The 2019 EY Attractiveness Survey report on foreign direct investment in Europe has some interesting insights. After surveying 506 global businesses, EY found Western Europe to be more attractive destination for FDI today, more than it has ever been in the last decade. Many global business leaders find Western Europe highly attractive as a place for establishing operations. Eastern Europe’s attractiveness has also improved from 4th place in 2014 to 2nd place in 2019.
Global ease on FDI
Although Europe is considered better than most regions in the world when it comes to FDI, the appetite to invest in Europe isn’t as great as it has been in the past seven years. There are economic and political factors in Europe and around the world that have made businesses ease on FDI. The global ease trend on FDI began last year.
In 2018, 6,356 FDI projects were completed in Europe, representing a 4% decline when compared to 2017. This decline is linked to political upheaval, a factor that was outside the control of many European countries.
Politics to blame
According to EY, political uncertainty remains the most significant risk to Europe’s attractiveness as an FDI destination in the near future (next three years). Brexit tops the list of political problems that erode Europe’s attractiveness. Political instability, the rise of populist and protectionist policies as well as global political uncertainty rank second, third, and fourth respectively in the list of political problems undermining Europe’s attractiveness.
Digital Investments responsible for most of Europe’s FDI
According to EY, the digital economy has risen despite the overall downtrend in FDI. Foreign investments in the sector have increased to a record high (by 5% in 2018). What’s more – increasing investments in the digital sector has been a rising trend since 2013. In fact, the no. of digital projects undertaken through FDI has increased by more than 200% since 2013.
Countries like Poland, Ireland, Spain, and Belgium are leading in regards to countries where digital FDI increased by 20%+. Germany and the UK weren’t so lucky in 2018 with FDI investments in the digital sector, falling by 13%. France enjoyed a growth of 1% only.
Digital FDI by country
Although Europe’s FDI appears to have dropped 4% in 2018 (the first drop in 6 years), some countries have enjoyed a significant surge in FDI. While Europe’s largest economies UK and Germany took a hit and France experienced insignificant growth (1%), Ireland and Poland enjoyed the largest surge in FDI at 52% and 38% respectively. Spain, Belgium, and Turkey followed in at 3rd, 4th and 5th place at 32%, 29%, and 14% respectively.
A global view on Europe as an FDI investment region
Despite the challenges facing Europe as an FDI destination, the global business leaders surveyed by EY still find Europe as the most attractive place for investment. 56% see Western Europe as one of the top three investment destinations globally, signaling a 3% increase compared to 2017. Central & Eastern Europe is the 2nd most attractive region.
Europe’s cities by FDI attractiveness: Cities in Poland and Spain increasing in attractiveness
Paris, which used to be among the most attractive cities in Europe for FDI, is now ranked #1 by only 30% of global business leaders surveyed by EY. This represents a 7% drop in attractiveness in a year. London has fallen below Paris with only 25% of global business leaders finding the city among the top three most attractive cities in Europe for FDI. Brexit has been cited as the reason for London’s diminishing attractiveness to global businesses.
As London and Paris lose their shine as Europe’s FDI hubs, cities like Warsaw in Poland have seen increasing interest as FDI hubs for tech investments. Warsaw and Madrid are the only two in three cities in Europe that enjoyed an increase in attractiveness as tech hubs in 2018. Both cities saw a 2% increase in attractiveness. Munich saw a 1% increase in attractiveness. Poland and Spain appear to be providing cities (Warsaw and Madrid) that are offering global companies with better business ecosystems.
In 2018, Poland had a total of 272 FDI projects representing a 38% increase and making the country Europe’s 6th largest FDI market. The traditional industrial and digital sectors are responsible for driving FDI growth in 2018. Traditional industrial sectors alone accounted for 127 foreign direct investment projects in 2018.
Spain’s current digital frenzy is responsible for increasing FDI investment. Spain’s foreign direct investment increased by 32% in 2018. FDI investment in the transport, finance and logistics industries was also significant, same as Poland.
External factors affecting FDI investment in Europe
Tax reforms in countries like the US have affected FDI in Europe. The United States is the largest foreign direct investor in Europe, contributing 22% of all of Europe’s FDI in 2018. However, tax reforms that were kick-started in 2017 and slowing growth resulted in the US investing just 3% in Europe in 2018. America’s attractiveness has also increased as a result of tax reforms. In fact, many global businesses have already started thinking about America as a serious contender for FDI.
Brexit is also to blame for Europe’s diminishing attractiveness. The effects of Brexit go beyond the UK. 38% of global businesses surveyed by EY cite Brexit as a top risk for FDI in Europe in the future. Only 30% thought Brexit was a problem last year.
How can Europe improve?
The top priority for global businesses when investing in other countries is usually the availability of workforces with tech skills, something which countries like Poland have in plenty. The most sought after skills by foreign investors include; cybersecurity, artificial intelligence, robotics, big data and analytics, areas where Poland has shown significant improvement hence the growing attractiveness.
Tech skills aside, global businesses also consider stable tax regimes, robust digital infrastructure, and strong trade links. Countries which are dropping FDI investment attractiveness in Europe have stagnated or fallen backward in terms of tax, infrastructure, and trade links.
Investments in these areas will boost FDI and related benefits. The EY report shows that 75% of European businesses state that skills shortages are hurting productivity and overall profitability. 66% believe skills shortage is damaging top-line growth. A shift away from protectionism globally, stable tax regimes, and a more robust tech infrastructure is also important.
Download the full report here.
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