Foreign investment into Europe holds up in 2012
Brussels, 5 June 2013
Foreign direct investment (FDI) into Europe held up in 2012 despite the ongoing economic problems in the Eurozone, according to EY’s annual European Attractiveness Survey. This report, now in its 11th year, combines an analysis of international investment into Europe over the last year with a survey of more than 800 global executives on their views about how and where global investment will take place in the next decade.
- UK remains top recipient of FDI in Europe although Germany closes the gap
- Mixed messages in Western Europe as investors look for bargains amid recession
- CEE investment picks up after two disappointing years
- US remains top investor in Europe, BRIC investment weakens
Despite the recession, the reports finds there was only a moderate 3% reduction in FDI project numbers down from 3,906 in 2011 to 3,797 in 2012. However, investment levels still remain higher than pre-crisis levels and the number of jobs created was up by 8% on 2011 to 170,434.
Marc Lhermitte, EY’s Head of International Location Advisory Services and author of the report comments, “The crisis has led foreign investors to actively pursue scarce opportunities and restructure their manufacturing presence in Europe. Consequently, we have in fact witnessed an investment rebound in key destinations including the UK, Germany and Ireland, but also in Poland and Russia. Foreign investors are for the most part confident that Europe will weather these hard times, and emerge stronger and different”.
Although rapid-growth markets are capturing the interest of foreign investors, Europe still remains the world’s largest FDI destination in terms of value, although its share in global FDI declined from 28.6% in 2011 to 22.4% in 2012, according to the United Nations Conference on Trade and Development (UNCTAD).
Destinations: FDI by country
The UK once again took the lead in terms of FDI with 697 projects in 2012, an increase of 3% although Germany is now closer than it has ever been in second place with 624 projects an increase of 5%. After overtaking the UK in the number of projects in manufacturing sectors during 2011, Germany is now catching up with sectors driven by services – France (471), Spain (274) and Belgium (153) came third, fourth and fifth respectively.
The countries in Western Europe that did particularly well and received a significantly higher number of projects compared to 2011 were Spain (273), Ireland (106), Belgium (153) and Finland (62). This was primarily down to a decline in relative unit labor costs, which enhanced their competitiveness.
A second group of Western European countries including France (471), the Netherlands (161), Italy (60) and Switzerland (61) attracted fewer projects and relatively few jobs. The reasons for the decline in investment vary from stagnant growth in France and Italy to high operating costs in the Netherlands and Switzerland.
Central and Eastern Europe (CEE) picked up as an FDI destination in 2012 after two disappointing years. Though the number of investment decisions slipped 5% on the year, the region secured 26% more jobs. That meant that CEE providing competitive costs with nearshoring advantages overtook Western Europe to become the leading recipient of FDI jobs in Europe – mostly due to increased manufacturing in the region.
Poland had the continent’s biggest increase of 22% in 2012, attracting 148 projects. Within CEE, Poland outpaced Russia (128) to become the leading destination for FDI. Serbia was also a strong performer attracting 78 projects. However, investment into Turkey and the Czech Republic declined slightly with 95 and 64 projects respectively.
Analysis by sector and activity
Business services and software remained the leading FDI sectors in Europe, providing 699 and 402 projects respectively. The UK was again the leading destination for these projects (28%), with Germany a distant second, followed by France and Spain.
Manufacturing accounted for 25% of investment projects, but 60% of jobs created on the continent. Russia became the leading recipient of FDI jobs in manufacturing operations, followed by the UK, Turkey and Serbia. The automotive sector provided the biggest surprise: despite European car sales being at their lowest for almost two decades in 2012, the sector provided 28% of all new FDI jobs in Europe – most being component makers. The focus of car manufacturing is gradually moving from the heart of Europe to its periphery and companies are quickly reorganizing their assets to gain competitiveness and tap into growing markets.
Where is investment coming from?
Intra-European investment is Europe’s major source of FDI but in terms of investment at a country level the US remained Europe’s single leading FDI generator, accounting for 1,045 (28%) inward investment projects in 2012 mostly in the business services and software sectors. The UK continued to be the favorite destination for American companies in Europe.
Europeans remain confident in their neighbors as they contributed more than half of all European FDI inflows – seven European countries, led by Germany (406), the UK (255), France (198) and Switzerland (184) were among the region’s top 10 investors. Together, FDI projects from European countries and the US accounted for more than 80% of FDI flows into the region.
Only 245 projects (6.5% of the total) came from the BRICs, a concerning decline from 266 projects in 2011. The majority of the projects were directed at the UK (70) and Germany (63). By contrast projects from Japan were up by 17% from 150 to 176.
London – Europe’s most attractive city
London remains the unrivaled leader among Europe’s cities, both in terms of the opinion of investors (49%) as well as in the number of investment decision secured which stood at 313 in 2012. Business services, software and financial services accounted for more than 70% of these projects. Paris comes second, identified as attractive by 34% of investors and securing 174 decisions followed by Barcelona in terms of project creation and Berlin in the perception survey. And yet, despite their excellent infrastructure, skilled labor and high quality of life, European cities struggle in the global competition. London is the only European location investors name among the top 10 – compared to 3 in both India and the US, 2 in China and in Japan.
Investors have faith in Europe
2012 was another difficult year for Europe as business leaders struggled to protect their bottom line in a stagnant economy. However, perhaps counter to expectations, this year’s survey shows that companies have become accustomed to the economic situation in Europe, learned to live with it, and do not want to miss out on the significant opportunities that still exist. The region is once again rated the second most attractive destination in the world to establish operations only behind China.
Most global investors believe Europe’s attractiveness will improve, or remain unchanged, in the coming three years. Fewer than one in four believe it will decline. The proportion of investors expecting an improvement, at 39%, has scarcely changed since 2011 (38%). Worryingly perhaps, investors not yet established in Europe are more optimistic about the region’s prospects than those already present: 60% of BRIC-based respondents and 45% of North American executives believe that Europe will become more attractive for inward investors.
Marc comments, “Thirty-eight percent of the companies interviewed are planning on investing in Europe next year, up from 26% in 2011. Despite economic uncertainty, investors have learned to master this “new normal”. They are also expecting further economic integration, fewer regulations and a renewed focus on education and innovation to move the European ‘dream’ a step closer to reality.”
Indications for 2013
The risk of an imminent Eurozone break-up, which weighed heavily on business confidence during much of 2012, has been averted. However, investors are “realistically” optimistic. While they think that the recession will end, they know that recovery is likely to take longer than it has done in the past. Half of our respondents predict a three-year recovery, while one-third expects it to take five years.
Marc concludes, “Europe’s fundamental strengths – stability, skills, structure and shoppers – still outweigh the continent’s economic weaknesses. Though gloom over the eurozone crisis lingers, the international business community believes in these strengths and still sees Europe as a reasonable long-term bet.”
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About the survey
EY’s 2012 European Attractiveness Survey is based on a twofold, original methodology that reflects:
The “real” attractiveness of Europe for foreign investors. Our evaluation of the reality of FDI in Europe is based on EY’s EIM. This database tracks FDI projects that have resulted in new facilities and/or the creation of new jobs. By excluding portfolio investments, mergers and acquisitions, it shows the reality of investment in manufacturing or services operations by foreign companies across the continent.
The “perceived” attractiveness of Europe and its competitors by foreign investors. We define the attractiveness of a location as a combination of image, investors’ confidence and the perception of a country or area’s ability to provide the most competitive benefits for FDI. The field research was conducted by Institute CSA in February and March 2012, via telephone interviews, based on a representative panel of 840 international decision-makers.