EY: Prolonged Geopolitical and Economic Uncertainty See Foreign Direct Investment into Europe Drop

Foreign direct investment (FDI) projects into Europe dropped 4% (to 6,356 projects) over the year according to the EY European Attractiveness survey. Despite the decline in FDI into Europe for the first time in six years, the level of investment remains the second-highest since EY began compiling this data in 2000. However, investor sentiment is gloomy, with only 37% of surveyed businesses foreseeing an improvement in Europe’s attractiveness in the next three years, down from 50% last year.

The technology sector, however, is bucking this downward trend, as the number of FDI projects surge to a record high of 1,227 in 2018 (up 4% year-on-year). Growth was mainly driven by US businesses, which accounted for 37% of the digital FDI projects in Europe last year. FDI was also strong in Europe’s traditional industrial sectors: the combined number of FDI projects in the transport, machinery and chemicals industries increased 4% to 1,729 projects in 2018.

The map of investment in 2018

Europe’s two largest economies, the UK and Germany, which together account for around one-third of the FDI in Europe, attracted 13% less investment than in the previous year (1,054 and 973 FDI projects respectively). The negative performance of the UK was due to a 35% decrease in manufacturing FDI projects (to 140), driven by investments into capacity to service the single market moving away from the UK. In addition, the number of newly established headquarters, which create high-value and highly-paid jobs, halved from 98 in 2017 to 48 last year.

Germany’s traditionally strong areas were also impacted: it saw a 7% production decrease in the automotive sector, mainly due to heightened concerns around a hard Brexit, US tariffs and a slowdown in demand from China.

France, which recorded spectacular FDI growth of 31% in 2017, only grew by 1% in 2018. However, for the first time, more research and development (R&D) and manufacturing FDI projects (144 and 339 respectively) were established in France last year than in any other European country.

Conversely, FDI is emerging as a major driver of jobs in other Western European and Central and Eastern Europe countries – despite the political uncertainty in some countries. Among the top 10 European FDI destinations, notable positive performance came from: Spain (32%), Belgium (29%), Poland (38%), Turkey (14%) and Ireland (52%). Beyond the top 10, Italy recorded a 63% year-on-year FDI increase, scoring the fastest FDI growth among the top 20 countries in Europe.

A number of countries recorded high double-digit declines in FDI growth: the Netherlands (-32%) which, however, still retains its place in the top 10 investment destinations; Sweden (-32%); and the Czech Republic (-51%).

US investment into Europe slows down

While traditionally a strong investor into Europe, FDI projects from the US increased only 3% last year, down from an average of 8% over the prior four years. The slowdown is mainly due to the US tax reform, introduced in December 2017, and the repatriation of assets and jobs by US multinational companies. However, the US remains the largest single investor into Europe, accounting for 22% of European FDI in 2018.

Intra-European investment continues to be the main driver of FDI in Europe, despite a slight year-on-year decrease of 2%. However, investment into Europe from outside the continent declined by 8%.

A cautionary tale

Investors still look fondly towards Europe, with 56% of surveyed businesses citing Western Europe as one of their top three destinations globally for their operations – a marginal increase on the 53% that cited this last year. However, there is a mismatch on concrete plans with only 27% of surveyed businesses planning to establish or expand operations in Europe in 2019, significantly down on the 35% that planned to last year. The study found that investment plans now stand at a seven-year low.

The study shows lower investor optimism with only 37% of surveyed businesses foreseeing an improvement in Europe’s attractiveness in the next three years, significantly less than the 50% that did so last year. The decrease is primarily caused by decelerating manufacturing and supply chain FDI plans, with only 10% of surveyed businesses planning to invest in manufacturing, supply chain and logistics projects this year, compared with 16% last year.

Thirty percent of businesses say Paris is one of the three most attractive European cities for investment compared with 37% last year, while only 25% cite London compared with 34% last year. The UK’s capital is only 1% ahead of Berlin in the attractiveness rankings – a stark change from last year when it was 10% ahead.

Geopolitical concerns eroding FDI into Europe

Geopolitical risks are dampening investors’ FDI plans: 38% cite Brexit as one of the top three risks impacting Europe’s attraction in the next three years. This represents a significant increase on the 30% that did so last year, when Brexit emerged in fourth place among the most significant risks to Europe’s attractiveness. Political instability in the European Union (EU) and the rise of populist and protectionist trends are the second and third greatest concern among investors.

According to 42% of surveyed businesses, the EU’s top priority should be to reform economic governance to ensure sustainable economic growth. Thirty-two percent add that the EU should enhance its international role.

Commenting on the findings of the survey, Stavros Pantzaris, Country Managing Partner of EY Cyprus, said: “While geopolitical and economic uncertainty, including the prospect of Brexit is having a negative impact on foreign direct investment in Europe, technology FDI into Europe is booming and has reached a historical high. Cyprus must seek to find itself at the forefront of this trend. To attract technology FDI, we must continue to invest in technology infrastructures and provide access to an agile and skilled workforce.”

SOURCE: Goldnews