It is encouraging that an all-time high 67% of the businesses we surveyed have “plans to establish or expand operations in Europe over the next year,” a metric that has rebounded sharply since the pandemic and is up from 53% a year ago.
These plans for activity appear to be shared across many industries. The prospect of new investments by chemical and pharmaceutical companies will contribute to increasing European independence in these strategic sectors, while the service industry seems to be actively searching for a new footprint, especially in Southern and Eastern Europe.
However, sentiment is weaker among companies headquartered outside Europe: Only 53% report plans to expand or establish operations, compared with 77% of European-headquartered executives. While 60% of FDI projects in 2022 originated with European-based companies, that gap shows that Europe’s political and business narrative needs to be strengthened, and its call for a European “industrial sovereignty” could be clarified among overseas investors.
Another differentiator is company size: Fewer SMEs say they have plans to invest (56%) than larger firms (79%). Governments and multinationals must support their subcontractors and business partners, which employ about 100 million people, account for more than half of Europe's GDP and play a key role in creating value across all sectors.
R&D is a top priority for inward investment
Businesses’ perceptions of the three-year outlook for Europe are relatively stable, despite recent challenges. Sixty-seven percent expect Europe’s attractiveness to increase over the period, slightly more than in 2022 and 2021.
Encouragingly, 64% of executives expect to increase their European footprint in R&D over the next three years, while the strong dynamics of the commercial and business services activities reflect Europe’s economic power. The implications of the focus on R&D will need to be considered carefully, however. Developing technology tends to create a small number of high-value jobs, while building technology delivers the jobs. As recent geopolitical events have shown, there are strategic advantages in being able to do both, although financial considerations typically drive manufacturing to lower-cost countries.
In that regard, it is potentially concerning that just 33% of respondents plan to increase their investment in manufacturing. To prevent Europe from losing out on the global reshaping of supply chains, and ensure it builds the industrial capacity needed to reach net zero, this proportion surely needs to be higher.