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European Inward investment stalls as recession looms
Five years of growth comes to a halt as investors flee risk
LONDON, KYIV, 5 June 2009 – Inward investment into Europe was flat in 2008, according to Ernst & Young’s annual Country Attractiveness Survey, demonstrating the global recession’s toll on investment projects into the region.
The 7th annual report, which examines figures for international investments into Europe, new projects or expansions, revealed that in 2008 Europe secured 3,718 investment announcements, six more projects than in 2007. The number of projects remained steady but the impact of the impending recession on new employment was severe. The number of jobs created fell 16% to 148,333, accelerating a downward trend underway since 2004.
“Five years of sustained inward investment growth in Europe came to an end in 2008, said Marc Lhermitte, Partner at Ernst & Young and author of the report. “As revenues fell and operating costs soared, projects were scaled back and some were halted. Many companies have suspended geographical and market expansion and acquisitions.
“But, the true picture of how the global recession has hit inward investment has yet to emerge. Investment decisions for 2008 will have been made many months before the downturn hit, which explains why in 2008 Europe secured as many FDI projects as the year before. We expect 2009 to tell a very different story.”
Analysis by country
Ernst & Young’s study, now in its 7th year, analyses both actual inward investment over the last 12 months and attitudes of global investors regarding their plans over the short to medium terms.
Retaining its ranking as the most attractive European location for FDI, the UK attracted 686 investment projects in 2008 - 4% less than in 2007. The leading recipients of FDI in Europe showed little change, despite the economic turmoil.
France, Germany and Spain, which have been the most important countries for the attraction of foreign investment projects since 1997, remained the top four countries.
Winners and losers
There were positive or relatively stable trends in Germany, Switzerland, Sweden, Italy and Ireland. Germany’s 28% increase - was fuelled by new regional headquarters for German or Eastern European markets, and by industrial demand for business services and software.
Ireland, although bruised by plans to shift manufacturing jobs to more cost-competitive countries, had a 35% increase in project numbers as British and US companies continue to invest.
Some industries are so far weathering the recession better than others. Machinery and equipment saw a 19% increase in FDI projects due to a surge of projects to supply wind turbines, solar components, fuel cells.
Marc Lhermitte said: “One of the biggest winners has been the renewable industries due to new green market opportunities, with almost 6,000 new FDI jobs in 2008. Astute businesses will be positioning themselves to take market share and gain access this sector.”
IT outsourcing, financial and business services were early victims of the downturn as their clients struggled, especially in the UK, France and Spain. New jobs from these sectors and countries slumped by 33% in 2008. Former FDI hotspots such as the Czech Republic, Slovakia or Turkey, saw numbers fall dramatically especially in automotive and electronics.
Where the investment is coming from
Europe's inward investment market remains mostly fueled by European (German, British and French mostly) and US investors (51% and 25% respectively). BRIC investors contributed to a relatively small number of projects into Europe (6%), but the trend is rising fast: projects from China and India have jumped from 118 to 182 projects. This has particularly benefited the UK.
2009 outlook
The recession will impact European FDI even more in 2009. Provisional data from the first quarter already indicates an 8% drop in project announcements compared with the first quarter of 2008. For the rest of the year, 53% of business leaders interviewed in the study say they have no green field or expansion plans for 2009.
Mark Otty, Area Managing Partner of Ernst & Young EMEIA, explains why even at the bottom of a global recession it is important for investors and authorities to work together to encourage cross border investment. “Although the natural reaction on one level is for investors to act in a protective way, open borders and free trade have had major benefits for the global economy in the last 20 years. We should do all we can to continue to promote it."
Urban attraction
Ernst & Young’s study uncovered some revealing results for global cities and their ability to attract inward investment. Investors clearly have greater confidence in the ability of cities with international qualities – or global cities – to emerge from the current situation than in the recovery capacity of their second-tier rivals.
London, which retained its position as the most attractive city for inward investment in Europe in 2008 for the 7th year in a row, secured 262 projects. However, London was not completely immune to the grip of the downturn with a 14% decline compared to 2007, halting a four year growth spurt. But, in comparison to its closest European city rivals, the capital received a relatively high number of projects, with Paris coming in second with 222 projects and Madrid third on 80.
Marc Lhermitte elaborated, “However, the primacy of long-established centres in the developed world – including Europe’s capitals – is being challenged by emerging Asian cities such as Shanghai and Bangalore and by regional cities acquiring international expertise. When business leaders from our study were asked where the next Google or Microsoft will emerge, Shanghai and Mumbai were seen as the more credible alternatives than New York and Silicon Valley, or London.”
Europe as a refuge - emerging economies lose favour in short-term
The uncertain climate has resulted in a temporary mood-shift amongst investors to more familiar markets. For the immediate future, businesses see Europe as the safer option to make their investment.
According to the survey, which interviewed 809 global investors in February 2009, Western (40%) and Central and Eastern Europe (39%) were neck-and-neck as the “safest” regions for being the most attractive regions in which to establish or expand operations.
There has been a retreat in investor sentiment from the emerging BRIC markets (Brazil, Russia, India and China). After topping the attractiveness table in 2008, China loses the lead as the most attractive region in which to establish operations in 2009, ranking third. India is fifth, behind North America, whilst Russia and Brazil, previously rising stars, trail in sixth and seventh place respectively.
Marc Lhermitte said: “Today, business leaders are focused on living through the crisis and maximising returns on existing assets. Though entering and operating in new markets can offer tremendous opportunities, this can also increase risks which decision-makers can ill afford.
“The BRIC regions are not providing the absolutely safe ground international investors are looking for. Europe is seen as predictable and safe. Investors are showing greater loyalty to their countries of origin and historical markets, launching fewer projects in Emerging Europe. And that’s why - for the moment - at least they’d sooner stay at home than venture abroad.”
But longer term the trend is inevitable
However as Mark Otty comments, “The economic downturn will not keep the global centre of economic gravity from moving West to East and from North to South. Companies are completely right to still believe in the opportunities of the emerging markets. A recent Ernst & Young report highlighted that Brazil, Russia, India and China will contribute 40% of global economic growth between 2009 and 2020.”
Vladimir Kotenko, Partner, Head of Tax and Legal Services at Ernst & Young Ukraine, adds: “Competitiveness of the tax system is one of the constituents of a country’s overall investment attractiveness. Ukraine’s investment attractiveness is impacted by imperfections of its tax regulations. Regardless of the global developments, we are able to improve Ukraine’s investments attractiveness by raising the quality of tax legislation."
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About the survey
The Ernst & Young’s European attractiveness 2009 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 Ernst & Young’s EIM. This unique 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 Institut CSA in February and March 2009, via telephone interviews, based on a representative panel of 809 international decision-makers.
Table 1: Top 15 locations for FDI in Europe by number of FDI projects in 2008
