Europe has gone through a testing time, but there are signs of improvement. Can the region regain its poise and attract foreign investment to aid its recovery?

Doing business in Europe

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Nothing raises European ministers’ blood pressure more than a debate on the Eurozone. It has been a difficult time, but, more generally, Europe has been battered from all sides by government-led austerity measures adding to widespread uncertainty and weakened consumer confidence. If ever there was a perfect economic storm, this is it.

Europe’s recession deepened in the final three months of 2012, with the economies of the 17 euro nations shrinking by 0.6% in the fourth quarter. These figures were worse than had been forecast, but not entirely surprising.

After all, this was the third consecutive squeeze on Eurozone GDP and the fifth on the trot where no growth or a decline was recorded. Life in Europe had been challenging, and the figures proved it.

EY - Doing business in Europe, graphic

Europe: prime location for doing business?

But are things really as bad as they seem or is Europe still one of the world’s prime locations for doing business?

The result is resoundingly the latter, according to EY's 2013 European attractiveness survey, which draws on the insights of 808 international decision-makers and market leaders from sectors such as industry, energy, consumer goods, pharmaceutical and telecommunications.

Conditions have been tough and investors have understandably sought markets where growth persists in spite of the global downturn. In 2012, this approach resulted in developing countries overtaking developed nations as the leading recipients of Foreign Direct Investment (FDI) - a factor that helps nations to achieve a sustainable high trajectory of economic growth, and so a good indicator of a country’s economic state and potential.

It was a momentous shift. The 3% drop in FDI to developing economies was modest compared with the 32% fall in FDI projects in developed nations.

However, things are not as bad as they seem: during the same period, Europe has benefitted from the creation of 170,434 much-needed new jobs through FDI initiatives, representing an 8% jump in year-on-year figures.

Despite the turmoil, Europe’s economies were also still seen as relatively secure places to do business, where high-quality infrastructure combined freely with an educated workforce.

With this in mind, investors directed most of their interest toward Western Europe, ploughing three quarters of all FDI projects into this established and predictable region. The UK held on to its leadership position, fighting off competition from Germany – but only just.

While this emphasis will not surprise anyone, the fact that more than half of all resulting FDI jobs were created in central and eastern Europe might. As if to prove this point, Poland overtook Russia in 2012 to become the leading destination for FDI projects in Europe.

This new interest in Poland can be attributed to its large domestic market, EU membership and cheap, skilled domestic labor market, all of which have created a fast-growing, opportunity-rich country.

Further afield, the research also shows that foreign investors are optimistic about the future, with the majority predicting Europe’s attractiveness will improve in the next three years. Fewer than a quarter believe it will decline.

Most tellingly, however, investors yet to establish themselves in Europe show the greatest signs of confidence, with 60% of BRIC-based respondents and 45% of North American executives believing Europe will become more attractive in the coming years.

FDI key to restoring confidence

While there are certainly signs of improvement, Europe has some way to go to recover its composure. European ministers will play their part, but FDI will also be key to restoring confidence by encouraging employment opportunities, enhancing productivity and skills, improving competitiveness and delivering a critical boost to trade.

But where will this boost occur? And which sectors are best placed to attract the much needed inward investment? Traditionally, Europe’s manufacturing function has been the continent’s driving force in this area.

In 2012, Europe’s automotive industry accounted for the lion’s share of jobs created through FDI and 84% of investors said they will continue to manufacture in Europe over the next 10 years, showing that confidence remains high in this sector.

Outside this core, 31% of business leaders viewed information and communication technologies (ICT) as the most powerful driver of European growth, while 28% opted for energy and utilities, 23% for pharmaceutical and biotechnologies and 20% for cleantech.

Europe is a place where traditions die hard, and that goes for its manufacturing sector and its reputation for innovation and inherent stability. Not surprisingly, 75% of business leaders are confident Europe will overcome its current dip, encouraged, no doubt, by the ability of Europe’s politicians to navigate choppy waters last year.

Although there may be a consensus about Europe’s recovery, half of those quizzed in the survey believed the recuperation process would take at least three years to complete, while another third thought it would be at least five years before things started to look up.

With confidence key to the recovery, it’s now up to Europe’s policy-makers to deliver the goods.

Easing this process is perhaps where Europe’s politicians can have the greatest influence. According to the survey, they should focus efforts on maintaining economic stability, encouraging R&D and promoting competitiveness. There were also calls for economic integration, reduction in regulations and a renewed focus on innovation.

Without doubt, 2012 was a year in which Europe was shaken by a crisis that caused general unease around the world. However, as EY's 2013 European attractiveness survey shows, there are a number of positive signs.

Inward investment took a hit, but early indications show that confidence is returning and interest in Europe is on the increase. With confidence key to the recovery, it’s now up to Europe’s policy-makers to deliver the goods.