Investors express “cautious confidence” in Europe’s future attractiveness
La Baule, France, 20 June 2012 – Despite the fragility of the Eurozone economy, inward investment continued to rise in Europe in 2011 with the total number of projects significantly higher than pre-crisis levels, according to Ernst & Young’s 10th annual European Attractiveness Survey. This report combines an analysis of international investment into Europe over the last year with a survey of more than 800 global executives on their views about how and where global investment will take place in the next decade.
Across Europe there was a 2% increase in projects from 3,757 in 2010 to 3,906 in 2011. Even more striking, the average project was markedly larger and foreign direct investment (FDI) job creation was up 15%. The US continued to be the largest investor in Europe, providing 1,028 projects, 26% of the total. This is a 6% increase on the number of projects that the US invested in last year and the highest number in the decade since the survey began.
Marc Lhermitte, head of Ernst & Young’s International Location Advisory Services and author of the report comments, “Despite the current turmoil in Europe, its fundamental strengths continue to endure. While the spotlight has focused on the world’s rapid-growth economies, Europe, too, remains a key destination for foreign investors. It remains the world’s largest single economy, and the attraction of its 500 million high-spending consumers, together with a stable and transparent legal and regulatory environment, remains a powerful draw for investors.”
Analysis by country and sector
The UK remained the most attractive country in Europe for investment with 679 projects, 17% of the total. The French total fell to 540 from 562 in 2011 as France, who was in second place last year, was overtaken by Germany who secured 579 projects in 2011. The increasing investment into Germany reflects its relatively strong economic performance.
More surprisingly, Spain achieved a remarkable 62% increase in the number of projects to 273 (+ 104 FDI announcements over 2010) as investors saw opportunities in cities and regions providing relatively low labor costs and a highly skilled and educated workforce.
With the exception of Poland, Central and Eastern Europe (CEE) saw a disappointing decline in investment as investors aired their concerns about CEE’s dependence on exports to Western European economies and a weak and largely foreign-owned banking system. Russia experienced a 36% decline with numbers falling to 128 projects.
Business services and software sectors remain the biggest recipients of FDI projects in Europe with an increase of 19% to 666 and 15% to 436 respectively. Altogether the two sectors accounted for 28% of total projects in 2011, providing more than 16,000 jobs. The automotive sector also saw an increase in the number of FDI projects to 270 from 258 last year and it was also the sector that created the highest number of jobs, at 37,790. The sectors that saw the biggest declines were financial intermediation which fell by 16% and electronics by 8%.
Where is investment coming from?
Although the US remains by far the largest single investor in Europe, Europeans also like what they see in their neighbors and in 2011 seven European countries were among the region’s top 10 inward investors. Germany, the UK and France remain the top three investors with 412, 294 and 192 projects respectively. Aside from the US, Japan and China were the only two countries outside of Europe who were in the list of top 10 investors with 150 and 140 projects respectively.
When measured by project numbers, Germany outpaced the UK, securing 69 projects from BRIC companies, up 35% from 2010. The UK, with 54 FDI projects, was second followed by France and Belgium.
Investors express “cautious confidence”
More than 80% of respondents are confident that Europe will overcome the ongoing economic crisis. In terms of Europe’s investment attractiveness in the medium-term respondents are broadly optimistic.
The fragility of the Eurozone economy has left investors more hesitant than usual about the ongoing challenges faced by the region. Research from the 840 global executives interviewed for the European Attractiveness Survey in late spring 2012 shows that only 26% had plans to establish operations in Europe during 2013, down from 33% who were planning to invest in the 2011 survey. However, more than a quarter are eyeing possible acquisitions: a sign that many European assets are expected to become available as vendors adjust to be more realistic about recovery prospects and valuations. With many companies sitting on cash, M&A could be an important complement to Greenfield investment in 2013.
Europe still demonstrates a strong, perhaps surprising, level of attraction. In terms of investor perception, Western Europe and Central and Eastern Europe rank second and third respectively behind China as the most attractive destinations for FDI.
Among survey respondents, 36% say that Europe’s future attractiveness will improve but it’s interesting to note that this rises to 51% among investors from the US, India, China and Japan who are more confident about Europe’s future prospects than Europeans themselves.
Indications for 2012
In terms of how the weakening European economy and ongoing political challenges are already impacting FDI flows into Europe, the indications for 2012 are encouraging.
As Marc explains, “Despite investors remaining cautious, early indications show that foreign investment into Europe is holding up. However, given the current economic climate it remains to be seen if this will hold true for the rest of the year.”
Mark Otty, Area Managing Partner for Europe, Middle East, India and Africa concludes, “Against the backdrop of the Eurozone crisis it is essential that solutions are found to Europe’s pressing educational, entrepreneurial and innovation challenges. These issues must be addressed to create the conditions for balanced and sustainable growth. Continued strong FDI will be pivotal in achieving this goal.”
About the survey:
Ernst & Young’s 2012 European Attractiveness Survey is based on a twofold, original methodology that reflects:
The “real” attractiveness of Europe for foreign investors. Our evaluation of the reality of FDI in Europe is based on Ernst & Young’s EIM. This database tracks FDI projects that have resulted in new facilities and/or the creation of new jobs. By excluding portfolio investments, mergers and acquisitions, it shows the reality of investment in manufacturing or services operations by foreign companies across the continent.
The “perceived” attractiveness of Europe and its competitors by foreign investors. We define the attractiveness of a location as a combination of image, investors’ confidence and the perception of a country or area’s ability to provide the most competitive benefits for FDI. The field research was conducted by Institute CSA in February and March 2012, via telephone interviews, based on a representative panel of 840 international decision-makers.