Luxembourg ranks first in number of foreign direct investment projects per capita, shows first EY Attractiveness survey
One of the key drivers of growth is a country or region’s ability to attract investment. By analyzing the attractiveness of more than 40 countries as a combination of image, investor confidence, and the perception of their ability to provide the most competitive benefits, the attractiveness survey has been widely recognized as a key source of insight into foreign direct investment (FDI) in Europe for 21 years. For the first time, Luxembourg has been participating in the study, the most reliable way to assess what makes the country competitive on international level and what main barriers to growth are perceived by (potential) investors.
The two-fold methodology of the study mirrors both the reality of FDI in the country through the analysis of the number and destination of investments that create new facilities and jobs, and by a survey reflecting the perception of international decision-makers.
Europe’s FDI recovery is slow, gradual but real
In 2021, foreign investors made a comeback to Europe: 5,877 locations and expansions were announced in 43 countries (+5% vs. 2020). However, the damage of the pandemic has not yet been erased, as the number of investments decreased by -12% vs. the record level of 2017.
Overall, the appetite to invest in Europe is high: 53% of executives intend to establish operations in Europe during the next year, which represents a significant increase of 13% compared to 2020. Luxembourg’s results regarding its attractiveness in view of executives is slightly below European average with 43%. Still, the Grand Duchy ranks 9th most attractive destination in Europe.
France, Germany and UK are on the podium. Where does Luxembourg stand?
France has made strong progress between 2020 and 2021 (+24% in the number of projects) and the country retains first place in the ranking with a share of 21% of all FDI projects in Europe. In the United Kingdom (UK), the number of projects increased by a modest 2% in 2021: the country’s attractiveness is struggling after Brexit, due to persistent concerns about trade restrictions and labor shortages. Germany saw a 10% drop in announced projects in 2021 but remains in the lead for manufacturing projects and still retains 14% of all FDI.
With a 39% increase and 25 foreign investments announced in 2021, Luxembourg ranks 26th place in terms of FDI share. Due to its size, the Grand Duchy might not own an important share of FDI, but it stands out as being on the first place for the number of investment projects per capita (number of projects per 100 000 inhabitants) with 3.94 projects per capita. This surpassing Ireland (30%+), a country with which Luxembourg shares many features, including its reputation for a fund domicile of choice and wide array of investment funds. This is then followed up by Lichtenstein (2.56), Finland (2.24) and Malta (2.13).
The sectors impacted by the pandemic rebounded strongly in 2021, while services experienced a slowdown
At European level, most investments have been made into manufacturing sites (+5% vs. 2019, the previous peak), logistics platforms (+23% vs. 2019), and R&D centers (+11% vs. 2019). Many initiatives that were put on hold during the height of the health crisis have been resurrected, while businesses have begun to rearrange supply chains, innovate and respond to the e-commerce boom. This is also true in Luxembourg where manufacturing sites and R&D centers represent 44% of investments in 2021.
Manufacturing and logistics recovery has been offsetting the downswing in business and professional services sector projects as, on the other hand, the relative weight of business services declined from 78% to 28%. Long lasting changes in working habits due to the pandemic impacted office-based sectors. New investments slowed down as hybrid working and digitalization changed investors’ real estate strategies.
Despite the net increase in assets under management, there has also been a relative slowdown in foreign direct investment in the financial sector. This can be credited to the “end of the Brexit effect” – companies that were due to relocate their activities to the Grand Duchy have now done so.
It is important to note that FDI is distinct to portfolio type investments. In the context of the study, FDI projects exclude portfolio investments and mergers and acquisitions (M&A). As such, the progression of assets under management (AUM) of a country has no impact on FDI statistics. In fact, 2021 was a record year for Luxembourg investment funds, with AUM at an all-time high of EUR 5.9 trillion, equivalent to a year-on-year increase of 17.8%. Luxembourg continues to be the largest investment centre in Europe, and second only to the US.
Main challenges for Luxembourg’s attractiveness in the next three years
The survey of decision-makers pointed out the same challenges in Luxembourg as in the rest of Europe: Reducing taxation, promoting innovation, and supporting high-tech industries and SMEs have been identified as main pillars.
Luxembourg as a financial center
With the Grand Duchy being the largest investment fund and asset servicing hub in Europe, it is important to analyze the challenges that need to be faced in this sector – especially as the survey has been showing a decrease in the appetite of investors in launching new headquarters or developing their business presence in Luxembourg.
Over 65% of C-Suite cite the ability to attract and retain talent as the two biggest risks to the attractiveness of Luxembourg as a financial hub. To maintain its status as the largest investment fund center in Europe, the talent topic must be tackled.
Focus on Tax policies
Across Europe, the degree of digitalization of tax authority systems is deemed the most important tax-related factor influencing location decisions. This factor is even perceived as more important than the absolute rate of corporate tax.
Pragmatism and flexibility of tax authorities are considered as the fourth most important factor when investing. As agility is one of the strengths of Luxembourg, this aspect does not seem like a threat – if it is nurtured in the future.
Manufacturing activities and “Industry 4.0”
As more companies are inclined to relocate to Europe and to regionalize their supply chains, Luxembourg should develop and build on its industrial legacy, become key player in logistics and become a test bed for “Smart Factories”. Green- & Cleantech companies also bring the opportunity to scale up and work on their perception to lead the way to an eco-friendlier business center.
Conclusion
Through the Attractiveness Survey, foreign investors have clearly defined the criteria that guide their investment choice, whether it is technology, sustainability or the availability of trained manpower. Luxembourg should encourage investors by giving them more visibility on the measures and prospects envisaged to meet these challenges, but also by demonstrating its ability to build a tax, regulatory and normative ecosystem that is evolving and encouraging the development of sectors of the future, such as the ecological transition.
