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EY's Attractiveness Survey

May 2017

Executive summary

Europe’s attractiveness in 2016: The reality


Europe’s attractiveness in 2017: Changing perceptions

Global investment environment

Global cross-border investment supported by strong M&A activity

Around the world, companies continue to calibrate their investments carefully to the opportunities offered by economic recovery, trade, business expansion, digitization and business model optimization – and continue to create economic progress and jobs.

M&A plays a growing investment role as companies reshape. According to UNCTAD, cross-border M&A in the EU increased by an extraordinary 34% to US$259b in 2016.

The continuing massive flow of investment into productive assets around the world comes against a backdrop of global economic recovery. On 18 April the International Monetary Fund lifted its forecast for world growth during 2017 from 3.4% to 3.5%, the first upward revision in six years. The IMF said that the upturn was supported by accelerating flows of goods and services around the world, and that it expected international trade to expand by almost 4% this year and next – a pick-up from the 2.2% of 2016, but still below the 7.1% a year average in the two decades to 2007.

FDI inflows by region (US$b), 2015–2016

EY - FDI inflows by region (US$b), 2015–2016

Geopolitics have penetrated more boardrooms, more than ever

Cross-border investment flows and trade have hugely increased in recent decades, so geopolitical instability touches many more companies, in more complex ways. In Europe, continuing economic recovery is accompanied by a widespread and powerful undercurrent of dissatisfaction. Europe’s place in the world is changing, its relative importance diminishing. Long term, a rethink about the future of the EU might help refresh Europe’s attractiveness.

Europe’s investment capacity appears intact

After averaging expansion of 1.7% in 2016, ahead of the US (1.6%) the 19 Eurozone countries are expected to achieve 1.6% this year and next. The 11 countries of Emerging and Developing Europe, on the region’s southern and eastern fringe, are expanding almost twice as fast. Steadier and stronger growth around the world lifts demand for European products and services at home and abroad, raises capacity utilization, and gives business decision makers the confidence to expand and invest.

EY viewpoint

Negotiating about jobs, growth and trade – Andrew Hobbs, EMEIA Public Policy Leader, EY


Foreign direct investment in 2016 and country rankings

Europe remains a “must be” market for multinational companies, despite its complexity and the uncertainties stalking its politics and institutions.

FDI projects and jobs created in Europe

EY - FDI projects and jobs created in Europe

In 2016, foreign direct investors announced a record 5,845 new projects in Europe, up 15%. The massive inflow of projects was accompanied by a 19% surge in jobs created, which reached 259,673.

Though counting job creation accurately is very difficult, that’s more than twice the number of jobs that we believe were created by FDI in the lean years of 2009 and 2010, when Europe was struggling through the immediate aftermath of the financial crisis. What’s going on?

The recent upsurge in foreign direct investment reflects a long-awaited return to economic growth throughout almost all of Europe. International investors have regained some of their confidence in Europe since the worst of the financial crisis.

Europe’s ability to attract increasing numbers of FDI projects confirms the endurance of its economic environment. Investors remain strongly attracted by and committed to the region, and continue to establish new operations, renew or expand existing facilities, and to create jobs in Europe.

Against the global backdrop of geopolitical and economic instability, the first of many striking messages from EY’s European Attractiveness Survey 2017 is that investors are continuing to bet on better economic trends and opportunities in the European Union, as well as its European neighbors, including Russia and Turkey.

Destinations and country rankings: gains for (almost) everyone

Three Western European countries captured half of European FDI

EY - Top 20 destination countries by FDI projects and job creations

Europe’s appeal to foreign direct investors is diverse: the number of projects increased in every leading destination except the Netherlands, Belgium and Switzerland.

However, Europe’s attractiveness is driven by three FDI champions: the United Kingdom, Germany and France. Together, these three big, highly-developed economies captured half of European FDI inflows in 2016, almost unchanged from the 51% they secured in 2015.

Central & Eastern Europe: competitive and attractive

Foreign direct investment in Central and Eastern Europe had a strong momentum in 2016. Poland leaped to fifth place in the national ranking, attracting 256 projects, a hefty 21% increase. The Czech Republic secured 110 projects, up 53% and Hungary and Slovakia also achieved firm gains.

The region attracted nearly half of Europe’s FDI industrial projects. It has become a favorite among European car-makers, which locate assembly plants in countries such as Slovakia where they find committed, skilled and affordable employees.

Southern Europe and Turkey: divergent trends

Southern Europe’s attractiveness revived strongly in 2016. FDI inflows to Italy, Portugal and Spain surged more than 24% year-on-year. A plentiful supply of well-qualified and affordable young people, and moderate real estate costs, contributed to the attractiveness of these Southern economies.

After significant growth of 23% in 2015, however, Turkey’s FDI rose just 3% in 2016, to 138 projects. Economic growth slowed last year and combined with a high ratio of USD denominated debt and instability in the neighboring region, including an ongoing conflict in Syria, these factors are impairing Turkey’s attractiveness for foreign investors.

EY viewpoint

The Baltics’ blossoming business appeal – Arvils Ašeradens, Minister for Economics of the Republic of Latvia and Deputy Prime Minister, EY

A blueprint for a future-facing EUAlessandro Cenderello, Managing Partner for EU Institutions, EY

FDI by activity, sector and origin

Europe is in the throes of a digital transformation that is changing the way people live and work, and transforming its economy and businesses.

Projects by activity in Europe

EY - Projects by activity in Europe

Europe’s most powerful attraction in the global battle to draw in FDI is the size and wealth of its increasingly dynamic marketplace. In 2016 Europe attracted a record 2,683 sales and marketing offices, up 29% on 2015. Sales and marketing activities made up 46% of all FDI projects in 2016, up from 41% in 2015. But in a digital era, this category almost certainly includes many software and business services companies that are expanding across borders.

Europe’s historic strengths in the manufacture of capital goods and in business services are being reinforced by the development and industrial adoption of robotics, artificial intelligence, the Internet of Things and other business-oriented digital technologies. We know that US giants such as Amazon, Alphabet and Facebook are investing hugely in Europe, both in greenfield projects and by acquiring digital innovators.

In a globalized economy Europe remains an attractive location for many manufacturers. Cross-border investors launched 1,538 industrial FDI projects in 2016, up 6% on 2015. Central and Eastern Europe is increasingly becoming the continent’s workshop. Last year CEE secured 754 projects, a 15% increase and an overall 49% share of European manufacturing FDI projects - up from 45% in 2015.

The origin of FDI: US and European investors still dominate

As the world’s biggest economy, and a leader in the digital transition, it is unsurprising that the US was the single biggest source country for FDI in Europe. However, the majority of FDI in Europe arises from intra-European FDI flows.

FDI projects and jobs created by source, % share

EY - FDI projects and jobs created by source, % share

Asian investors continue to flag their confidence in Europe. Chinese companies launched 297 FDI projects in Europe in 2016, up 25%. Two-thirds of these were sales and marketing projects, though Chinese investors also announced 52 manufacturing projects, making up 18% of total Chinese projects, and 22 R&D investments, an increase of 10% on 2015. Chinese companies invest across a very diverse range of sectors, but machinery and electronics are in the vanguard.

EY viewpoint

Building the single market of the future – Bernhard Lorentz, Leader, Government and Public Sector Germany Switzerland Austria, EY

Europe’s changing tax landscape – Helmar Klink, Partner, International Tax Services, Ernst & Young LLP (The Netherlands)

European companies know their neighboring markets increasingly well, and are busy transforming themselves from national into pan-European or global champions.

Looking ahead

Executives say that even as Europe is gaining attractiveness, and North America levels off, China’s appeal continues to fade. It is now down to 37% from a peak of 48% in 2007.

We surveyed decision makers in a representative sample of 505 foreign companies in Europe and beyond about how they see Europe’s attractiveness as an investment destination. Their answers show unequivocally that for its typical investors, Europe remains the world’s most attractive destination for cross-border investment.

Despite ground-breaking economic reforms and strong growth India’s appeal has also weakened, though it is Brazil, down to 7% from 26% in 2013, that risks falling off investors’ radar. Russia, meantime, now attracts less attention from foreign investors, who struggle to understand the investment outlook there.

Attractiveness by region (2017): Europe in top position

EY - Attractiveness by region (2017): Europe in top position

Current climate does not damage long-term hopes in the European Union

EY - Current climate does not damage long-term hopes  in the European Union

The freedom of movement of goods, services, capital and labor across the EU’s 28 states are still providing a fairly attractive environment in which business is thriving, adapting and investing – creating jobs and profits.

Europe’s single market of more than 500 million consumers makes investment in new goods and services worthwhile, and enables companies to achieve economies of scale. It also enables them to achieve efficiencies, by locating their activities where they can get the best results at the lowest cost – benefiting their customers and their shareholders.

Open borders are facilitating the movement of capital and talent towards modernizing cities and regions in both Western and Central and Eastern Europe. For companies, much of Europe is working reasonably well – at least for the moment.

Will Brexit stymie the resilience of Europe?

Brexit and Article 50 will have an impact, but it’s just too early to see. Four out of five asked investors say they have no plans to change or relocate operations. But many companies do not yet have a comprehensive view of the tax and regulatory consequences, and have only just started, are thinking about the possible consequences. Logistics and supply chain, manufacturing, innovation and R&D activities may well be redrawn as clarity emerges about the detail of the UK’s separation from the EU. Some companies will alter their production of goods and services, and even review the location of their headquarters.

EY viewpoint

Innovation based on progressive trade and a strong Single Market – Ann Mettler, Head of the European Political Strategy Centre, the European Commission’s in-house think tank

Mastering Brexit effectsMats Persson, Head of International Trade EY UK&I

Paradise deferred

Asian investors continue to flag their confidence in Europe. Chinese companies launched 297 FDI projects in Europe in 2016, up 25%.

Investors seem to see the prospect of strong European economic growth receding further into the future. In 2015, 58% expected Europe’s attractiveness to improve within the next three years. In 2017, that proportion is down to 35%. Likewise, in 2015, some 53% predicted an improvement in Europe’s growth within five years. By 2017, that proportion had fallen to 42%, whilst the proportion expecting a return to steady economic growth after at least five years has risen to 56%.

Moreover, many companies are still completing the Europe-wide integration of their operations to serve a single European market that has yet to become a reality in many domains. For example, although many consumer and digital products are essentially identical across Europe, the infrastructure over which they are delivered remains largely in the hands of national players, from railways and trucks to telecom operators.

In your view, given the current uncertainties in Europe, how long before we see a return to steady economic growth and performance in Europe?

EY - In your view, given the current uncertainties in Europe, how long before we see a return to steady economic growthand performance in Europe?

Investors seem to be saying that whatever the near-term bumps, Europe is on its way to more clarity and more sustained economic growth.

Recommendations for foreign investors

  • Brexit is an obstacle: leap over, leap ahead

    Global trends are disrupting operating models, and will continue to do so because of continuing global economic integration, digitalization and cost pressures. At the same time, the tax and regulatory environment is undergoing unprecedented changes, notably from greater global harmonization and transparency enshrined in the Base Erosion and Profit Shifting initiative (BEPS), and the promised US tax reforms. Any operating model changes must take this wider context into account.

    Yes, Europe’s political instability and Brexit negotiations are creating volatility and uncertainty in Europe. But paradoxically these factors can have a catalytic effect on companies, prompting thinking and discussion over future business models, market strategies and operational priorities.

    Some companies have started to re-evaluate supply chains, look at alternative suppliers, and refresh their operating model. Others are being spurred to accelerate their operational excellence transformation and delve into future international trading opportunities. All in all, companies – whether directly affected or more distantly – must put the UK’s planned exit from the EU in context, understand the implications for their business, and get on the front foot for the key battles ahead.

    Companies need to think through all the implications of Brexit strategically and avoid falling into the trap of addressing this disruptive shockwave department by department.

    Policymakers need to work on creating clarity. They need to be clear about objectives, realistic about what can be achieved, and pragmatic in finding – and implementing – solutions. The faster uncertainty is removed, the more quickly business can plan and adapt to a changed situation. Policymakers need to devote ample resources to ensure unnecessary business disruption is minimized.

  • Time to bet on skills

    Ensuring that Europe has the right people and skills to ensure its prosperity is the biggest challenge.

    The urgency of developing education and skills rings loud and clear from our survey. Moreover, developing education and skills is considered vital by 44% of investors already committed to Europe, against 10% of those not yet present. The clear implication is that Europe’s investors find its talent pool wanting, and believe remedial action is pressing.

    Policymakers’ action needs to begin at the start of the pipeline, where educators must ensure better basic literacy and numeracy for all. They need to invest in turning out more people more able in Science, Technology, Engineering and Mathematics (the so-called STEM subjects) at ALL levels, so that there is a place for every disenchanted, unemployed under-25 in the digital economy - and equally - an ample supply of those with doctorates.

    Companies that make their home here must assume their share of the responsibility for training and developing talent – and not just focus on scarcities of particular niche skills. To assure their bottom line long-term, their future labor supply – and their license to operate – companies need to hire, educate and train young people, working in close partnership with local bodies and educational organizations. Talent, not geography, will make the difference between success and failure in tomorrow’s world.

  • Develop digital Europe

    That supporting high tech industry and innovation (34%) comes in second place in investors’ recommendations only confirms their conviction that Europe must do more to underpin its transition to the digital era. Although it lags in consumer IT, Europe is a leader in many emerging digital technologies, including artificial intelligence, robotics, and the Internet of Things. Already, the continent has produced thousands of digital start-ups, and even some substantial businesses… developing products and services that companies in Europe need today or will need tomorrow… and that often catch the eye of overseas acquirers.

    Policymakers must do much more to enhance the start-up environment. Areas for action include:

    • Modernizing laws on copyright

    • Overhauling tax regimes: to encourage innovation and not penalize companies that do not turn an early profit, to ensure entrepreneurs are appropriately incentivized, to rationalize VAT rules to avoid unnecessary burdens on small cross-border traders and unequal liabilities between business models offering similar services in different ways

    • Overhauling labor codes, to ensure workers have appropriate protections in the gig economy, and bridge the gulf between those with long-term security, and the chronically insecure

    • Modernize the regulation of financial institutions to facilitate innovation in funding models, via peer-to-peer, lending, venture capital, and traditional grants and lending, so as to ensure appropriate finance is available to develop ideas that can change our society for the better

    • Deepen the capital markets union: many startups service the needs of big companies, and the funding capacity of big companies is critical to the health of the entire European economy

    Companies must learn to constantly scan for opportunities and potential impacts of digital technologies on their activities. They must reorganize their own business models to profit from new ways of working, while adopting intrapreneurship and empowering employees. They must identify and partner with external innovators, and develop an open innovation mindset underpinned by appropriate contractual arrangements that leave scope for the unforeseen.

    Europe’s complex economy and extensive physical infrastructure offer vast potential for efficiency gains and new services developed on the back of data capture and analysis.

  • Companies should help overhaul Europe and speak up

    Economic progress is the most critical issue for Europe’s future. Yet people and politicians are focused on yesterday’s problems. Progress in the construction of Europe and further expanding the huge range of benefits it delivers has stalled.

    For instance, Europe’s tax regimes were designed in a bygone age, when companies, assets and people were national and immobile. The attempt to harmonize international corporate taxation through BEPS should stamp-out some of the most obvious tax avoidance schemes. But what Europe really needs is a root and branch overhaul of its national tax regimes in favor of jobs, innovation, the environment – and greater equity. Taxation can be used to discourage what is bad, and promote what is good for Europe and its people.

    As it hurtles into a period of accelerated change, Europe is abounding with opportunities. Many countries in Central, Eastern and Southern Europe are enjoying rapid economic growth as they progress their transition to open, internationally-integrated, market based economies. Educated and connected, their city-dwellers are a precious and affordable resource for business.

    Meantime in Western Europe, knowledge-based science and industry clusters are developing ever more sophisticated and connected ecosystems. Digital technologies are transforming every sector and business model, from energy and transport to real estate, consumer goods and healthcare. The diversity of Europe’s people, languages, and social and economic models has become an opportunity to experiment alternative solutions in different markets, and quickly transpose those which work best.

    Corporate Europe needs to come in and help. Companies and citizens alike benefit enormously from the EU, albeit unequally, and companies have powerful insights into the strengths and shortcomings of the European economy. They need to share them, loud and clear, with employees, citizens and policymakers. They need to fight inequality and campaign vigorously for the greater good, including for more support, such as education and training, for those adversely affected by change.

    Companies must do more to highlight the success of Europe’s single market and open-border policies in improving lives. And they must do more to convince, hire, train and retain the citizens, especially the young, upon whom the future of Europe and its investors depend.