better to make sure they are equipped to face global challenges. "Italy has been very focused on the issue of national ownership," said "But after 2007, the world changed. The real issue today is to find someone with the means to develop sound industrial projects, otherwise we are finished. Reporting By Lisa Jucca; editing by Alessandra Galloni and Philippa Fletcher