How can Europe reset the investment agenda now to rebuild its future?

Authors

Julie Linn Teigland

EY EMEIA Area Managing Partner and EY Global Leader – Women. Fast forward

Passionate about the transformational power of digitalization and innovation and its potential to deliver sustainable, inclusive growth for clients. Prominent voice of the Women20 global agenda.

Marc Lhermitte

EY EMEIA Geostrategic Business Group Lead

Fascinated by the complex interactions between companies, people and the geographies they live in.

Hanne Jesca Bax

EY EMEIA Markets & Accounts Leader

Experienced leader blending different cultures, generations, mindsets and genders.

Contributors
57 minute read 28 May 2020

COVID-19 has slowed foreign investment in Europe, but there’s still cause for optimism, according to EY’s latest Attractiveness survey.

Foreign direct investment (FDI) rarely makes the headlines. Browse the business pages of leading publications, and you’ll see a range of news about mergers and acquisitions (M&A), infrastructure investment and initial public offerings. FDI is often an afterthought.

It shouldn’t be. According to the European Commission, FDI totaled €7.2 trillion as of the end of 2018, accounting for 45% of the EU’s gross domestic product (GDP).

FDI also turbocharges research. Foreign-owned firms account for a quarter of business R&D in France, Germany, and Spain; between 30% and 50% in Portugal, Sweden, and the UK; and more than 50% in Austria, Belgium, and Ireland.

It is therefore vital to understand what drives businesses to invest in particular countries and regions, how their location priorities are changing, and what governments can do to influence these decisions.

In this spirit, EY has conducted extensive research on the level of FDI in Europe, and what drives it, every year for the last 19 years.

This year, our usual research program was interrupted by the coronavirus disease (COVID-19) outbreak. Like almost every aspect of life, the pandemic has disrupted, though by no means decimated, FDI.

To remain attractive in this reframed business environment, Europe - businesses and governments together - must think creatively, act decisively, and put cohesion and collaboration at the heart of everything it does.
Julie Teigland
EY EMEIA Area Managing Partner

The results are sobering, but certainly not discouraging. For example, 9 out of 10 surveyed businesses expect to decrease or delay investment plans this year, though 51% plan to do so to a minor extent. The exact impact in investment levels will, of course, depend on the extent to which the global economy recovers and how FDI is incentivized at a local level.

We believe FDI can also spark Europe’s economic recovery and transformation. Of course, countries must count on investment from the United States (US) and Asia to remain active in Europe, the world’s number one economy. But we also think that FDI from Europe can be an incredible economic and transformational force for Europe.

For this to happen, European countries and institutions, as well as global companies headquartered in Europe, must grasp what it means to be an attractive FDI destination post-COVID-19.

“To remain attractive in this reframed business environment, Europe - businesses and governments together - must think creatively, act decisively, and put cohesion and collaboration at the heart of everything it does,” says Julie Teigland, EY EMEIA Area Managing Partner.

A businessman standing at the door in a green office
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1

Chapter 1

How was European FDI performing when COVID-19 hit?

European FDI stabilized in 2019, but projects are in jeopardy.

Today, 2019 seems like a distant memory; yet it’s worth reflecting on the state of FDI before the pandemic hit. EY analysis reveals that 6,412 FDI projects were announced in Europe last year, a 0.9% uptick on 2018. Investment was particularly strong in France and Spain, but global trade tensions, Brexit uncertainty and subdued economic growth caused investment across all of Europe to increase by only a modest amount.

Even so, measured by the number of announced projects alone, 2019 was the second-strongest year for FDI ever, behind 2017.

“Foreign direct investment can, in several ways, spark Europe’s economic recovery and transformation post COVID-19,” says Hanne Jesca Bax, EY EMEIA Managing Partner Markets & Accounts.

A record year for FDI

6,412

FDI projects announced in 2019 across the 47 countries of Europe, a +0.9% increase year on year, making it one of Europe’s strongest years ever.

Historically, only a marginal number of FDI projects announced in any particular year is not delivered. But COVID-19 interrupted project realization. EY analysis reveals that market uncertainty and, in some sectors, market decimation will result in only 65% of projects announced in 2019 being delivered on time. A further 25% are delayed and 10% are cancelled. 

COVID-19 interrupts - but does not stop - FDI

65%

of FDI projects announced in 2019 will be delivered on time. A further 25% are delayed and 10% are cancelled.

Even the projects that are proceeding as planned may not meet their investment and employment targets.

The impact of COVID-19 on project realization is less severe in certain countries. In highly competitive, service-oriented countries such as Ireland, Poland, and Portugal, where a large proportion of FDI involves shared service centers, software development offices or research and development facilities, up to 80% of FDI projects are likely to be maintained. This is significantly higher than the average 65% realization rate across Europe

A resilient Europe investing in itself is the foundation for recovery, and will reframe Europe’s future.
Hanne Jesca Bax
EY EMEIA Managing Partner Markets & Accounts

France overtakes the UK as Europe’s top FDI destination

Investment in France rocketed 17% to 1,197 projects in 2019, with a 18.8% market share. For the first time, France attracted more FDI projects than any other country last year. France’s resurgence, which has gathered pace since 2017, is a direct result of President Macron’s reforms of labor laws and corporate taxation, which were well received by domestic and international investors alike.

Europe’s top investment destination

17%

The annual increase in FDI in France, which attracted 1,197 new projects.

Across the Channel, investment in the UK increased 5%, demonstrating resilience to Brexit uncertainty. However, the country lost its top rank for the first time ever.

Other countries with strong performance include Portugal (+114%), Spain (+55%) and the Netherlands (+11%). It remains to be seen how COVID-19 will affect the realization of FDI projects, particularly in Spain, where the economy has been one of the more disrupted in Europe.

FDI decreased in Ireland (-7%), Russia (-9%), Poland (-26%) and Turkey (-33%). Germany’s stability in FDI reflects the structural difficulty for new entrants to hire staff in crowded labor pools, and the fact that supply chains are already very well organized and integrated. Decreases in Russia and Ireland follow strong levels of investment in 2018. 

  • Viewpoint: A new European strategy to attract and retain foreign investment

    Pascal Cagni, France Ambassador for International Investments and Christophe Lecourtier, Chief Executive Officer, Business France

    Christophe Lecourtier, Chief Executive Officer, Business France (left)

    Pascal Cagni, Ambassador for International Investments, France (right)

    COVID-19 highlighted the need for companies to reorganize their supply chains. The experience of the past few weeks must encourage Europe to intensify its efforts, and Member States to work together.

    France and Germany will lead the way. On May 18, 2020, President Emmanuel Macron and Chancellor Angela Merkel unveiled a Franco-German initiative to support Europe’s economic recovery, ecological and digital transition, and its industrial sovereignty. They insisted that 5G, ‘a Europe of health’, and the green transformation of Europe must be prioritized, with strong support from all stakeholders, governments and businesses.

    Berlin and Paris will have a common strategy of reducing their dependence on imports in strategic sectors, such as life sciences. However, this industrial autonomy cannot and will not, in any way, prohibit the growth of foreign businesses with strong industrial bases and R&D centers in Europe.

    All these priorities, and the associated funding that will be put in place, represent an opportunity for new investments and jobs, starting with companies who are already present in the EU.

    France’s performance as the leading FDI destination in Europe in 2019 shows the resilience of the French economy. And, this transformation of France’s ‘business model’ has been very well received by domestic and international investors alike.

FDI surges in Europe’s major cities

Although European FDI only increased by 0.9% last year, investment in major cities exploded. In Greater London, investment increased 17% due to its digital and business services leadership, while investment in the Paris region surged 34%. These two regions account for 8% and 6% of FDI across Europe respectively.

The strong industrial regions of Bavaria and North Rhine-Westphalia (NRW) had mixed fortunes. Investment in NRW rocketed 44% and it is now the third-largest region for FDI in Europe, while investment in Bavaria dropped 24% and it is now ranked fourth. In both regions, the high proportion of manufacturing projects means more FDI projects announced in 2019 will be delayed or canceled, and those that proceed are more likely do so with less job creation.

Major European cities continued to attract foreign investors

14%

The share of FDI that Greater London and Paris attracted in 2019.

FDI dominant in digital and business services sectors

The digital and business services sectors attracted most FDI in 2019, collectively accounting for 31% of new projects and 24% of new jobs created. Anecdotal insight from local governments indicates that most projects in these sectors had already been implemented before COVID-19 unfolded.

Projects in the transportation sector, including automotive and aeronautic manufacturers and suppliers, which accounted for 7% of new projects and 23% of new jobs, are more at risk. Along with the industrial equipment, chemicals and plastics sector, our research shows that this industry has experienced the greatest supply chain disruption and revenue losses, leading to a greater proportion of projects being delayed or downsized than in other sectors.

A business man enjoying the night view
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2

Chapter 2

How will COVID-19 affect new FDI in 2020 and beyond?

Investors ease off new projects, but do not fully retreat.

At the time of writing, COVID-19 had put the brakes on investment plans in Europe, though not halted them altogether.

A survey of 113 businesses at the end of April 2020 revealed that 51% expect a minor decrease in 2020 FDI plans; 15% expect a substantial decrease; and 23% plan to delay new projects until 2021. Only 11% do not expect any change.

FDI planning in Europe

66%

of business executives surveyed expect a decrease in 2020 FDI plans.

Investment intentions have understandably fallen because lockdowns make it practically impossible to evaluate and execute investment projects. The economic uncertainty caused by the outbreak also means companies are reconsidering whether manufacturing, research or support services projects are still financially viable. Indeed, 73% of businesses expect COVID-19 to have a severe impact on the global economy, according to EY’s Capital Confidence Barometer launched in March 2020.

If optimistic predictions of a V-shaped recovery materialize, in which economic activity rebounds strongly in the second half of the year, FDI could recover strongly. By contrast, pessimistic predictions of a protracted depression would dampen it for the foreseeable future. EY’s macroeconomic modeling suggests that an uneven, saw-toothed, slow recovery, marked by choppy, uneven growth, is most likely.

FDI recovery rates are still difficult to predict because investment is also contingent on the rate of recovery in the regions from which FDI into Europe emanates, beginning with Europe itself.

A protracted European recession would significantly affect FDI, given that 52% of European investment came from European companies between 2015 and 2019. That said, some countries are especially reliant on the US, such as Ireland, where 40% of the private sector depends on US companies.

The shape of the recovery curve will vary depending on individual countries’ ability to control infection rates within health care capacity and according to different levels of exposure to global value chains.
Dr. Marek Rozkrut
Co-Chair EY EMEIA Economists Unit
  • EY Viewpoint: Expect a slow, choppy, uneven recovery

    Dr. Marek Rozkrut, Co-Chair EY EMEIA Economists Unit, Head of EY Economic Analysis Team

    Dr. Marek Rozkrut

    Co-Chair EY EMEIA Economists Unit

    It is the first time since the Great Depression that we will witness recessions both in advanced and emerging market economies.

    Due to its costs, a policy of nationwide lockdowns, which is leading to a decline in the level of output of 20%–25%, is unlikely to be sustainable. EY’s economic scenario is that we will most likely see a slow ‘saw-tooth’ recovery marked by choppy, uneven growth. The exact patterns of these increases and setbacks will be heavily influenced by recurring epidemic outbreaks and the abilities of governments to contain and mitigate their effects.

    The European Commission forecasts that EU GDP will contract by 7.4% in 2020, with hardly any European economies expected to get back to their pre-pandemic levels within the next two years. Faced with huge uncertainty, many firms will delay or cancel investment. We project FDI in Europe to contract by 35%–50% in 2020 compared with 2019.

    At the same time, transitioning to what comes next will place heavy demands on companies’ ability to adapt and increase resilience to weather aftershocks. More attention will be paid to sustainability and climate change. COVID-19 has altered our relationship with digital – where digitalization was a “can” before the pandemic, it is now a “must.” 

FDI is most at risk in sectors hit hardest by COVID-19

COVID-19’s impact on market demand and the ability to execute operations varies significantly by sector. This has a direct knock-on effect on FDI. Companies in sectors experiencing a surge in demand due to COVID-19 (such as life sciences, essential consumer goods and retail, e-commerce, and online entertainment) are more likely to maintain their investment plans.

By contrast, a global survey of investment promotion agencies conducted by the World Bank revealed that supply chain disruptions are hitting production and revenues. This is resulting in Capex and employment reductions in investment plans, particularly impacting manufacturing investment in the transportation and textile industry.

With regard to manufacturing FDI projects, the transportation industry (including automotive and aeronautics), chemicals and plastics, machinery and industrial equipment, and agri-food sectors will all be hit hard. The pharmaceutical and medical equipment sectors appear resilient for now. 

  • EY Viewpoint: Resilient banks, resilient customers

    Nigel Moden, EY EMEIA FSO Banking & Capital Markets Leader

    Nigel Moden

    EY EMEIA FSO Banking & Capital Markets Leader

    The European banking sector has responded proactively to the need for increased financial support to businesses of all shapes and sizes, as well as to individual consumers. This has taken the form of increased lending, both through the variety of government-backed stimulus schemes that have been launched across Europe and through existing product lines, and a range of forbearance measures, including mortgage payment holidays, interest-free overdrafts and preferential rates on credit card transactions.

    The banking sector continues to be financially resilient and has thus far demonstrated that it has both the operational capacity and balance sheet strength to meet these increased demands. In this effort, they have been supported by European regulators, which have announced a range of measures designed to ease the burden on capital and enable banks to focus their energies on supporting their customers.

    The experience of the past few weeks will encourage the sector to intensify its efforts to transform ways of working and customer engagement strategies, while accelerating the pace of automation and digitization. The agility demonstrated by our banks during the crisis will be an important retained asset as they respond to changing market dynamics.

  • EY Viewpoint: Life sciences - the data revolution

    Pamela Spence, EY Life Sciences Industry Leader

    Pamela Spence

    EY Life Sciences Industry Leader

    In the life sciences sector, future value equals innovation to the power of data. This means that you must unlock the power of data to fuel innovation, the success of which should be measured by the degree of levels of personalization and better health outcomes. COVID-19 has accelerated the need to do this, but it was already important.

    To make this vision a reality, companies in this sector will have to partner and collaborate closely with nontraditional entities. Clusters such as Cambridge and Oxford in the UK have previously facilitated this. They create the serendipity that science has always relied on. Today, close proximity is, of course, not possible, but virtual collaboration is — and it is very much alive.

    In the future, I think clusters will still be very important and an asset to attracting foreign investment. Coming out of the COVID-19 crisis, governments should really think about what industries they want to excel in, then encourage businesses in those sectors to invest.

    Different countries’ response to COVID-19 has also raised questions at the government level about what is needed within the country. We may see some supply chains onshored at governments’ request.

    Companies themselves may decide that they need more localized supply chains. Rather than a global supply chain, I can see companies deciding to have separate supply chains for the Americas, Europe and Asia, for example, that are not interdependent.

National stimulus packages sway foreign investors, but cities and regions need a fresh approach

COVID-19 is likely to reset investors’ perceptions about which countries and cities are attractive. With scientists unsure whether a second wave of COVID-19 will materialize in the last quarter of 2020, businesses might start to favor FDI in European countries less affected by the first wave of COVID-19 at the expense of those worst affected.

The same applies to cities. COVID-19 might reverse the fortunes of Europe’s major cities such as London and Paris, with those that appear less resilient to pandemics potentially becoming less attractive in the future.

Leaving aside their specific vulnerability to COVID-19, major cities may lose economic muscle due to several trends accelerated by the lockdown experience. Businesses may no longer consider it necessary to locate offices in dense cities if they allow greater numbers of staff to work from home, and citizens may be attracted away due to concerns about future outbreaks and air pollution. Certain European countries, such as the UK, are actively trying to rebalance prosperity away from capital cities to smaller cities and regions.

Cities and countries of all sizes have an opportunity to shape their own attractiveness. Indeed, 80% of business leaders surveyed at the end of April 2020 say that the nature and weight of the stimulus packages-mostly national-will influence their future location choices. Countries and cities can increase their attractiveness with targeted FDI support; however, unexpected but necessary spend on wage subsidies, tax deferrals, rate reductions and business interruption loans may leave little scope for it.

  • EY Viewpoint: Refreshing FDI policy for towns and small cities

    Mark Gregory, EY UK Chief Economist

    Mark Gregory

    EY UK Chief Economist

    The belief that agglomeration, concentrating people into city centers, generates higher growth and faster innovation through greater connectivity has dominated economic development policy in recent years. But this crisis has shown that city-based growth comes with costs as well as benefits.

    Sharp declines in air pollution and carbon emissions have laid bare the burden cities place on the environment. At the same time, people have begun to realize that their lifestyle could be very different without a daily commute, not to mention how much money they can save.

    This is not to say that face-to-face human interaction has no value. It remains very important in sectors such as business services, finance and advertising, but we can collaborate without being physically together every day. However, we have failed to challenge the assumption that all sectors are the same, when the reality is that work in other sectors can be distributed, thereby boosting growth and efficiency. In the UK, for example, two-thirds of all coding jobs are in the Southeast of England. Now, it really doesn’t seem that this has to be the case.

    This doesn’t mean that cities won’t continue to grow. We should use the learnings from the current situation to initiate the rebalancing of economic activity from major capital cities to smaller cities, towns and rural areas.

    The interesting question is therefore: how does your FDI policy need to adapt? What works for London will not work for a small town.

This new reality presents a new set of challenges and demands innovative policies and ideas, from both the public and private sector, with the EU assuming an important role.
Fernando Medina
Mayor of Lisbon, Portugal
  • Viewpoint: Europe’s cities will bounce back

    Fernando Medina, Mayor of Lisbon, Portugal

    Fernando Medina

    Mayor of Lisbon, Portugal

    Like every global and interconnected city, Lisbon was strongly affected by the COVID-19 pandemic. Although the rate of contagion was controlled and the number of infected people was moderate compared with other countries, many services, namely in the tourism and hospitality sector, were forced to close during the lockdown. They now face a serious challenge to recover, even with the city’s and government’s support.

    The tourism sector will have to turn its attention to the domestic market until the world regains confidence in international travel. The increase in unemployment demands a strong social response and accelerated reskilling to mitigate the already on-going impact of digitalization and automation, which was accelerated by COVID-19.

    This new reality presents a new set of challenges and demands innovative policies and ideas, from both the public and private sector, with the EU assuming an important role. The recovery might take time, presenting a serious economic and social challenge in the short-term. But when the situation is contained, European cities will recover fast and strongly.

    Lisbon will reinforce its commitment to a carbon-free future, with a more sustainable and green mobility system facilitated by a high level of investment in public transport. By doing this, the city will continue to attract investment and people to one of the oldest, yet most vibrant and dynamic capitals, of Europe.

Brexit no longer the major threat to FDI, but uncertainty remains

Fears of a no-deal Brexit were put to bed following the decisive victory of the Conservative Party in the UK general election in December 2019. The subsequent implementation of the Withdrawal Agreement was supported by business leaders because it removed the immediate possibility of a no-deal Brexit. This is reflected in our survey data, with just 24% identifying Brexit as a top-three risk to Europe’s attractiveness in the next three years, compared with 38% last year.

The EU and the UK wish to enter into a free trade agreement, but there are major disputes about the extent to which the UK will have to continue to abide by EU regulation. COVID-19 has also delayed negotiations, and most observers believe there is simply not enough time to agree and ratify an all-encompassing free trade deal.

If a deal is not agreed in time and the transition is not extended, the UK and the EU will face trading on World Trade Organization  terms. However, a more realistic scenario is that a narrow trade deal covering goods will be agreed, but that discussions relating to services will be pushed back.

A comprehensive free trade deal would boost FDI in the UK and in its trading partners significantly; however, the 5% increase in UK FDI in 2019, when Brexit uncertainty was at its peak, indicates that the lack of a comprehensive free trade deal will not sever long-term investment prospects.

A business women carrying her briefcase and files and walking by
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3

Chapter 3

What will drive FDI in the reframed business environment?

Technology, sustainability and a reconfiguration of supply chains will be major areas of focus.

EY’s research in April 2020 shows that executives making location decisions expect three megatrends to influence their European investment plans:

  1. The acceleration of technology for cost reduction and customer access
  2. A sharper focus on climate change and sustainability in investment decisions
  3. A reconfiguration of supply chains, with a new mix of reshoring, nearshoring, and offshoring
The fate of FDI in Europe will not just be governed by economic forces. FDI itself can also spark Europe’s economic recovery and transformation.
Marc Lhermitte
EY EMEIA Leader – Geostrategic Business Group and Global Leader International Location Advisory Services

Technology investment set to accelerate

COVID-19 has altered consumers’ and businesses’ relationship with digital technologies in a matter of a few weeks.

More than half of companies (55%) plan to enhance digital customer access, virtualize business-to-consumer interactions and engage in more e-commerce in the short term.

In parallel, we expect companies to accelerate investment in more intelligent automation and robotization of manufacturing and transactional services such as IT, human resources and finance.

While digitalization was a “can” before the pandemic, it is now a “must.” Businesses clearly recognize this, with 82% expecting technology adoption to accelerate in the next three years as a result of COVID-19. 

Technology adoption

82%

of surveyed business leaders expect technology adoption to accelerate in the next three years as a result of COVID-19.

Countries’ digital competitiveness, including digital infrastructure, digital skills, and a dynamic environment of technology companies, has long determined their attractiveness. Before COVID-19, businesses ranked gaining global leadership in the digital revolution as the top priority for Europe to increase its attractiveness. In parallel, businesses ranked the availability of a workforce with technology skills as the most important factor to determine where they invest. 

Accelerated technology adoption will make countries’ digital competitiveness an even more important factor in investment decisions. Governments must therefore ensure fair access to fast internet and communications infrastructure in remote areas. This would help improve FDI attractiveness beyond major cities. 

Renewed sustainability agenda will reshape the way investment decisions are made

COVID-19 has enhanced citizens’ and consumers’ appreciation of, and demand for, sustainability. They enjoy the benefits of lower air pollution caused by the lockdowns. The closure of all but essential shops has forced frugality, which may endure. And awareness of income inequality has grown, especially in relation to frontline health care workers.

Therefore, populations will increasingly demand that businesses address major societal challenges, such as climate change and income inequality. Moreover, governments may impose regulations that encourage businesses to drive this change.

Most businesses recognize this: 57% anticipate a renewed focus on sustainability and climate change in the next three years due to COVID-19.

Sustainability

57%

of surveyed business leaders anticipate a renewed focus on sustainability and climate change in the next three years.

The economic recovery from the COVID-19 crisis has the potential to accelerate the transition to a sustainable future. And the push for sustainability also creates industrial opportunities.
Doris Birkhofer
Chief Executive Officer, Siemens Smart Infrastructure France & Belgium

How will this influence FDI? Businesses that already have sustainability at the heart of their corporate agenda may find Europe more attractive from an FDI perspective if the continent’s business, regulatory and societal climates reflect their own aspirations.

On the flipside, there is a risk that overbearing regulation and uncompetitive taxes implemented to enhance sustainability may detract from Europe’s attractiveness. 

  • EY Viewpoint: Decarbonize now - take the green path to recovery

    Bernhard Lorentz, Managing Partner Markets - Germany, Switzerland & Austria, EY, and Head of EYCarbon

    Bernhard Lorentz

    EY Managing Partner Markets - Germany, Switzerland & Austria, and Head of EYCarbon

    Governments have rightly launched large-scale stimulus programs to mitigate the economic and social effects of COVID-19, but there’s a risk we will neglect another big crisis: climate change. There’s significant merit in tackling both, but the right approach is needed.

    Last December, before the onset of COVID-19, Ursula von der Leyen, President of the European Commission, presented a plan that set the course for a climate-neutral future and called for EU Member States to support a European Green Deal.

    This aims to transform the bloc from a high-carbon to a decarbonized economy. It proposes a far-reaching set of actions, including investing in sustainable technologies and supporting industry to innovate. This aligns well with the agreement by EU heads of state that Europe should become the first climate-neutral continent. By 2050 at the latest, Europe’s greenhouse gas emissions are set to be net zero.

    To achieve this target, the plan calls for greenhouse gas emissions to be cut by at least 50%–55% by 2030 from 1990 levels, an increase on the current 40% reduction target.

    If done well, Europe could become a global pioneer by establishing its own economic model and creating a powerful stimulus for innovation. 

Reconfigure supply chains for resilience and agility

The risk of future pandemics, increased geopolitical tension, and climate change will reinforce the need for flexible supply chains. Quite how this is implemented depends heavily on the needs of individual companies and the sectors in which they operate, but FDI is likely to play a strong role.

Rather than a massive reshoring movement, a regionalization of supply chains is expected by 83% of the surveyed executives, with a move of certain production sites and their value chains closer to the borders of the EU and Africa. At the same time, some onshoring of critical activities will happen, help create a more agile value network and restart production, while mitigating risk of disruptions in the future.

Location considerations aside, 61% of businesses expect to reduce their dependence on single-dominant-source countries. 

Supply chain

61%

of surveyed business leaders expect to reduce their dependence on single-source countries.

Technology will play a role here, too. Almost 80% of businesses plan to move to lean or additive manufacturing (e.g., 3D printing) to gain advantages in speed, cost, precision and materials.

Technology may have a further role in keeping manufacturing facilities open by improving health and safety: for example, technologies will be deployed to track employee health, reduce human-to-human interactions, and improve ventilation.

Those with a resilient supply chain have seen huge competitive advantage in the recent period of COVID-19, and I think this will continue in the longer term.
Robert O’Sullivan
Vice President of Finance, Kellogg’s Europe
  • Viewpoint: Juggling cost and resiliency - the supply chain imperative

    Robert O’Sullivan

    Vice President of Finance, Kellogg’s Europe

    In recent years, outside of people and food safety, which will always be the main priority, businesses such as ours have looked at their supply chains primarily through the lens of cost as an enabler to margin expansion. Post-COVID-19, there will be an additional lens front and center: resiliency. The challenge will be to find the right balance between the two. Those with a resilient supply chain have seen huge competitive advantage in the recent period of COVID-19, and I think this will continue in the longer term.

    How can businesses ensure supply chain resiliency? Businesses in our sector will look at everything, but I don’t expect any knee-jerk reactions. There may be some relocations and nearshoring but, given that the main risk is security of supply, the immediate priority will be to change the KPIs when evaluating suppliers and doing everything possible to improve certainty. This could mean, for example, dual- or triple-sourcing to ensure security of supply.

A an riding his bicycle beside the modern office building
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4

Chapter 4

How can Europe attract the FDI critical to its recovery?

We offer four recommendations on how Europe can act decisively to retain its attractiveness.

An alarming number of executives are pessimistic about Europe’s prospects post-COVID-19, with 49% believing that Europe is at risk of being less or much less attractive for investment. Of course, all regions are likely to be less attractive for cross-border investment, not just Europe. Nonetheless, Europe must act decisively to retain its attractiveness. Here are four ways it can achieve this.

Recommendation 1: Protect globalization, starting within Europe

COVID-19 has accelerated existing anti-globalization trends. Many national governments, including those in France and Germany, have touted the need to develop domestic supplies of certain products. At the same time, barriers to acquisitions of key companies from foreign acquirers have been fortified.

Perhaps reflecting this, 37% of surveyed businesses are considering increasing their manufacturing presence in Europe. It is unclear whether this trend will grow to include investment in multiple sectors or just in essential products, such as medical equipment. In addition, major countries, particularly the US, continue to repudiate critical international institutions and treaties. 

Manufacturing

37%

of surveyed business leaders are considering increasing their manufacturing presence in Europe.

Against this backdrop, the EU has an opportunity to act as a strong voice for international collaboration and coordination, starting within its own borders. This spirit is required not only to build resilience to future shocks, but also to create an environment that attracts future investment, growth, and prosperity for all.

EY’s analysis shows that investment projects from European companies into another European country represented more than half (52%) of FDI in the past five years. This, we believe, is the foundation for Europe’s recovery. Rebuilding confidence among and between European citizens, consumers, manufacturers, and financial investors must be the priority to restart the European engine.

Europe now needs to turn its attention to supporting business and investment in the long term. As a starting point, it must revisit tax reform.
Guillaume Alvarez
Senior Vice President, EMEA, Steelcase Inc., and Chairman of the European Executive Council
  • Viewpoint: Europe’s road map to future competitiveness

    Guillaume Alvarez, Senior Vice President, EMEA, Steelcase, and Chairman of the European Executive Council

    Guillaume Alvarez

    Senior Vice President, EMEA, Steelcase Inc., and Chairman of the European Executive Council

    It may seem paradoxical, but Europe’s response to COVID-19 has been great, although with some complications. On the other hand, there has been a lack of coordination across Europe, and working out what the rules were in different countries sapped a lot of energy.

    There may be close collaboration behind the scenes at the European level, but this hasn’t been obvious to the public or businesses, which creates uncertainty.

    Europe now needs to turn its attention to supporting business and investment in the long term. As a starting point, it must revisit tax reform. Unfortunately, we expect that there will be a temptation to increase taxes, but there should be a way for us to keep cash in really productive investments.

    Labor laws are also important. COVID-19 will result in some parts of business doing a lot better than others, so there needs to be greater flexibility to redeploy workers into growth industries and new jobs.

    There also needs to be an ambitious policy to develop a technology sector in Europe.

    Then there’s Brexit. We have to be pragmatic and maintain free circulation of goods and people as far as possible.

    Finally, there needs to be a finalized European budget that accounts for the massive shock that we’ve just gone through and pays special attention to supporting mobility and sustainability.

    This is the pathway to Europe’s recovery.

Recommendation 2: Invest in technology, health care and environmental industries

The importance of Europe’s technology and sustainability sectors in economic growth is not lost on survey participants. They rank CleanTech first in terms of its potential for economic growth across Europe in the coming years. The digital economy sector ranks second, and the health care and well-being sector third.

But continued investment in Europe’s technology-intensive sectors is not guaranteed. The continent needs a robust digital infrastructure, with fast and reliable connectivity. To protect the health of Europe’s 500 million citizens, the EU will also need a plan to promote research for treatments and vaccines, and to work together with EU Member States to reinforce national health care systems.

To remain a priority destination for talent, entrepreneurs and global firms, European countries must adapt their education and training systems to equip people with the right skills for the labor market.

Companies that establish in-house digital training and development opportunities will be better positioned to attract and retain talent.
Caroline Jenner
Chief Operating Officer, JA Worldwide
  • Viewpoint: Educators must embrace digital or lose relevance

    Caroline Jenner, Chief Operating Officer, JA Worldwide

    Caroline Jenner

    Chief Operating Officer, JA Worldwide

    The education sector was digitally transforming, but only at a modest pace. COVID-19 accelerated the shift to online learning platforms, and the education sector has achieved in two months what would have otherwise taken two years. Of course, we need to be careful that technology dependency does not entrench inequality.

    When the pandemic recedes, I don’t expect consumers to want to go back to the ‘old ways.’ Instead, they will want blended learning based on a combination of digital and human interaction. Educators will want to improve how they assess a learner’s progress. This means that those that provide online education will only thrive if they focus on quality, impact and real-world relevance.

    This will be driven by the younger generations, who are more tech savvy; they have already identified online alternatives to classroom teaching and are re-skilling themselves to remain relevant in the labor market in a post-COVID world. Competences such as entrepreneurship, so essential today, should be mainstreamed.

    Companies should learn from this. Those that establish in-house digital training and development opportunities will be better positioned to attract and retain talent.

    However the training is provided, meaningful partnerships are needed in the long term between government, business, civil society and local communities to create the education systems that will meet the needs of tomorrow’s youth and business.

Recommendation 3: Fund the “new normal” with a careful balance between public support and economic competitiveness

EU Member States and the EU itself have provided significant funds to help businesses deal with the economic impact of COVID-19. However, funding is needed not only to weather the storm, but also to rebuild after it. Infrastructure investment will be needed to rejuvenate distressed regional economies; early-stage financing will be needed to catapult new businesses; and multinationals will need capital to fund expansion.

This calls for new sources of public and private finance and a gradual reduction in the dependency on bank loans. For example, Europe has long looked with envy at the US’s vibrant venture capital environment. Perhaps now is the time to create the conditions in which venture capital in Europe can thrive. In addition, some of the debt incurred by small and medium businesses could be turned into equity in the long term.

Where public finance is concerned, governments must strike a careful balance between increasing taxes to pay for the recovery and stimulus, and ensuring European businesses are competitive with their Asian and US competitors. For example, the technology sector, was identified by our survey of 500 European executives as the number one priority for the attractiveness of Europe. This sector must be taxed appropriately, but overbearing costs or regulation may deter future investment. 

Recommendation 4: Prepare for the next crisis

After COVID-19, being an attractive investment destination means being resilient and agile. Europe must ensure it is prepared for future shocks, whether it be another pandemic, a mass cyber event or an environmental catastrophe.

Preparation must take place on a number of fronts. As a starting point, the advanced analytical power of Europe’s academic and corporate sector must be used and increased to predict, track, and mitigate future crises more effectively.

  • EY Viewpoint: Decisive government action

    Alessandro Cenderello, EY Managing Partner for EU Institutions

    Alessandro Cenderello

    EY Managing Partner for EU Institutions

    There are often complaints about excess regulation and government intervention in the market in Europe, but when a crisis like this hits, you realize the importance of resilient institutions.

    The EU has learned the lessons of the 2008–12 financial crisis, and our institutions are more equipped. With Europe at a crossroad, how can it attract the FDI that is critical to its recovery?

    EU Member States have launched national programs, which differ country to country.

    Europe is also driving global efforts to respond to COVID-19. The European Commission’s global initiative to raise €7.5 billion to develop a vaccine and treatments is a good example of how it is bringing organizations around the world together.

    Will heightened government intervention continue? It should, and it will. Some nationalizations are already happening across Europe, so governments will certainly be more actively engaged in businesses and the economy after COVID-19.

    But the more important issue is how governments will ensure resiliency in the long term. Improving resiliency will not only protect businesses and people, but also make Europe competitive and attractive to foreign investors, which will be needed to accelerate the recovery.

The EU’s key institutions must also ensure they are adequately prepared. Many of the institutions that bind Europe together faced heavy criticism for their response to COVID-19. While organizations will need to learn vital lessons, calls to disband or dismantle these institutions must be resisted. FDI in Europe will only prosper with collective action and initiatives spearheaded by cohesive European institutions.

Finally, the pandemic has highlighted the economic vulnerability of certain segments of society and demonstrated that the vulnerability of some increases the vulnerability of all. Businesses and governments must protect not only the most vulnerable sectors, but also the most vulnerable people, including part-time, independent and gig workers.

We can’t forget that people may lose the incentive to acquire the skills if all they see in the future is the precarious gig economy.
Sandeep Mishra
EY EMEIA Markets, Business Development Director
Improving resiliency will not only protect businesses and people but also make Europe competitive and attractive to foreign investors, which will be needed to accelerate the recovery.
Alessandro Cenderello
EY Managing Partner for EU Institutions
  • Methodology

    To take the uncertainty of H1 2020 events into account, EY enhanced its methodology for the Attractiveness program to include a three-pronged approach:

    1. The ‘real attractiveness’ of Europe for foreign investors

    Our evaluation of the reality of FDI in Europe is based on the EY European Investment Monitor (EIM), an EY proprietary database, produced in collaboration with OCO. This database tracks those FDI projects that have resulted in the creation of new facilities and new jobs. By excluding portfolio investments and M&A, it shows the reality of investment in manufacturing and services by foreign companies across the continent.

    An investment in a company is normally included in FDI data if the foreign investor acquires more than 10% of the company’s equity. FDI includes equity capital, reinvested earnings, and intracompany loans.

    2. 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’s or area’s ability to provide the most competitive benefits for FDI. Field research was conducted by the CSA Institute in January and February 2020 via telephone interviews, based on a representative panel of 504 international decision-makers.

    A second perception survey was conducted from 15 to 29 April 2020 to reflect decision-makers’ perception changes due to the COVID-19 crisis. This online survey was led by Euromoney, based on a representative panel of 113 international decision-makers.

    3. Assessing the impact of COVID-19 on FDI in Europe

    To estimate the share of FDI declared in 2019 that would remain secured in 2020 despite the COVID-19 crisis, EY combined data from three sources:

    • A modelling exercise, to assess FDI vulnerability
    • The Euromoney survey, based on 113 international decision-makers
    • Webinars with 30 European investment promotion agencies, to collect field data

    To view the full methodology for EY’s Attractiveness program, download the full EY Europe 2020 Attractiveness Survey (pdf).

Summary

Europe must take decisive action to drive economic recovery after COVID-19. To remain attractive in this new business environment, EU Member States must focus on intra-European investment and create more agile and resilient markets.

About this article

Authors

Julie Linn Teigland

EY EMEIA Area Managing Partner and EY Global Leader – Women. Fast forward

Passionate about the transformational power of digitalization and innovation and its potential to deliver sustainable, inclusive growth for clients. Prominent voice of the Women20 global agenda.

Marc Lhermitte

EY EMEIA Geostrategic Business Group Lead

Fascinated by the complex interactions between companies, people and the geographies they live in.

Hanne Jesca Bax

EY EMEIA Markets & Accounts Leader

Experienced leader blending different cultures, generations, mindsets and genders.

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