With the government's backing, the National Innovation Fund aims to raise millions of euros of venture capital for small and medium enterprises within three years.
The government hopes to add other incentives, including generous tax relief, that will take the total to €2 billion, according to Economic Development Minister Luigi Di Maio.
"The whole system has to work together to put Italian venture capital to use and attract more from overseas," he announced on Monday. "Investing in this fund is strategic for our economy, our skills and to make young people stay."
The fund, to be managed by state lender CDP, should be operational from May. The priority sectors for investment, according to CDP's chief executive Fabrizio Palermo, are mechanical engineering, financial technology, biotech and pharma. Support will take the form of direct and indirect investment – in the form of contributions to other specialized funds – as well as help accessing other potential investors.
Di Maio also announced a €40,000 bonus for small businesses looking to hire an "innovation manager" to oversee their digital transformation.
"Italy can become Europe's leading manufacturer, but it has to focus on training and productivity by way of digitization," said Di Maio, who is also Italy's deputy prime minister and head of the Five Star Movement.
A stagnant economy combined with Italy's reputation for corruption, favouritism and red tape mean the country is low on most entrepreneurs' lists of places to start a business.
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Tens of thousands of young Italians emigrate overseas each year in search of better opportunities, many of them highly educated. The result is that Italy's technology sector struggles to fill thousands of skilled jobs, despite the county's high unemployment, due to a shortage of talent.
In a bid to foster innovation, in 2012 Italy introduced the Italian Startup Act, which made it simpler to register a new company, relaxed labour regulations, introduced tax incentives for investors and created a fast-track startup visa for entrepreneurs.
Meanwhile the national agency for attracting foreign investment, Invitalia, offers interest-free loans to innovative startups, with special grants available for those in historically deprived parts of southern Italy and earthquake zones.
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