Foreign investors back Europe, but is Europe back?

Julie Linn Teigland

EY EMEIA Area Managing Partner; EY Global Leader, Women. Fast forward

Passionate about the transformational power of digitalization and innovation and its potential to deliver sustainable, inclusive growth for clients. Prominent voice of the Women20 global agenda.

Hanne Jesca Bax

EY EMEIA Markets & Accounts Leader

Experienced leader blending different cultures, generations, mindsets and genders.

Marc Lhermitte

Partner, EY Consulting, Global Lead – FDI & Attractiveness

Fascinated by the complex interactions between companies, people and the geographies they live in.

15 minute read 7 Jun 2021

Show resources

  • EY Europe Attractiveness Survey 2021 HR (pdf)

The COVID-19 crisis caused a 13% decline in foreign investment in Europe. Swift action is needed to secure Europe’s long-term attractiveness.

In brief
  • Foreign investment in Europe declined 13% in 2020 as COVID-19 interrupted investment plans and triggered uncertainty.
  • Investment is set to rebound this year as investors reignite projects paused in 2020: 40% aim to establish or expand operations in Europe in the next year, up from just 27% in early 2020.
  • Policymakers must focus on skills, sustainability, stimulus and simplification to ensure Europe remains an attractive destination for many years to come.

The year 2020 was a year of shock, volatility and change, both within Europe and beyond: a global pandemic, a new US President, a trade deal between the EU and the UK, double-digit GDP declines, more than 12 million European job losses and a massive and unprecedented stimulus package to rescue Europe’s economy.

This is not exactly the stability that investors crave. But, despite the unprecedented circumstances, foreign investment in Europe only declined by 13% in 2020 and is expected to rebound swiftly. And although investment was down overall, some areas actually fared very well. For example, investment in the life sciences sector surged 62%, and the number of logistics projects increased 11%.

Amid the volatility, investment in Europe is relatively resilient because it is perceived to be a stable environment that has the fundamentals that investors need: an abundant supply of skilled labor, robust infrastructure, political stability and a large addressable market.

But Europe cannot be complacent. COVID-19 has elevated the importance of a number of factors that influence location decisions. Take skills, for example. Businesses have always located their operations in areas where there is an abundance of talented workers. But the COVID-19 crisis has accelerated businesses’ digital strategies and, as a consequence, their need for digital competencies. In addition, the 2021 Europe Attractiveness survey’s data reveals that 9 in 10 businesses consider environmental sustainability to be an important factor that determines their investment strategy.

In the long term, businesses are optimistic about Europe as an investment destination.
Julie Linn Teigland
EY EMEIA Area Managing Partner; EY Global Leader, Women. Fast forward

This raises a key challenge for European policymakers: can they cater for businesses’ new and changing priorities while also continuing to get the fundamentals right? Can they use the crisis as a catalyst for change to create a better Europe?

In this article, we explore the drivers of investment in 2020, the investment outlook over the next few years and, perhaps most importantly, what governments need to do to ensure Europe remains a long-term attractive investment destination.

Woman on the hill wating the sunset
(Chapter breaker)

Chapter 1

European foreign investment in 2020: down, but not decimated

Foreign businesses still see a stable and sophisticated region with skills and are eager to invest for the long-term.

Businesses from around the world announced 5,578 Foreign Direct Investment (FDI) projects in Europe in 2020, a 13% decline from 2019. This is the first time that foreign investment posted a double-digit year-on-year percentage decrease since 2009, when the global financial crisis triggered an 11% fall. Last year’s drop needs no explanation. The onset of the COVID-19 pandemic at the beginning of the year stopped investment plans in their tracks and created immense economic uncertainty.

FDI in Europe


the amount of decline of FDI in Europe in 2020 – the first double-digit decline in Europe in more than a decade.

Due to Germany’s relative success in containing COVID-19 during 2020, its investment fell less precipitously than in France and the UK, leaving the three countries virtually tied as Europe’s top investment destinations. France attracted 985 projects, the UK 975 and Germany 930.

Looking by sector, life sciences was the only major industry that experienced an increase in foreign investment, as businesses rapidly moved to meet the surging demand for COVID-19 vaccines, treatments and personal protective equipment.

Why was investment so resilient? Despite the unprecedented circumstances, foreign businesses still see Europe as fundamentally one of the most attractive regions around the world to invest for the long-term: a relatively stable political and regulatory regime, a highly skilled workforce and comparatively robust transport, energy and telecoms infrastructure.

Technological and green innovation is powering the agenda for investors in Europe.
Hanne Jesca Bax
EY EMEIA Markets & Accounts Leader

Businesses are therefore proceeding with plans that they might have first developed as early as 2017. Illustrating this, 41% say their 2021 investment plans have not changed due to COVID-19, and 17% have actually increased their investment plans. Just 30% decreased their investment plans, while 11% delayed them (see figure 2). 

So, although some businesses throttled back, investment levels are still healthy given the unprecedented circumstances.

Manufacturing FDI suffers most

Unfortunately, supply chain disruption, restrictions on movement, national lockdowns and uncertain demand caused manufacturing FDI to decline 22% to just 1,320 projects in 2020. In contrast, logistics FDI projects increased by 11% as online retailers mobilized to cater for surging demand (see figure 3).

Figure 3: Notable foreign investment categories in Europe
Activities 2019 2020 Change
Manufacturing facilities 1684 1320 -22%
Logistics 534 595 +11%
R&D centers 552 574 +4%

Source: EY European Investment Monitor 2021.

Supply chain relocation could have a significant impact on FDI in Europe. When the pandemic first hit, severe supply chain disruption caused many businesses (83% of businesses in our April 2020 survey) to consider nearshoring or reshoring back to their domestic market. This would have significantly impacted foreign investment in Europe, with international businesses potentially relocating operations away from Europe coupled with some European businesses returning to Europe. But one year later, the survey data reveals that most businesses have not pursued these plans, with just 20% planning to reshore operations to their domestic market and only 23% expecting to nearshore closer to customers (see figure 4).

Currently, many companies would prefer to avoid disruptive and costly reorganizations. Asia is showing solid signs of recovery causing multinationals to maintain a presence there for now.

Although businesses are less keen to reshore and nearshore operations than they were 12 months ago, there is stronger appetite to reduce their dependence on single or dominant source countries and to operate more regional-based supply models.

Ice cave climber
(Chapter breaker)

Chapter 2

Sectors in the spotlight

Supply chain disruption, social distancing and uncertain demand caused FDI contraction in most sectors.

With the exception of life sciences, foreign investment fell in all major sectors in 2020. But some industries were hit much harder than others:

Foreign investment in pharma


of businesses in this sector announced a robust increase in FDI on 2019.

Software and IT services remains by some distance the largest sector attracting foreign investment in Europe (1,046 projects in 2020), but it decreased by 14% on 2019. Investment in this sector was down significantly in the UK (-30%) and France (-29%) but increased in Germany (+13%).

However, the outlook overall remains bright: when asked which sectors will drive Europe’s growth in the coming years, the digital sector was cited most frequently.

In our industry, 5G, edge cloud, network function virtualization and network APIs unlock exciting new business models. Network functions become available ‘as a service’ – capacity, speed, latency, quality of service – dynamically, locally and on demand.
Rainer Deutschmann
Group Chief Operating Officer, Telia

Business and professional services recorded 691 projects in 2020, an 11% annual decrease. Executives are not bullish on the prospects for FDI in this sector, only ranking it 6th in terms of its potential to drive future growth. This is likely a result of companies in distressed sectors cutting outsourcing contracts.

Life sciences FDI was robust in 2020, unsurprisingly. Businesses in this sector announced 265 projects, a 62% increase on 2019. The number of pharmaceuticals projects doubled in a number of countries, including in the UK, France, Germany and Belgium, driven by an increased demand for the vaccines, treatments and personal protective equipment needed to combat COVID-19.  

Looking to the future: cautious optimism

What does the future hold for foreign investment in Europe? The long-term outlook seems encouraging: when asked which regions will be most attractive to establish operations when the COVID-19 pandemic is behind us, Western Europe ranks first, with Central and Eastern Europe and North America tied in second place. In parallel, 63% of investors believe Europe’s attractiveness will improve during the next three years. Only 5% think it will decrease (see figure 5).

The survey indicates an increase in investment appetite, after a year that constrained companies' ability to execute projects.
Marc Lhermitte
Partner, EY Consulting, Global Lead – FDI & Attractiveness

Outlook on Europe


of foreign investors plan to establish or expand operations in Europe in next 12 months.

Even in the near-term, the survey points to a rapid rebound: 40% of surveyed businesses plan to establish or expand operations in Europe during the next 12 months, a significant increase on the 27% that had such plans in 2020 and 2019. Appetite to invest in Europe is in fact at its highest level since the financial crisis.

Fortunately, the vaccine is coming much quicker than we thought it would, so I am cautiously optimistic that we're going to come out of this faster than we hoped, than anybody would have thought.
Pravina Ladva
Group Chief Digital Transformation Officer, Swiss Re
Woman on boat with binoculars
(Chapter breaker)

Chapter 3

4 ways to promote long-term attractiveness

Skills, sustainability, stimulus and simplification are key ingredients for the future.

Although there is cautious optimism that foreign investment in Europe will rebound, policymakers and businesses cannot relax. Because the factors that influence location decisions are changing, the private and public sectors together need to focus on four key areas to ensure that the continent remains an attractive long-term investment destination.

1. Revamp Europe’s digital skills base

Digital skills have long been mentioned as a priority for governments seeking to attract international investment. The new role of technology triggered by COVID-19 – digital customer experiences, “phygital” work environments, and more automated production lines and back offices – makes this an absolute imperative. Tellingly, 92% of international investors say that the availability of a workforce with technology skills is an important factor that determines where they invest.

Whether it be cloud computing, data analytics, remote sensors or artificial intelligence, the type of digital skills that businesses need depends very much on the type of business and the technologies it is developing and deploying. Given the rapid emergence of new technologies, even businesses themselves might not know which digital skills they will need five to ten years from now. Therefore, rather than trying to evaluate how many, for example, artificial intelligence or sensor experts could be employed in a certain region, many businesses analyze which universities create graduates with broader technology skills, and factor this into their location decisions.

European policymakers understand the importance of digital upskilling and reskilling and have made this a crucial component of their COVID-19 economic recovery plans. The European Commission lists this as one of seven core focus areas for Member States while some national stimulus plans for growth include a series of measures to enhance skills.

Governments’ focus on skills is remarkable and should be welcome news for investors given that it is the top factor that determines their location decisions. That said, it is imperative that governments engage with industry so that they harness the capabilities that industry will need in the future. European governments have not always done this as much as their counterparts in Asia and the US.

2. Cement Europe’s ‘green leader’ status

Environmental sustainability increasingly influences investors’ location decisions: nine in ten surveyed businesses say sustainability is important to their investment strategy. (see figure 7) Encouragingly, 85% of businesses already consider Europe a green leader.

Europe as a green leader


of foreign investors are influenced positively by Europe’s commitment to sustainability.

Why is sustainability important? Whether it be from customers, employees, investors, or direct regulatory requirements, businesses across most sectors are being put under pressure by multiple stakeholders to act more sustainably. Many businesses took notice and now consider environmental sustainability when evaluating key business decisions, including where they locate their operations. This might include the percentage of renewables in the energy mix in certain countries, recycling provisions, the coverage of public transport (so that employees do not need to drive to work) and much more.

The chemicals industry needs to reimagine itself, and the EU's Green Deal presents a huge opportunity for our industry and others to work on this green rebound.
Ilham Kadri
CEO, Solvay

Beyond environmental sustainability, businesses also face pressure to address other societal problems, from income inequality to the ethical challenges associated with new technologies such as artificial intelligence. By addressing these challenges and therefore generating benefits for a wide range of stakeholders, including employees, customers and wider society, business can generate long-term value.

COVID-19 has intensified the importance of long-term value: 66% of business leaders say that COVID-19 increased expectations from stakeholders that their company will drive societal impact, environmental sustainability and inclusive growth. In parallel, 79% believe that companies with a focus on long-term value will emerge stronger in a post-pandemic world.1

Stakeholders expectations going forward


of investors believe that European companies should focus on creating long-term value to succeed post-COVID-19.

Quite how the imperative to deliver long-term value will influence location decisions varies considerably depending on the individual business. For example, when manufacturing businesses consider the location of their supply chains, they may increasingly shun regions with a poor record on human rights or huge income inequality. Alternatively, technology companies may begin to favor locations where there is strong dialog between government and businesses on how to address the ethical challenges associated with technologies such as artificial intelligence.

What does this mean for public authorities tasked with attracting foreign investment? In addition to getting the basics right, they will also have to demonstrate how their locations align with businesses’ growing desire to create sustainable, long-term value for their employees, investors, customers and wider society.

3. Simultaneously deploy short-term stimulus and longer-term transformation programs

Europe’s Recovery and Resilience Facility (RRF) is the EU’s COVID-19 recovery package. It will make €672.5 billion in loans (€360b) and grants (€312.5b) to help EU Member States recovery sustainability. In making this capital available, the EU has adopted a radically different approach to its global financial crisis recovery plan, when fiscal prudency was prioritized over expansionary investment.

COVID-19 recovery plan beneficiaries


in loans and grants will assist in creating a resurgence in economic activity.

Will the EU’s and national recovery plans significantly influence investor decision-making? An initial review of the survey responses would indicate not. Foreign investors say that the weight of national stimulus packages and their potential impact is not a critical factor in determining where they invest.

But this is likely because most European member states had not announced their stimulus packages when the survey data was collected, which may have led investors to downplay their importance. Investors also likely noted that national and European stimulus packages are aimed at the long-term and deep-rooted transformation of economies and societies. This might jar with businesses’ more urgent need to survive.

But although individual investors may not appreciate its importance, the RRF will certainly boost Europe’s attractiveness in the long-term. There will likely be some foreign investment opportunities associated with large-scale infrastructure projects, but perhaps more importantly, a significant proportion of the funds will be allocated to drive reforms, which will undoubtedly fortify Europe’s attractiveness in the long-term.

In addition, by specifically promoting Europe’s sustainability and digital transformation–at least 37% of expenditure must be allocated to climate investments and reforms and 20% must be used to foster digital transformation–the RRF is addressing two of the most important areas for businesses when considering investment decisions. The RRF therefore has great potential to boost Europe’s long-term attractiveness.

4. Continue down the hard path of tax harmonization and transparency

Based on our experience of working with clients, tax has fallen down the agenda in recent years as a factor that determines where businesses locate their operations in Europe. We think this is in part thanks to the work of the EU and other multilateral organizations such as the Organization for Economic Co-operation and Development (OECD) in driving tax harmonization. President Biden’s objective for countries to adopt a global minimum rate of corporation tax would, if implemented, further harmonize tax regimes, not just in Europe but globally.

Uniform tax rates won’t necessarily eradicate tax as a factor that determines countries’ attractiveness. Instead, countries may look at other ways of remaining competitive, such as the rates of indirect taxes or the extent to which new types of tax, such as environmental taxes, are implemented. Countries may also try to carve out a competitive edge by how they administer taxes and the extent to which they assist large businesses with tax compliance.

Governments may be unwilling or unable to lower indirect taxes or relax administration. The US$30t in financial stimulus provided by governments around the world will have to be paid for somehow. According to a report from EY tax professionals in 68 jurisdictions, increased enforcement of existing taxes and shifting resources from other government priorities are the most likely ways that governments will cover the cost of this stimulus. 2

The stimulus can't go on forever, so it's really a matter of when, not if, taxes will go up.
Jan Lyons
Senior Vice President, Tax, BP

Digital taxes are also currently in the spotlight. The OECD is leading global efforts to create new rules for taxing digital businesses. In the meantime, a few countries have implemented their own digital taxes. This has created immense cost and complexity in ensuring compliance, because it has given rise to a variety of VAT, customs duties, levies and other hybrid digital transaction taxes.

What does this mean for foreign investment in Europe? It’s very difficult to say as the picture is so complex, but it is vital that the EU maintains its efforts as part of the OECD’s program to reach consensus on how to tax digital businesses. One potential consequence is that US digital companies may throttle back on establishing a presence in low-tax jurisdictions in Europe if they can no longer enjoy the tax benefits. Given that the US is the largest investor in Europe, accounting for 21% of all announced projects in 2020, any decrease in US appetite could have a significant impact on overall investment levels.

We hope that the findings in this report trigger an active conversation about Europe’s economic future. As part of commitment to building a better working world, EY people are dedicated to helping businesses, sectors and countries recover, transform and thrive. It is firmly believed that foreign investment has a key role to play in this endeavour.

The views of third parties set out in this publication are not necessarily the views of the global EY organization or its member firms. Moreover, they should be seen in the context of the time they were made.


Foreign investment looks set to bounce back following the first double-digit decline in more than 10 years. But public authorities must act swiftly to cater for businesses’ new location requirements and prolong Europe’s long-term attractiveness.

About this article

Julie Linn Teigland

EY EMEIA Area Managing Partner; EY Global Leader, Women. Fast forward

Passionate about the transformational power of digitalization and innovation and its potential to deliver sustainable, inclusive growth for clients. Prominent voice of the Women20 global agenda.

Hanne Jesca Bax

EY EMEIA Markets & Accounts Leader

Experienced leader blending different cultures, generations, mindsets and genders.

Marc Lhermitte

Partner, EY Consulting, Global Lead – FDI & Attractiveness

Fascinated by the complex interactions between companies, people and the geographies they live in.