- Historically strong US investment into Europe decelerates for the first time in three years
- Only 27% of investors plan to establish or expand operations in Europe in 2019
- Technology FDI into Europe is booming – at historical high
Foreign direct investment (FDI) projects into Europe dropped 4% (to 6,356 projects) over the year according to the EY European Attractiveness survey. Despite the decline in FDI into Europe for the first time in six years, the level of investment remains the second-highest since EY began compiling this data in 2000. However, investor sentiment is gloomy, with only 37% of surveyed businesses foreseeing an improvement in Europe’s attractiveness in the next three years, down from 50% last year.
The technology sector, however, is bucking this downward trend, as the number of FDI projects surge to a record high of 1,227 in 2018 (up 5% year-on-year). Growth was mainly driven by US businesses, which accounted for 37% of the digital FDI projects in Europe last year. FDI was also strong in Europe’s traditional industrial sectors: the combined number of FDI projects in the transport, machinery and chemicals industries increased 4% to 1,729 projects in 2018.
Andy Baldwin, EY EMEIA Area Managing Partner and EY Global Managing Partner – Client Service-elect, says:
“While the size and diversity of Europe’s market continues to make it attractive among global investors, we are now seeing the impact of Brexit and other political and economic uncertainty as investor optimism into Europe deteriorates. The UK’s historical competitive advantage in FDI has been eroded over the last three years largely due to Brexit, which means that thousands of new jobs have not been created. While competitive advantages remain, such as a flexible labor market and the rule of law, the persistent uncertainty experienced over the last three years is turning investors elsewhere as they are no longer willing to take a ‘wait-and-see approach’ on Brexit negotiations.
“France continues its FDI progress, albeit at slower rate, now tying with the UK, which it will likely overtake in FY19, as long as Macron’s reform agenda continues. However, investors are concerned about the ‘keyman’ dependency in terms of leadership. In Germany, the FDI projects that fuel its export engine are slowing due to potential trade war concerns resulting from an asymmetric trade balance.
"For Europe to continue to attract FDI it needs to play to its strengths: data privacy, its plans for a digital single market and stable tax regime. It also needs to continue to invest in technology and provide access to an agile and skilled workforce, which drives FDI.”
The map of investment in 2018
Europe’s two largest economies, the UK and Germany, which together account for around one-third of the FDI in Europe, attracted 13% less investment than in the previous year (1,054 and 973 FDI projects respectively). The negative performance of the UK was due to a 35% decrease in manufacturing FDI projects (to 140), driven by investments into capacity to service the single market moving away from the UK. In addition, the number of newly established headquarters, which create high-value and highly-paid jobs, halved from 98 in 2017 to 48 last year.
Germany’s traditionally strong areas were also impacted: it saw a 7% production decrease in the automotive sector, mainly due to heightened concerns around a hard Brexit, US tariffs and a slowdown in demand from China.
France, which recorded spectacular FDI growth of 31% in 2017, only grew by 1% in 2018. However, for the first time, more research and development (R&D) and manufacturing FDI projects (144 and 339 respectively) were established in France last year than in any other European country.
Conversely, FDI is emerging as a major driver of jobs in other Western European and Central and Eastern Europe countries – despite the political uncertainty in some countries. Among the top 10 European FDI destinations, notable positive performance came from: Spain (32%), Belgium (29%), Poland (38%), Turkey (14%) and Ireland (52%). Beyond the top 10, Italy recorded a 63% year-on-year FDI increase, scoring the fastest FDI growth among the top 20 countries in Europe.
A number of countries recorded high double-digit declines in FDI growth: the Netherlands (-32%) which, however, still retains its place in the top 10 investment destinations; Sweden (-32%); and the Czech Republic (-51%).
US investment into Europe slows down
While traditionally a strong investor into Europe, FDI projects from the US increased only 3% last year, down from an average of 8% over the prior four years. The slowdown is mainly due to the US tax reform, introduced in December 2017, and the repatriation of assets and jobs by US multinational companies. However, the US remains the largest single investor into Europe, accounting for 22% of European FDI in 2018.
Intra-European investment continues to be the main driver of FDI in Europe, despite a slight year-on-year decrease of 2%. However, investment into Europe from outside the continent declined by 8%.
Europe’s tech race is on
Europe’s technology sector is booming, with the number of new FDI projects surging to a record high of 1,227 in 2018 (up 5% year-on-year). Overall, FDI projects more than doubled from 510 to 1,227 in the last five years. The survey also finds that digital is the top sector driving Europe’s future growth (39% of investors), followed by cleantech (25%) and energy and utilities (21%).
When asked which cities offer the best chance of producing the next technology giant, investors ranked London 4th globally behind San Francisco/wider Silicon Valley, Shanghai and Beijing. Berlin ranks 7th globally and 2nd in Europe, while Paris ranks 12th globally and 3rd in Europe.
The survey finds that Europe is home to more than one-third of the global cities that are most likely to produce the next technology giant. Two of Europe’s cities rank in the global top 10 list of most attractive technology hubs: London and Berlin, which come in fourth and seventh place respectively. Investors identify London, Berlin, Paris, Stockholm and Amsterdam as the top five most attractive technology hubs in Europe.
Baldwin says: “With its steady, fast growth and its strong appeal to US investors, technology is Europe’s big bet. Europe’s businesses and government leaders need to focus on creating a competitive and stable environment underpinned by balanced regulation. The skills shortages we are seeing in Europe demand a concerted response from government and business to equip the current workforce and train future workers with the right technology skills.”
A cautionary tale
Investors still look fondly towards Europe, with 56% of surveyed businesses citing Western Europe as one of their top three destinations globally for their operations – a marginal increase on the 53% that cited this last year. However, there is a mismatch on concrete plans with only 27% of surveyed businesses planning to establish or expand operations in Europe in 2019, significantly down on the 35% that planned to last year. The study found that investment plans now stand at a seven-year low.
The study shows lower investor optimism with only 37% of surveyed businesses foreseeing an improvement in Europe’s attractiveness in the next three years, significantly less than the 50% that did so last year. The decrease is primarily caused by decelerating manufacturing and supply chain FDI plans, with only 10% of surveyed businesses planning to invest in manufacturing, supply chain and logistics projects this year, compared with 16% last year.
Thirty percent of businesses say Paris is one of the three most attractive European cities for investment compared with 37% last year, while only 25% cite London compared with 34% last year. The UK’s capital is only 1% ahead of Berlin in the attractiveness rankings – a stark change from last year when it was 10% ahead.
Geopolitical concerns eroding FDI into Europe
Geopolitical risks are dampening investors’ FDI plans: 38% cite Brexit as one of the top three risks impacting Europe’s attraction in the next three years. This represents a significant increase on the 30% that did so last year, when Brexit emerged in fourth place among the most significant risks to Europe’s attractiveness. Political instability in the European Union (EU) and the rise of populist and protectionist trends are the second and third greatest concern among investors.
According to 42% of surveyed businesses, the EU’s top priority should be to reform economic governance to ensure sustainable economic growth. Thirty-two percent add that the EU should enhance its international role.
Baldwin says: “We are now seeing the effects that geopolitics and prolonged political uncertainty can bring with the tightening and even the loss of investment. Irrespective of the future changes, the full extension of the UK and Europe need to maintain their competitive edge and attractiveness. Otherwise global investors will place their valuable dollars in other more stable and equally attractive markets.”
Notes to Editors
EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.
EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. Information about how EY collects and uses personal data and a description of the rights individuals have under data protection legislation is available via ey.com/privacy. For more information about our organization, please visit ey.com.
This news release has been issued by EYGM Limited, a member of the global EY organization that also does not provide any services to clients.
About the survey
EY attractiveness surveys analyses the attractiveness of a particular region or country as an investment destination. The surveys are designed to help businesses make investment decisions and governments remove barriers to growth. A two-step methodology analyses both the reality and perception of FDI in the country or region.
The evaluation of the reality of FDI in Europe is based on the EY European Investment Monitor (EIM), the proprietary EY database, produced in collaboration with OCO. The field research was conducted by the CSA Institute in January and February 2019, based on a representative panel of 506 international decision-makers. ey.com/attractiveness