5 minute read 8 Jun 2020
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How foreign investment in Europe, by Europe, can drive economic recovery

To remain attractive, Europe must put collaboration at its heart and simultaneously embrace digital, innovation and sustainability.

Europe must take decisive action to drive economic recovery after COVID-19. In the wake of the crisis, competition for foreign direct investment (FDI) has become even tougher. To remain attractive in this new business environment, EU member states must focus on intra-European investment and create more agile and resilient markets.

During 2018, FDI into Europe accounted for €7.2 trillion, equating to 45% of the EU’s Gross Domestic Product (GDP). Data reveals that 52% of FDI projects between 2015-2019 originated from countries within Europe, demonstrating FDI from Europe can be an incredible economic and transformational force for Europe. Analysis of projects in 2019 found that seven of the top ten investor countries were within Europe.

To help Europe continue to be seen as an attractive FDI destination, it is vital for governments to adopt the mindset of businesses and work to ensure they are innovating and creating new strategies to invite FDI, not only to aid employment figures, but also to help ensure the resiliency of local supply chains. Our data show that almost half (49%) of the international business leaders surveyed in April 2020 believe that Europe is at risk of being less attractive for investment in a post-COVID-19 world.

It is undeniable that the impact of government mandated lockdown measures has negatively affected some sectors and aided others. According to the EY Europe Attractiveness Survey 2020, 80% of business leaders surveyed indicated that the nature and weight of COVID-19 recovery and stimulus packages will be the primary influencer of future investment location choices.

The ripple effect

By the end of 2019, Europe achieved a record 6,412 foreign investment projects in 47 countries, resulting in one of its strongest investment years ever.

All sectors were not equally impacted when COVID-19 hit Europe. Some sectors saw unprecedented surges in market demand (such as medical supplies, pharma manufacturing, e-commerce and agriculture), while others such as tourism/leisure and aviation/marine have been negatively affected.

It is positive to note that only a quarter of business leaders surveyed believe their investment plans will be delayed. As a continent, Europe has a lot to offer, from highly skilled professionals to resilient supply chains. However, to reframe its future as an attractive investment destination in a post-COVID world, European nations must take a step back and review the new wave of opportunities and challenges that organizations and consumers face as a result of the pandemic.

Based on the trends we have been observing through our annual Attractiveness Survey over the past 19 years, we were not surprised to learn this year that 31% of new projects, primarily in the digital and business service sectors, attracted the most FDI in 2019 and created 24% of new jobs in the region. It’s imperative that Europe must continue to invest in technology and cultivate an agile, skilled workforce to attract foreign direct investment into the future.

For the first time, France became the leading destination for foreign investment, bumping the UK out of the top spot by securing 18.8% of market share, undoubtedly driven by France’s labor law and corporate taxation reforms.

But with investment increasing by 5%, the UK remains attractive; aligning with a reduction of investors’ concerns around Brexit, as just under a quarter (24%) of respondents (vs 38% in 2018) cite Brexit uncertainties as one of their top three risks to attractiveness across Europe. Given the mutual interdependencies of Europe, including the UK, this cannot be a win-lose situation.

It is encouraging to note, that despite a drop in the number of investment projects into Germany in 2018, our analysis reveals that projects into the country remain level in 2019 (2019: 971 projects, 2018: 973 projects).

Supply chains will be reshaped

The COVID-19 crisis revealed the widespread fragility of global supply chains. To recover operations and help ensure resiliency is built into future supply chains across Europe, business leaders have plans to reconfigure them, with a new mix of reshoring, nearshoring and offshoring.

In our survey, many respondents believe COVID-19, the risk of future pandemics, climate change and increased geopolitical tension will reinforce the need for agile, future-ready supply chains. In fact, the majority (83%) expect to see regionalized supply chains replace their existing global infrastructure.

Alongside the demand for regionalized supply chains, the COVID-19 pandemic has enhanced consumer awareness of, and demand for, sustainability, with almost six in ten respondents (57%) renewing their focus on climate change and sustainability within the next three years. It’s my view that businesses which already have sustainability at the heart of their corporate agenda may find Europe more attractive from an FDI perspective if the continent’s business, regulatory and societal climates reflect their own aspirations. But whether governments will mandate the deployment of new sustainability initiatives over time remains to be seen.

And, at the heart of building supply chain resiliency is technology. Transitioning to lean manufacturing gives companies advantages in speed, cost, precision and materials, and with humans at the center of planning, technology will change health and safety, improving the working conditions of employees.

The CleanTech sector has the potential to drive economic growth across Europe and creates opportunities for economic development, job creation and innovation. A robust digital economy with a reliable, extended infrastructure and connectivity developments beyond major cities is key for investors. And, resilient national health care systems in the EU are needed to establish research and training to manage ongoing health care needs.

Quo vadis, Europe?

As we all navigate through this global crisis, investors and business leaders are cautiously optimistic about the future. Many share my belief that the opportunity to reframe our future is now.

Governments and organizations should focus on elements that drive European competitiveness, support economic growth and appeal to international investors. While the recent pandemic has reduced confidence in countries – especially those hardest-hit by the virus – rebuilding investor confidence in the overall resiliency and capability of countries to adapt and prosper is critical for Europe’s future.

I believe that FDI will be the spark of Europe’s recovery, and we can fan the flames of economic growth by strategically investing in regions, projects and sectors in Europe, and ultimately broadening the economic benefit for the continent and beyond.

Summary

In the wake of the COVID-19 pandemic, EU member states must focus on intra-European investment and create more agile and resilient markets. But to ensure long-term value for investors, Europe must remain attractive as competition for foreign direct investment increases.

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