The new geopolitical and economic environment, mainly created by the war in Ukraine, means that Europe’s immediate attractiveness for investment may be challenged, However, the long-term attractiveness of Europe remains robust with 64% of investor respondents believing Europe’s attractiveness will improve during the next three years.
The EY European Attractiveness Survey is based on qualitative research – conducted between February 2022 and April 2022, with 501 international investors across a range of industries, business types and locations – and quantitative analysis of FDI projects announced in 44 European countries in 2021.
“Europe remains competitive when it comes to attracting FDI, from within the continent, the US and beyond. The effects of the war are significant for businesses with a presence in Europe ranging from the escalating costs of energy and commodities, to economic sanctions, social tensions, and increased risks of cyber-attacks. However, it’s heartening to see that investors can look beyond these challenges and see Europe as an appealing investment destination in the long-term”, said Bogdan Ion, Country Managing Partner EY Romania & Moldova and Chief Operating Officer for EY South-East & Central Europe and Central Asia (CESA).
Manufacturing, logistics and R&D projects saw an increase of 22% in 2021 partly due to supply chain reorganizations, which are set to continue. Fifty-three per cent of respondents are considering ‘nearshoring’ – bringing operations closer to customers (more than double compared with last year). Forty-three per cent of respondents are considering “re-shoring” – bringing activity back to their domestic market – compared with 20% in 2021. This industrial rebound is a partial reason for the high performance of many Southern European countries.
Investors remain optimistic about Europe’s attractiveness despite the war in Ukraine. If supply chains are disrupted to the point that businesses begin to either re-shore or nearshore operations back to Europe, then manufacturing investment in Europe may increase. The most likely outcome is that sanctions and supply chain disruption will persist and there will be impacts on commodity price inflation, geopolitical tension and, heightened risks of cyber-attacks on large businesses and critical infrastructure.
Beyond the current economic and geopolitical context, the survey highlights many structural factors that could impact the continent’s long-term attractiveness to FDI. The survey data reveals five top priorities: Investment in digital: the most important factor that determines where businesses invest is the level of technology adoption by consumers, citizens, and administrations; Sustainability as a competitive edge: businesses ranked policy approaches to climate change and sustainability as the second-most important factor that determines where they invest; The need for new talent: new skills among the workforce is one of the top two priorities in assessing for FDI among those surveyed, particularly in relation to Europe’s green and digital transitions; Tax flexibility and pragmatism: the degree of digitalization of tax authority systems is the most important tax-related factor that determines where businesses invest; Support for small to medium enterprises from policymakers: small and medium-sized businesses (revenues less than EUR1.5 billion) were hit hardest by the pandemic and are less likely to have rebooted their FDI plans (83% of large businesses versus 44% of SMEs).