Five forces shaping foreign direct investment in Europe

Over the past decade, a succession of shocks, from the COVID-19 pandemic to the war in Ukraine, has profoundly reshaped the environment in which companies make location and investment decisions. Meanwhile, Europe is experiencing political fragmentation, fiscal tension and the rise of populism (pdf) in several countries, creating uncertainty around governance and policy.

This explains why 41% of executives now identify geopolitical tensions and conflicts as the leading risk to Europe’s attractiveness over the next three years, up from 35% in 2025 and 27% in 2024. Trade barriers and tariffs also rank among investors’ most significant concerns.

Europe’s commitment to the rule of law, institutional continuity and rules-based governance remains a powerful differentiator. Preserving this advantage requires greater unity between countries and faster execution in Brussels, placing a particular responsibility on policymakers. Governments will need to provide more predictable and consistent industrial, trade, energy and regulatory frameworks, while ensuring that Europe remains open to international investment and innovation.

Europe’s sustainability ambitions are both a strength and a weakness in attracting investors. Businesses view the continent’s proactive policy approach to climate change and sustainability as its fourth-greatest advantage, while the availability of low-carbon energy ranks seventh. Nearly one-third of EU energy already comes from low-carbon sources, making Europe comparatively attractive for companies with ambitious climate commitments and net-zero strategies.

At the same time, businesses see complex and fragmented sustainability regulations as a competitiveness risk. And Europe also faces the “energy trilemma” of simultaneously attempting to decarbonize its economy, preserve industrial competitiveness and secure its energy supply.

Geopolitical shocks reinforce the probability that price volatility will persist in the medium term. Although Europe has reduced its exposure to imported fossil fuels, it remains vulnerable to gas, shipping and commodity pricing swings. This helps explain why surveyed businesses identify energy costs as Europe’s main investment disadvantage.

The survey conducted finds that 37% of executives in industrial sectors have canceled, delayed or scaled back an investment project in Europe over the past 12 months because of energy prices or uncertainty around future costs. In parallel, more than 60% of executives in industrial sectors believe policymakers underestimate the risks that high energy prices pose to European industry, while half say policymakers do not fully understand business concerns.

Building on Europe’s sustainability leadership

Europe could transform sustainability into a source of competitiveness and industrial renewal by building on its significant structural advantages: strong public support for the energy transition, leading industrial capabilities in low-carbon technologies, sophisticated financial markets and growing investor demand for sustainable assets. But execution remains too slow, and administrative issues block progress. For example, 53% of surveyed energy businesses say they canceled, delayed or scaled back an energy infrastructure project in Europe in the past 12 months because of permit issues.

A much faster and more coordinated response is required. Priorities include:

• Accelerating permit procedures for energy and industrial projects
• Strengthening electricity grids
• Scaling renewable and nuclear investment
• Expanding long-term power purchase agreements (PPAs) and creating more integrated European energy markets
• Simplifying regulation, including through more coherent European frameworks instead of fragmented national subsidy systems

Geopolitical crises have exposed the economic cost of Europe’s strategic dependencies. As a result, public intervention in coordination with business is essential to protect the continent’s strategic industries and reduce dependence on unreliable or overly dominant international partners.

Europe has an opportunity to identify and support the critical sectors that will drive future growth, exports, innovation and employment. These will likely be semiconductors, AI, CleanTech, biotechnology, cloud computing, quantum technologies and defense. Surveyed businesses agree: They rank the need to support strategic industries among Europe’s top three priorities.

Achieving strategic autonomy

A broad set of initiatives is at Europe’s disposal to support critical industries, including targeted tariffs, tax incentives, public investment support and foreign investment screening mechanisms. It could also pursue regulatory simplification and stronger integration of innovation ecosystems.

But the continent must be careful not to slide into economic nationalism and protectionism. Decisions about strategic autonomy should not be based on businesses’ nationality but on the extent of their long-term commitment to Europe. Foreign investments that contribute to the European economy remain essential.

Growing demands for strategic autonomy will require international businesses operating in critical sectors to establish a long-term presence. This means localizing production capacity and research centers, training local talent and keeping intellectual property within Europe. The survey reveals optimism about such a shift: 87% of industrial company leaders in Europe believe it is possible to reduce dependencies on suppliers from other regions.

Europe’s defense challenge

Defense is a critical sector that needs support. The European Commission (EC) now identifies defense as a priority sector for FDI, particularly in advanced manufacturing, dual-use technologies and critical supply chains. More importantly, Europe’s ambitions are being matched with financial firepower. In March 2025, the EU unveiled an €800 billion plan aimed at strengthening the bloc’s defense capabilities. In addition, Member States can now deviate from EU budgetary rules to increase defense spending without triggering deficit procedures.

Those announcements are already contributing to an increase in defense FDI in Europe, with the number of projects up 84% from 2024. They will create almost 7,000 jobs. This momentum looks set to continue: 59% of defense executives surveyed plan to establish or expand operations in Europe over the next 12 months.

Businesses’ ability to innovate at scale plays a critical role in Europe’s long-term investment attractiveness. However, foreign investment in R&D centers, which drive corporate innovation, fell 30% in 2025, reaching its lowest level in four years. The number of jobs created declined 60%.

Encouragingly, there are signs of improvement: R&D is now considered the continent’s third-largest investment advantage, while concerns over the “slow pace of innovation” have fallen from the fifth- to the eighth-biggest perceived risk. This is likely a result of certain positive regulatory developments such as the EU’s Digital Omnibus on AI Regulation Proposal. Made in late 2025, it aims to modify aspects of the EU AI Act to make it easier for businesses to adopt and scale AI.

European AI investment surges

At the same time, FDI into European AI-related projects surged by 96% in 2025, creating more than 14,000 jobs. Investment in this sector grew faster than in any other, rising in France, the UK and Germany even as total FDI declined.

Yet more work is needed to build Europe’s reputation as an innovation hotbed: 43% of businesses view Europe as less attractive than the US and China for AI investment, innovation and deployment. That figure rises to 55% among companies without a European presence. This is due to regulatory complexity, high energy costs compared with the US and China, skills shortages and slow permitting for digital infrastructure.

Policymakers are moving in the right direction, but the pace needs to accelerate if Europe is to close the gap with the US and China. Asked how Europe could improve its AI attractiveness, businesses rank streamlining AI regulation first and improving technology skills second. The EU AI Act could become a global standard for responsible AI. Expanding regulatory sandboxes alongside harmonization would give businesses the space to experiment without bearing full compliance costs upfront.

Digital infrastructure also requires attention. China already has 1.5 times more data center capacity than Europe; the US has three times more. By 2030, the gap will widen. Fast-tracking permits for data centers and grid infrastructure would help close it.

Former Italian Prime Minister Mario Draghi has estimated that Europe needs between €750 billion and €800 billion in additional investment every year to restore its competitiveness, equivalent to 4%–5% of EU GDP¹. Government budgets are already stretched, and the financing gap cannot be closed by public spending alone.

However, the conditions to mobilize private capital at the required level do not yet exist. Every year, approximately €300 billion in European savings is invested primarily in the US rather than in European growth.² Europeans hold approximately €14 trillion in savings deposits, but fragmented capital markets, inconsistent insolvency frameworks and prudential rules that favor low-risk liquid assets prevent those savings from reaching the productive, long-term investments Europe needs.³

The savings and investments union (SIU), designed to channel Europe’s abundant private savings toward its significant investment needs, addresses this directly. But progress has been slow: Insolvency frameworks remain fragmented, supervision inconsistent and cross-border investment processes unnecessarily complex.

Unlocking institutional capital also requires urgent attention. Policymakers, institutional investors and businesses will need to collaborate in designing investment structures that match long-term risk-return expectations. In addition, policymakers must give high-growth businesses access to equity capital markets that match their funding requirements as they scale. A Europe that cannot finance its most promising ventures will continue to lose them to markets that can.

Encouragingly, 52% of all businesses surveyed are confident that Europe will make the strategic decisions required to unlock the investment needed to address its competitiveness and productivity shortcomings. Just 21% lack that confidence.

The role of financial services

Addressing the structural funding gap requires both the architecture to mobilize European savings and the financial institutions capable of deploying them productively. FDI is helping build a financial services sector capable of doing this. It was one of the strongest-performing sectors in European FDI in 2025. Foreign financial services firms executed 355 investment projects, up 21% on 2024, creating 9,762 jobs, a 16% increase on the previous year. The US contributed significantly to this momentum. FDI in Europe from US financial services firms reached a 10-year high in 2025.

Conclusion

Europe today is at a critical turning point. Geopolitical turmoil, the energy transition, the need for strategic autonomy in critical industries, the rise of AI, and the need to mobilize capital at scale are all exerting a significant influence on the continent’s attractiveness to investors.

But businesses have good reasons to believe in Europe’s long-term potential. The continent has qualities that, together, remain unsurpassed: a vast consumer market, high-quality infrastructure and a proactive approach to climate policy. This helps explain why most investors have confidence in the region in the longer term: 60% of surveyed businesses expect Europe’s attractiveness to improve in the next three years.

The task now is to harness Europe’s potential. By building on its strengths, it can emerge from disruption more resilient, more competitive and more attractive to investors.