Press release

31 May 2022 London, GB

Foreign Direct Investment in Europe a game of two halves: current volatility impacts strategy while long-term appeal instills confidence

LONDON, 31 MAY, 2022. Europe’s attractiveness for FDI has shown signs of recovery following the COVID-19 pandemic with a 5% increase in the number of projects announced in 2021 compared to 2020, according to the latest annual EY European Attractiveness Survey.

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  • Foreign Direct Investment (FDI) in Europe recovered in 2021; 5,877 projects announced, an annual increase of 5% but in different sectors compared to pre-COVID 19
  • Investors’ confidence has decreased in 2022, with 79% of those surveyed before 1 March planning to establish/expand in Europe versus 25% of those surveyed after 14 March 
  • France, Germany, and the UK are the top markets for FDI; their economic prospects and growth sectors have shifted significantly

Europe’s attractiveness for FDI has shown signs of recovery following the COVID-19 pandemic with a 5% increase in the number of projects announced in 2021 compared to 2020, according to the latest annual EY European Attractiveness Survey.

At the same time, the new geopolitical and economic environment, mainly created by the war in Ukraine, means that the immediate attractiveness of Europe for investment may be challenged, However, the long-term attractiveness of Europe remains robust with 64% of investor respondents believing Europe’s attractiveness will improve during the next three years.

The EY European Attractiveness Survey is based on qualitative research – conducted between February 2022 and April 2022, with 501 international investors across a range of industries, business types and locations – and quantitative analysis of FDI projects announced in 44 European countries in 2021.

The survey finds that, a post-pandemic rebound and “Macron reforms” caused investment in France to excel 24%, to 1,222 projects in 2021. Investment in the UK remained steady, increasing 2% to 993 projects; London remains the most attractive city for FDI with 34% of executive respondents ranking it as a top-three city for investment. In contrast, the number of projects in Germany fell 10% to 841. However, it also attracted large, industrial projects, especially in the automotive and electronics sectors. In terms of job creation, the story differs, with the average FDI project creating 68 jobs in the UK, 45 in Germany and only 38 in France.

Further nuances add color to the picture across Europe

Manufacturing, logistics and R&D projects rebounded 22% in 2021 partly due to supply chain reorganizations, which are set to continue. Fifty-three per cent of respondents are considering ‘nearshoring’ – bringing operations closer to customers (more than double compared with last year). Forty-three per cent of respondents are considering “re-shoring” – bringing activity back to their domestic market – compared with 20% in 2021. This industrial rebound is a partial reason for the high performance of many Southern European countries.

Western Europe suffered compared to the rest of Europe, owing to its reliance on services investment, the need for which has declined owing to an increase in hybrid and remote working. For instance, businesses announced 25% fewer sales and marketing offices in 2021.

Julie Teigland, EY EMEIA Area Managing Partner, says:

“European businesses are facing increasing levels of complexity. The data from 2021 shows that the recovery from the COVID-19 pandemic is slower than expected. Recent new trends – such as the growth of hybrid/remote working – means that different sectors and countries have different recovery experiences. Businesses that have people and operations in Ukraine and Russia are facing monumental challenges. In addition, the knock-on effects of the war are significant for businesses with a presence in Europe ranging from the escalating costs of energy and commodities to sanctions and social tensions. However, despite all these factors, it’s heartening to see that investors can look beyond the immediate challenges and see Europe as an appealing investment destination in the long-term.”

Europe’s long-term attractiveness hinges on five priorities

Investors remain optimistic about Europe’s attractiveness despite the war in Ukraine. If supply chains are disrupted to the point that businesses begin to either re-shore or nearshore operations back to Europe, then manufacturing investment in Europe may increase. The most likely outcome is that sanctions and supply chain disruption will persist and there will be impacts on commodity price inflation, geopolitical tension and, heightened risks of cyber-attacks on large businesses and critical infrastructure.

Beyond the current economic and geopolitical context, the survey highlights many structural factors that could impact the continent’s long-term attractiveness to FDI. The survey data reveals five top priorities:

  1. Investment in digital: the most important factor that determines where businesses invest is the level of technology adoption by consumers, citizens, and administrations
  2. Sustainability as a competitive edge: businesses ranked policy approaches to climate change and sustainability as the second-most important factor that determines where they invest
  3. The need for new talent: new skills among the workforce is one of the top two priorities in assessing for FDI among those surveyed, particularly in relation to Europe’s green and digital transitions
  4. Tax flexibility and pragmatism: the degree of digitalization of tax authority systems is the most important tax-related factor that determines where businesses invest
  5. Support for small to medium enterprises from policymakers: small and medium-sized businesses (revenues less than EUR1.5bn) were hit hardest by the pandemic and are less likely to have rebooted their FDI plans (83% of large businesses versus 44% of SMEs)

Teigland says:

“I believe that Europe will remain competitive when it comes to attracting FDI, from within the continent, the US and beyond. Policymakers and businesses should work together to achieve this. We cannot slowdown in building and maintaining the right skills for our people particularly in technology, analytics, and sustainability. We need to continue to build a robust digital infrastructure and equitable support for all businesses, with a sustainable future in mind.”

-ends-

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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 EY proprietary database produced in collaboration with OCO. This database tracks the FDI projects that have resulted in the creation of new facilities and jobs. By excluding portfolio investments and mergers and acquisitions (M&A), it shows the reality of investment in manufacturing and services by foreign companies across the continent. Data on FDI is widely available.

An investment in a company is normally included in FDI data if the foreign investor acquires more than 10% of the company’s equity and takes a role in its management. FDI includes equity capital, reinvested earnings and intracompany loans. To confirm the accuracy of the data collected, the research teams aim to directly contact more than 70% of the companies undertaking these investments.

We define the attractiveness of a location as a combination of image, investor confidence, and the perception of a country’s or area’s ability to provide the most competitive benefits for FDI. The field research was conducted by Euromoney between February and April 2022 via online surveys, based on a representative panel of 501 international decision-makers.