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Why optimism remains in Europe as foreign direct investment declines

Foreign investors look fondly on Europe despite the first downturn in three years. But a recovery is not guaranteed.

In brief

  • The post-COVID-19 recovery in European foreign direct investment (FDI) ended abruptly in 2023, with the number of projects decreasing 4% year on year.
  • France secured the most FDI projects despite a 5% annual decline. The UK ranked second following a 6% increase. Germany came third after a 12% drop.
  • Investors rank London as the most attractive city for investment. Paris is a close second.

Slow economic growth, spiralling inflation, soaring energy prices and a febrile geopolitical environment caused the first downturn in European FDI since 2020. Declining demand for new offices resulting from increased remote working also dented investment.
France secured the most investment despite a 5% annual decline in the number of projects, reveals the 23rd EY Europe Attractiveness Survey. The UK ranked second, where the number of projects jumped 6%. Germany came third following a 12% fall in investment.
Despite the annual decrease, the survey indicates that Europe remains an attractive investment destination in the long term: more than seven in 10 (72%) businesses plan to expand or establish operations in Europe in the next year, an increase from 67% last year. In parallel, three-quarters think Europe’s attractiveness will increase during the next three years.
That said, most new projects in the next 12 months will focus on expanding existing assets, rather than the new greenfield developments associated with high-potential industries such as electric vehicles, life sciences, digital technology and renewable energy.
In addition, there are clear risks on the horizon: increased regulatory burden and red tape, energy prices and supply issues, and political instability in a multi-election year. Urgent action is needed in these areas to address investors’ concerns and ensure Europe’s future attractiveness.

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Chapter 1

Foreign investment in Europe loses momentum

Europe’s FDI recovery stalls.

After two successive years of growth, the post-COVID-19 pandemic recovery of foreign direct investment (FDI) in Europe has stalled: 5,694 FDI projects were announced in Europe in 2023, down 4% from 2022. Measured by the number of announced projects, FDI remains 11% below the level in 2019, just before the pandemic hit Europe, and 14% below the record high of 2017. The number of jobs created by FDI projects in 2023 fell sharply, down 7% compared with 2022.


International investment decelerated due to disappointing economic growth, high inflation, rising global geopolitical tension and persistently high energy prices, especially when compared with the US.


Radical changes in working practices also impacted investment. Remote working and the growing use of collaborative technology, combined with an ever-increasing focus on cost control amid squeezed margins, means large office spaces are no longer required. Confirming this trend, the number of regional headquarters in Europe fell by more than half (51%) in 2023.


The success of the US Inflation Reduction Act (IRA) may also have diverted some investment from Europe to the US; the number of projects announced by US companies in Europe fell by 15% in 2023.

Given that foreign investment increased in other parts of the world during the same period, these figures will worry European policymakers. Data from the United Nations Conference on Trade and Development (UNCTAD), which tracks foreign investment flows globally, shows that greenfield FDI increased by 2% in the US, 8% in China and 17% across Asia in 2023, but declined by 20% in Europe. 

Europe needs foreign investment as much as foreign investors need Europe. Policymakers and businesses should therefore work together to create the conditions in which investment can flourish.

This downturn comes at the worst possible time for European business. According to the International Monetary Fund (IMF), economic growth in the euro area fell from 3.4% in 2022 to just 0.4% in 2023. This is significantly lower than in the US (2.5%) and Asia (5.6%). Foreign investment helps the European economy by creating jobs, stimulating innovation and boosting exports. For example, 3.9 million people are employed by foreign-owned companies in Germany. In the UK, foreign investors generate 29% of the approximate gross value added. In France, 35% of industrial exports stem from foreign companies.

“Europe needs foreign investment as much as foreign investors need Europe,” says Julie Linn Teigland, EY EMEIA Area Managing Partner. “Policymakers and businesses should therefore work together to create the conditions in which investment can flourish.”

FDI in services sectors declines, but manufacturing proves resilient

The number of FDI projects in software and IT services and business and professional services — traditionally Europe’s largest sectors for investment — fell by 19% and 27% respectively. Both are suffering from the effects of purse-tightening on the part of their clients and a general decline in outsourcing.

By contrast, investment in tourism and culture, which is the 17th largest sector for investment, increased by 130% in 2023. The sector continues to rebound as consumers return to vigorous spending on leisure and travel, free from pandemic-induced restrictions.

Foreign businesses are expanding operations in Europe to reshore supply chains, create efficiencies and accelerate innovation. This has created some pockets of high activity despite the general downward trend.

Investment in manufacturing proved resilient, declining only 1%. Businesses maintained manufacturing investment to ensure that they can meet future consumer demand, which is expected to rise. Ongoing efforts to reorganize supply chains and relocate production bases to Europe also maintained manufacturing investment levels.

“The flow of FDI into Europe has more undercurrents than ever before,” says Marc Lhermitte, Partner, EY Consulting at, EY Global Lead FDI & Attractiveness. “In addition to traditional drivers of investment, foreign businesses are expanding operations in Europe to reshore supply chains, create efficiencies and accelerate innovation. This has created some pockets of high activity despite the general downward trend.” 

France stagnates, the UK rebounds and Germany falters

In line with the Europe-wide trend, investment in France fell by 5%. That said, the number of jobs created by FDI increased by 4%, underlining the ongoing benefits of business-friendly reforms and a comparatively healthy economy relative to other European countries. 

The EY 2024 Europe Attractiveness Survey, which is based on insight from 500 business leaders involved in FDI, indicates that the downswing in investment will be only temporary.

When asked about the most attractive countries for investment, respondents ranked France first, ahead of Germany and the UK.

The UK bucked Europe’s negative trend with a 6% increase in FDI projects in 2023. However, this was achieved from a low base, following a 6% drop the previous year. After a 2022 marked by political uncertainty, high inflation and rising energy prices, investors perceived something of a return to stability to UK markets last year, with foreign software and IT providers particularly loyal to London.

FDI in Germany decreased by 12% in 2023, continuing a steady decline in projects since the onset of the COVID-19 pandemic. Industrial investors have been deterred by the recessionary environment, high energy prices and concerns about the security of energy supply. In parallel, low unemployment, complex bureaucracy and high labor costs limit Germany’s ability to attract more foreign businesses.

Most foreign investment in Europe is internal – a business located in one European country establishes or expands a project in another. Outside Europe, the top origin countries for investment are the US (accounting for 19% of projects), China (5%) and Japan (3%).

London is considered the top European city for investment: 32% ranked the UK’s capital as the most attractive city during the next three years, putting it marginally ahead of Paris in second place (31%). Zurich (selected by 22%), Munich (20%) and Barcelona (17%) complete the top five.

Mixed fortunes outside the top three

Several countries in Southern and Eastern Europe benefited significantly from businesses’ reorganization of supply chains and reshoring of production activities. The number of manufacturing projects decreased across the continent but increased in Spain (+7%), Turkey (+12%), Poland (+17%) and Italy (+18%). Investment grew even more in Serbia (+30%), the Czech Republic (+70%) and Hungary (+70%).

The war in Ukraine continues to impact investment in markets bordering either of those countries, including Romania (-13%), Finland (-32%) and the Baltic countries such as Latvia (-31%) and Lithuania (-40%). Despite its proximity to Ukraine, investment surged in Hungary due to a recovery in the number of projects in the transport sector. 

Slowing investment in the digital and business services sectors impacted investment in countries for which these areas are traditional strengths. These include the Netherlands (which saw one of the lowest numbers of FDI projects in a decade in 2023), Belgium (-8%) and Ireland (-46%).

Top 20 destination countries by FDI projects in 2023



Number of projects in 2023

Number of projects in 2022

Change 22/23

Number of jobs created in 2023








United Kingdom



























































































































Source: EY European Investment Monitor 2024

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Chapter 2

Foreign investment could surge, but risks remain

FDI could rebound more strongly than expected.

Despite the slowdown, there are signs that investment could bounce back notably. A large proportion (72%) of executives surveyed say their organization plans to expand or establish operations in Europe over the next 12 months, up from 67% last year. A similar proportion (75%) are optimistic about Europe's prospects over the next three years.

Admittedly, these expectations of recovery are partly driven by pent-up demand for projects after a long period of low investment and difficult economic conditions. Whether it's the war in Ukraine, soaring inflation or difficult financing conditions, the past three years have been marked by shock after shock, decelerating capital spend. These challenges have not gone away, but they have eased to the extent that organizations now feel ready to invest again.

Nevertheless, executives intend to proceed with caution. The primary driver for investment is reducing costs. This likely stems from the post-pandemic surge in logistics expenses. Tellingly, 48% plan to make greater use of regional supply chains and 45% plan to focus on projects that bring them closer to their customers.

Likewise, the survey data indicates that the expansion of existing facilities may initially take precedence over the creation of new ones. This is cause for concern because greenfield projects are imperative for Europe’s economic rejuvenation and global competitiveness in critical industries such as life sciences, electric vehicles, energy, artificial intelligence (AI) and semiconductors.

Despite the recent downturn, Europe remains an attractive long-term investment destination. As the competition for investment intensifies, Europe’s leaders must get better at articulating everything the continent has to offer.

That said, analysis of the investment data suggests that only a small proportion of businesses that express appetite to relocate supply chains actually do so. This is unlikely to change, as high inflation in Europe, including energy and labor costs, has made China even more cost effective as a supplier base. Therefore, relocation is most likely to take place in sectors whose customers are relatively less price sensitive.

Where there is new investment, it will primarily focus on innovation and client-facing services, rather than manufacturing facilities. Indeed, 55% of organizations intend to increase their R&D footprint in the next three years, while just 35% plan to increase that of manufacturing.

“Despite the recent downturn, Europe remains an attractive long-term investment destination,” says Hanne Jesca Bax, EY EMEIA Markets and Accounts leader. “But as the competition for investment intensifies, Europe’s leaders must get better at articulating everything that the continent has to offer.”

Risks remain on the horizon

Investors are positive about Europe’s long-term prospects because the economic situation is expected gradually to improve. According to the survey, high inflation and high interest rates have fallen to only fourth and sixth positions among the greatest risks to Europe’s attractiveness in the next three years. Moreover, in the context of rising geopolitical tension, the relative stability of Europe’s major economies is a considerable advantage.

However, risks remain. The leaders surveyed identified the top three threats to Europe's attractiveness over the next three years:

  1. The increased “regulatory burden”: Europe has pioneered new regulatory initiatives, be they carbon disclosure, supply chain due diligence, data protection or the safe use of AI. But investors are worried that the expanding regulatory framework will stifle European business growth and agility.
  2. Energy prices and supply issues: The second-most potent threat to Europe's attractiveness, reflects concerns about the energy crisis of the past two years. 
  3. Political instability in Europe: Executives are concerned with the uncertainty in the run-up to the European elections and rising social tensions and political radicalism at local levels.

Securing the recovery

There is no room for complacency. Europe competes with the US and Asia so policymakers must take bold and decisive action to boost its attractiveness. A profound change in public policies at the European and local level would encourage foreign investors to invest more.

A number of economic, business and political institutions have released comprehensive reports in 2024 that outline their vision for Europe. A second deep dive into the Europe Attractiveness Survey will be published on 19 June 2024, and explores some specific questions relating to the policies needed to attract foreign investment: 

  • How can Europe harmonize regulation to help businesses contend with different laws across and within individual countries?
  • How can Europe alleviate the most immediate barriers to investment, such as high operating and financing costs, limited access to critical skills, excessive red tape, and the complexity of financing the green and digital transitions?
  • How can confidence in the energy supply be restored, while managing costs and the transition to a low-carbon economy?
  • In the context of fragmented capital markets, how can access to capital be facilitated, especially for SMEs?
  • How can European governments design long-term industrial policies that boost its manufacturing competitiveness?


Foreign investment in Europe fell for the first time since 2020. Economic and geopolitical tensions greater than ever have pushed companies to streamline their operations, relocate their supply chains, but also invest in innovation. Nevertheless, the survey indicates that Europe remains an attractive destination in the long term despite clear risks on the horizon: increased regulatory burden, energy prices and supply issues and political instability in a multi-election year.

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