European attractiveness survey 2006: team Europe defends its goals

Paris, 7 June 2006: In conjunction with the 4th World Investment Conference in La Baule, Ernst & Young has published the results of its third annual survey into the Attractiveness of Europe. Will India be the next Eldorado? When will the Russian economy end its transition period? Are we seeing a rebirth of the Japanese model? At what pace will Europe be able to integrate the reforms necessary to maintain its place amongst the major world economies? The answers to these questions form the core of the survey.

Ernst & Young’s survey analyses two different angles of investment patterns: the investments and expansion projects of foreign investors in Europe in 2005 (through the use of the European Investment Monitor—EIM—database), together with the perceptions of 1,019 foreign investors concerning the current and future attractiveness of Europe, its strengths and weaknesses.

Key findings of the 2006 European Attractiveness Survey:

Image of countries:

• The US and China remain the two preferred countries for international decision makers, with 41% of responses. While China maintains a strong image rating, its attractiveness varies according to the size of the company questioned: multinationals are less interested (38% in 2006 against 58% in 2005) while SMEs maintain a strong interest (46% in 2006).
• India is still a key destination, but the gap separating it from China remains significant. India is placed fourth in the ranking of the most attractive countries in 2006, with 15% of responses; however a full 23 points separate it from the top ranking duo if the US and China.
• As a zone on the global attractiveness map, Western Europe retains its position as a leader. At a global level, the European zone is placed first among the principal world zones in terms of its attractiveness, benefiting from the combination of Western Europe’s maturity (68% of respondents cite Western Europe as one of their three preferred zones, up five points on 2005) and Central and Eastern Europe’s dynamism (52% of responses for Central and Eastern Europe). Europe’s image in the eyes of investors is improving: 47% consider that its attractiveness has improved over the course of the last year. 2006 shows Europe returning to its level of popularity of 2004, following a fall in 2005.
• International decision makers’ perceptions in 2006 show a preference for traditionally low risk locations. This trend explains the strong positioning of Europe this year. However, investors remain attracted by the possibility of cost reductions offered by the emerging markets, and are this interested in Central and Eastern Europe as an alternative to China.

Investment reality:

• A record number of investment projects by foreign investors in Europe. Europe registered 3,066 project announcements in 2005, representing an icrease of 6% on 2004 (2,885 projects). The UK remains the top investment location with an 18.2% market share, followed by France with 17.5%.
• The 2006 survey also shows a fall of 13.5% in the number of jobs generated by foreign investment. 197,000 identified jobs were created in 2005 compared with 227,000 in 2004. This is explained notably by the reduction in the number of jobs created for each project (in 2004, the average was 113 jobs per project, compared with 95 in 2005). Central and Eastern Europe dominated in terms of jobs created in 2005. In this context, Poland is placed a clear first, with 37,745 jobs generated by international investments.
• The US remains the country which invests the most in Europe. However, intra-European investment dominates the investment pattern, with the key contributors being Germany and the UK. Intra-European investment has increased consistently over the last five years, rising from 42.9% of the total in 2000, to 53.8% in 2005. In comparison, investment in Europe by the US has decreased over the same period from 41% to 26.5%.

The challenges for Europe:

• The majority of European countries show a difference between the image they portray to investors and the reality in terms of investment flows. Germany, for example, ranks first for its investor image, but is in third place for the reality of investment levels. The same pattern is true for Poland and the Czech Republic. The challenge for these countries is to transform their superior image into concrete investment projects. Conversely, the UK and France, in first and second place respectively in European investments received in 2005, suffer from an image deficit and were placed in third and fifth position by international decision makers. These countries risk, over time, losing ground to their competitors with a superior image, with a consequent decline in their market share of actual investment.
• Investors have high hopes for European reform: increased flexibility, simplified regulations and increased innovation. 57% of decision makers consider that improving the attractiveness of Europe will be achieved as a result of radical or important reforms. They also believe that its attractiveness could be achieved through an increased level of exposure to Europe’s economic issues in mainstream education programmes (36%) and a focus on sustainable development in European policy (30%).