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How can Europe attract next-generation inward investment?

To thrive in a period of transformation, Europe needs to adapt to investors’ new requirements, EY’s 2023 Europe Attractiveness survey shows.

In brief

  • As businesses seek to sharpen their strategic and operational edge, the location logic behind inward investment decisions is fundamentally changing.
  • Foreign investors are positive about Europe’s prospects, but they also warn of threats.
  • As global competition intensifies, there are six priorities for Europe to secure next-generation foreign direct investment (FDI). 

Ahigh number of companies plan to invest in Europe in 2023 because in a volatile and fast-changing environment, businesses know that standing still is not an option.

The results of the 22nd EY Europe Attractiveness Survey show that a paradigm shift is emerging today as investors’ priorities evolve, the interests of communities and policymakers shift, and global competition intensifies. The shift is ushering in the next generation of FDI in Europe. 

In every sector, in every market, businesses are seeking to sharpen their strategic and operational edge. This means strategies are evolving as transformative digital technologies, including generative AI, and the sustainability imperative pave the way for new value models. At the same time companies are driving supply chain resilience, Environmental, Social and Governance (ESG) compliance and the journey toward net zero, while striving to secure the skills needed to deliver in line with their strategic objectives.

The initial analysis of the results of the 22nd EY Europe Attractiveness Survey highlighted the extent to which FDI in Europe was affected by the shocks that hit the continent in 2022. The number of FDI projects announced grew just 1% between 2021 and 2022. 

Download the 22nd EY Europe Attractiveness Survey

We need a forward-looking European narrative that reminds investors of the power of Europe — its collective strength, above and beyond the individual economic interests of nations, regions or cities.

“Today’s investments require a new location logic, mixing the enduring business focus on profitability and efficiency targets with environmental and social considerations,” says Marc Lhermitte, Partner, EY Consulting, Global Lead – FDI & Attractiveness. “And while companies are rethinking how to select the optimal sites for investment, countries and communities are likewise rethinking their priorities.” There is a growing emphasis on environmental and social goals, and on supporting regional development. All this sits alongside the fundamental considerations of job and wealth creation. Quality, not just quantity, is the new mantra for economic development.

This shift is taking place against a backdrop of renewed global competition for investment. Europe needs to be agile and adaptive to maintain and enhance its attractiveness relative to the competition.

The question we ask is: Can Europe do this at both the general and local levels? We have identified six priorities for Europe to reinforce business confidence and attract next-generation FDI.

  1. Refresh Europe’s appeal as the natural home of next-generation businesses. 
  2. Reinforce support for small- and medium-sized enterprises (SMEs), which remain the vulnerable fabric of Europe’s economy.
  3. Simultaneously strengthen Europe’s capabilities for developing technology and manufacturing in all sectors.
  4. Make the most of Europe’s leadership on climate change and accelerate on ESG.
  5. Develop next-generation talent and align skills with the vision of Europe’s future.
  6. Build confidence with a modernized tax and regulatory regime
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1

Chapter 1

The new location logic for inward investment

For companies making decisions about their location in 2023 and beyond, the calculus is changing and a new strategy is emerging.

The survey results make clear that investors currently prize the relative stability and strength of Europe’s economy. The liquidity of financial markets and availability of capital, and the strength of the domestic market, are investors’ top priorities when selecting countries for investment.

Today’s investments require a new location logic, mixing profitability and efficiency targets with environmental and social considerations.

But business’s third area of focus is the policy approach to climate change and sustainability, a top-three priority for the second year running (having been ranked second-last as recently as 2021). That reflects the dual challenge facing businesses today: They must simultaneously navigate the near-term demands of a complex and uncertain operating environment, while making investments that will drive success over the longer term as relatively new considerations such as carbon emissions become ever more important.

The cost of energy and the energy mix appear to be less critical location factors than other considerations. Yet higher energy costs drive higher materials costs and elevated inflation rates — and our broader discussions with investors indicate that energy remains a fundamental concern for many. The results may reflect the steps that companies have taken to diversify and secure energy supply. Moreover, they are confident that European policymakers will have to stay focused on energy security as a major aspect of strategic competitiveness. Otherwise, gas reserves could run out in winter 2023–24, and high costs could severely damage Europe's manufacturing base.

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Chapter 2

Building Europe’s future: how to attract next-generation investment?

The 2023 survey data suggests that investors are positive about Europe’s prospects.

Even if investors are positive about Europe’s prospects, in a fast-changing world nothing can be taken for granted.

 

“Policymakers at all levels will need to understand investors’ evolving priorities and do what they can to attract the next generation of FDI in Europe,” says Hanne Jesca Bax, EY EMEIA Markets & Accounts Leader.

 

What, then, are investors’ priorities that will maintain Europe’s competitive position in the global economy? At the top of the list is support for high-tech industries and innovation. That is closely followed by support for small and mid-size enterprises (SMEs) — a segment that is also critical for innovation — and then by a focus on the regulatory environment, especially as it relates to emerging technologies.

Policymakers at all levels will need to understand investors’ evolving priorities and do what they can to attract the next generation of FDI in Europe.

EY research has identified six areas to build Europe’s attractiveness as a destination for next-generation inward investment:

 

1.  Refresh Europe’s appeal as the natural home of next-generation businesses
 

Europe can reinforce its appeal to investors by focusing on the factors that will drive its competitiveness in tomorrow’s global marketplace. Investors will respond positively to a vision of Europe that underlines its economic resilience and the stability of its political and regulatory environment, while also committing to support rapid-growth sectors and engaging with the era-defining challenges of the digital and net-zero transitions. 

 

Political commitments to coordinated action will be welcomed by investors. Julie Teigland, EY EMEIA Area Managing Partner, says: “We need a forward-looking European narrative that reminds investors of the power of Europe — its collective strength, above and beyond the individual economic interests of nations, regions or cities.” In that respect, many businesses are likely to welcome fresh political impetus within the EU for the capital markets union. Building on the logic of the single market, improved integration for Europe’s capital markets could increase their collective strength.

2.  Reinforce support for SMEs, which remain the vulnerable fabric of Europe’s economy

One of the biggest priorities in shaping a competitive business environment fit for the future should be to boost support for SMEs and help them scale more effectively. SMEs employ about 100 million people across Europe, account for more than half of its GDP and play an important role in creating value across all sectors. But far fewer smaller enterprises than larger firms plan to expand in Europe in 2023 (57% compared with 79%), and they are less optimistic about Europe’s prospects in the next three years. A comprehensive view is required of all the elements needed for more European SMEs to make the leap to become potentially world-leading businesses.

3.  Simultaneously strengthen Europe’s capabilities for developing innovative technology and manufacturing in all sectors

The survey identifies R&D as the top category for new investment in Europe over the next three years: 64% of executives expect to increase their European footprint in R&D over the next three years. That gives the continent a unique opportunity to incentivize manufacturing capability that is aligned with emerging technologies. 

 

R&D in focus
64%
of executives expect to increase their European footprint in R&D over the next three years, rather than the much-needed focus on manufacturing

It is concerning that far fewer executives have plans to invest in manufacturing than in R&D. Technology development tends to create small numbers of high-value jobs, but to create jobs at scale means attracting investment to build those technologies. Unless manufacturing becomes a bigger priority that if manufacturing does not become a bigger priority, Europe could lose out on the potential benefits of supply chain redesign, will struggle to build the industrial capacity needed for the net-zero transformation, and will find it hard to build strategic autonomy in a world of increasing geopolitical tensions.

To seize the current opportunity, Europe should consider how to encourage investment in manufacturing — especially in the high-value strategic industries that are reshaping the global economy and where policymakers seek to reduce Europe’s external dependencies.

4.  Make the most of Europe’s leadership on climate change and accelerate on ESG

The research suggests that investors recognize the advantages of Europe’s leadership on net zero and ESG: 61% of investors surveyed assess Europe to be more attractive than its peers on sustainability. Europe should aim to consolidate its leadership position and seek to head off the competitive challenge of the US whose Inflation Reduction Act (IRA) has already led some companies to rethink planned investment in Europe. Investors seek a response of similar scale, ambition and simplicity in Europe.

The survey also highlights the importance to business of the rising share of renewables in Europe’s energy mix. Access to decarbonized energy is increasingly important, especially for energy-intensive investments such as factories, and investors are attempting to limit their exposure to future changes in carbon prices. Europe should do everything it can to continue driving up the percentage of renewables.

5.  Develop next-generation talent and align skills with the vision of Europe’s future

High employment levels in many European countries mean that businesses face intense competition for talent, especially in growth industries. The EU has designated 2023 the European Year of Skills, with a view to increasing momentum toward its 2030 targets to have at least 60% of adults in training every year and at least 78% in employment. But every year of the coming decade needs an equally sharp focus on skills, across every European state. Europe needs a cohesive approach that aligns business and educators around business’s changing needs.

6.  Build confidence with a modernized tax and regulatory regime

Investors’ top tax priority in 2023 is R&D tax credits, which ranked only fourth in 2022. That may reflect planned investments in R&D — and the effect of the US IRA, which has shown the potential impact of tax credits. More broadly, businesses want tax rules to be as stable as possible.

Clarity and stability are also important for Europe’s regulatory frameworks. Even where policy is still emerging in new fields, such as Artificial Intelligence (AI) and low-carbon technologies, policymakers can promote confidence by giving clear signals about their intentions. The priorities surely must include rapid steps to put Europe at the forefront of the AI revolution, allowing business to reap the benefits of AI while setting clear parameters around its use. Succeed in that and Europe could benefit from a “flight to safety,” just as businesses largely regard Europe’s current regulatory frameworks as an advantage, whether on data protection, intellectual property or tax.

 

How can Europe turn on the taps of foreign investment?

Dive deeper into the 22nd EY Europe Attractiveness Survey

Summary

The 22nd EY Europe Attractiveness Survey points to a paradigm shift for FDI in Europe. In a volatile and fast-changing environment, business priorities are evolving. At a time when global competition for inward investment is intensifying, European policymakers should consider how to maximize next-generation investment.

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