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Europe’s major cities have new rivals for foreign investment, as new opportunities unlock growth potential for smaller cities.
In brief
- Multinationals and startups are looking for places that support innovation, and an ability to deploy tech-led projects.
- Foreign investors favor locations that have strong ESG environmental, social and governance strategies and policies.
- Access to available tech skills is key to almost 90% of surveyed investors.
EY 2021 Europe Attractiveness Survey has shown that Europe continues to be a draw for foreign investors, despite the turbulence created by COVID-19. For multinationals and startups alike, Europe's fundamentals – starting with its position as the world's largest economy by GDP – still play a role in consolidating their presence or attracting new projects.
But it is also obvious that the pandemic has changed many investment models used by businesses to make appropriate location decisions. Traditional factors have been expanded to include a host of new considerations. The complexities brought about by COVID-19 have resulted in investors taking a fresh perspective on business sustainability and minimizing uncertainty. Consequently, their expectations of European countries, regions and cities have changed, which has reframed the appeal of some of Europe’s “secondary” cities as investment locations.
On the one hand, COVID-19 has accelerated the idea that in a digitized world, the option of working from more distant territories has become a real possibility for multiple professions. On the other hand, major European cities need to rethink their value propositions as they now have new rivals for domestic and foreign investment. In either case, this new competition is good for Europe, and it will play a key part in the revitalization of Europe’s cities in the coming years.
Resilient capitals still entice investors, but smaller cities offer fresh appeal
According to our survey, Paris, London and Berlin remain close contenders for the role of most attractive European capital for foreign investors. This is largely due to the fact that France, the UK and Germany were virtually tied as the top investment destinations in Europe in 2020. Despite Brexit-related fears, London continues to hold onto its status as the financial center of EU.
As global companies look to new priorities for future investment, Europe's ‘rising stars’ are increasingly likely to offer a new attraction for much-needed capital, technology and jobs. These cities already include Amsterdam, Brussels, Dublin, Luxembourg, Copenhagen and Lisbon, among others. On a smaller scale, cities such as Antwerp, Lyon and Vilnius, for example, have anticipated the increased sensitivity to more agile and livable cities that also offer prime economic opportunities.
Multinationals and startups are looking for places where they can best innovate, experiment and deploy technology-intensive projects.
Three game changers for Europe’s cities
EY survey and conversations with many clients indicate a distinct mindset shift among investors, which has created interdependent, demanding and non-negotiable “game changers” for local economic development.
Game changer 1: The right technology choices for cities and citizens
EY 2021 European Attractiveness Survey clearly shows that technology is the main driver of change for companies. As a result, multinationals and startups are looking for places where they can best innovate, experiment and deploy technology-intensive projects.
Foreign investors also tell us they like the European model of medium-sized smart cities that use technology to improve urban services and use data to monitor and manage transportation systems and utilities, but also crime detection, schools, libraries or hospitals. In this category are unlikely leaders like Dijon (France), Santiago de Compostela (Spain), Venice (Italy) or Sofia (Bulgaria), for example, whose ambitious and innovative practices offer many lessons that large cities can learn from, such as e-mobility and in-home or in-street robotics.
Game changer 2: Cities will have to drive environmental, social and governance (ESG) accountability, too
Environmental sustainability increasingly influences investors’ location decisions: nine in ten surveyed businesses say sustainability is important to their investment strategy.
At a local level, this might include the percentage of renewables in the energy mix in certain cities, recycling provisions, the coverage of public transport (so that employees do not need to drive to work) and much more.
But Europe’s foreign investors are also beginning to insist upon ESG as a prerequisite. In the foreseeable future, we can expect that foreign investors will favor locations that have strong ESG policies, which combine environmental impact, job creation, financial inclusion, public governance and ethical use of technology in wider society.
Game changer 3: Reskilling Europe for the post-COVID economy
It is often said that the jobs of tomorrow do not exist today. The reskilling of Europe’s workforce is a major priority for international companies: access to available workforces with technology skills was highlighted as a key location factor by 89% of our surveyed investors. The acceleration of technology transformation in the past year – new digital customer experiences, new “phygital” work environments, and more automated production lines and back offices – makes new and more digital skills an absolute imperative.
Added to that, increasingly more European cities are recognizing the need for their workforces to be mobile. Estonia was the first country in the world to issue a “digital nomad visa” to attract digital skills. This innovative scheme supports the growing “phygital” and mobile work trend, where professionals do not need to be tied to a single location for access to their skill set. While this has complex consequences in terms of how companies traditionally operate their real estate, it does offer an interesting perspective into what a “better working world” could look like in the next decade, and which cities will become hubs for mobile workforces and digitalized communities.
The survey indicates an increase in investment appetite, after a year that constrained companies’ ability to execute projects. But Europe, at every level, cannot be complacent.
The long game for Europe
For the past few decades, multinationals have considered Europe a relatively “safe haven” for their investments, driven by the continent’s economic and political stability, as well as sophisticated markets and skills.
The survey indicates an increase in investment appetite, after a year that constrained companies’ ability to execute projects. But Europe, at every level, cannot be complacent. While the signs of recovery are evident, we should be under no illusion that the rebound will be immediate. At the most, our anticipation is that foreign investment levels similar to 2019 benchmarks might be achieved in the next three years, most likely five.
Even though foreign investors are eagerly tracking the EU’s massive resilience and recovery plans, they also are naturally skeptical of big government initiatives. They will look at the most agile, creative and innovative initiatives – and locations – that will help them to gain a competitive edge.
We have started to write a new chapter in Europe’s growth story in a post-COVID-19 world. I believe there is no time like the present for cities and regions to seek out opportunities for innovation, collaboration and broadening our growth framework. We should learn from the most recent crisis, and position Europe for a strong recovery driven by the power and imagination of local entrepreneurs, from the private and the public sectors.
Summary
Foreign investors have changed their expectations of Europe’s cities as they learn from the disruption caused by COVID-19. As a direct consequence, some of Europe’s ‘secondary cities’ now hold increased appeal for foreign investment, which will help unlock economic development and job creation. This article explores three game changers these cities should consider how best to leverage the refreshed investment landscape.