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According to the EY European Attractiveness Survey 2023, In 2022, foreign direct investment (FDI) in Europe experienced sluggish growth, increasing only by 1% compared to 2021, and remaining 7% lower than pre-pandemic levels in 2019.
The survey reveals that France, the UK, and Germany have continued to be the top three destinations for FDI, attracting nearly half of the total projects. However, their performance in 2022 was underwhelming, with France recording a slight increase of 3% (1,259 projects), while the UK saw a decline of 6% (929), and Germany was down by 1% (832).
In 2022, businesses across the globe announced a total of 5,962 greenfield and expansion projects in 44 European countries, marking a meagre 1% year-on-year increase compared to the 5% growth in 2021, as revealed by a report on FDI trends in Europe.
The report further notes that despite this slight uptick, the level of investment in Europe is still 10% lower than its peak in 2017. Additionally, a C-suite survey conducted as part of the research found that 29% of the participating businesses had deferred planned investments due to the energy crisis.
The report also highlights a 16% year-on-year decrease in the total number of jobs created in Europe as a result of FDI, totalling 343,634, indicating investor hesitancy in the face of uncertainty across the region’s markets.
The surveyed companies cited the economic challenges of increasing interest rates (45%), high inflation (40%), and soaring public debt levels (36%) as the three main risks impacting investment in Europe.
France’s higher volume of projects resulted in the creation of fewer jobs overall (38,102) and on average (33) compared to the UK (46,779 total, 59 average) due to higher wage costs and more restrictive labor regulations.
Despite these challenges, 67% of the surveyed businesses expressed their intention to establish or expand operations in Europe in the coming year, indicating the region’s continued significance in their current and future business plans. Nevertheless, expectations remain high for the EU and Member States’ responses to global competition.
Julie Teigland, EY EMEIA Area Managing Partner, said, “Last year, we saw signs that FDI would bounce back after the pandemic with a significant rise in planned investments – this has not materialized. The impact of the geopolitical, energy, and economic crises facing Europe is clear and the stalled growth is indicative of investors’ caution in the face of uncertainty across Europe’s markets. The core question is whether this latest slowdown will be long-lasting, or a relatively short lost period.
“Europe’s critical ambition should be to create the conditions for businesses to manufacture in Europe, invest in R&D, and make the digital and green investments that will power future prosperity. The time to act is now.”
Spain and Belgium have also mirrored the lacklustre performance of the top three FDI destinations, with a 10% and 4% reduction in investment respectively, according to the EY European Attractiveness Survey 2023. It is worth noting, however, that both countries experienced a robust rebound in 2021 following the worst of the COVID-19 pandemic.
In contrast, Ireland recorded a substantial increase of 21%, which is a significant deviation from the trend. This can partly be attributed to its agile, pro-business agenda and its appeal to large US corporations. Overall, the report highlights that despite the challenges faced by some European countries in attracting FDI, others have shown resilience and have adapted to the changing market conditions to attract more investment.
Teigland said, “The groundwork for France’s performance was laid many years ago by the Macron government’s series of business-friendly reforms, from which it is now reaping the benefits. The UK is impacted by concerns about trade restrictions and labor shortages, which are in part caused by Brexit, while neighbor Ireland’s increase partly reflects its agile, pro-business agenda. Despite a robust German industry, foreign investors are deterred by its tight labor pool and a high-carbon energy mix.”
Rise of digital
The biggest sector for FDI projects in 2022 was software and IT services, up 8% – double the rate of growth in 2021 – and accounting for 20% of total projects. It was followed by business services and professional services, up 27%. However, only 33% of respondents plan to increase their investment in manufacturing. Encouragingly, 64% of executive respondents expect to increase their European footprint in R&D over the next three years.
Teigland says: “In the drive for greater inward investment, the challenge is to reinforce Europe’s capacity for innovation and to build a compelling business case that will sustain its standing as a leading global manufacturing hub. Meeting that challenge will be crucial if Europe is to seize the opportunities that lie ahead.