UK FDI attractiveness falters, European sentiment improves on stability

06 February 2017 4 min. read
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The UK's attractiveness for foreign investors has, as expected, taken a hit following the decision to leave the EU. According to a new report, attractiveness has decreased by 34%. Investors, however, are increasingly positive about Europe more widely, with 56% of investors saying that they are planning to increase their presence over the coming three years. London remains the top pick for city directed FDI, although Paris is close behind.

The global political stage has undergone a shakeup as the consequences of the UK’s EU referendum result see the country leave the European Union over the coming years and Trump, and his ‘America first’ policy direction, continues to create waves – largely of resentment and uncertainty.

In a new report from EY, titled ‘European attractiveness survey: Plan B … for Brexit’, the consultancy firm focuses on the wider impact of Brexit on investors’ interest in Europe more widely. The study involved 254 senior business executives from investment companies across the world with investments in Europe, and was completed in November of last year, thus prior to the full, Trump effect, taking hold.

Future investment in Europe

The broad picture of investors’ interest in Europe is positive. 56% of respondents say that they are looking to grow their existing foreign direct investment (FDI) presence over the coming three years (with 21% planning to do so significantly), 39% of respondents say that they plan to keep it at the same level while 5% say that they will reduce their existing presence.

The reasons for the positive sentiment towards the continent are multifaceted, including talent, innovation capacity, and large, integrated market and production system. The continent has also managed to boost its growth slightly, hitting 1.7% for 2016. The report also notes that many businesses, even in the face of considerable uncertainties, are upbeat about the future. Many current and coming trends, from geopolitical shifts to demographic shifts, offer opportunities.

Risks affecting investment decision in Europe

The respondents were also asked to identify the top three risks that they face in relation to their next investment decision in Europe. The most cited risk was ‘high volatility in currencies, commodities and other capital markets', cited by 37% of respondents. 'Economic and political instability in the EU' takes second spot, cited by 32% of respondents, while 38% cite the 'impact of Brexit'.

Other highly ranked risks including a 'slowdown in global trade flows' (28%), 'global and regional instability' (20%) and 'competition from emerging markets' (19%). The least cited risks include, 'weak innovation capacity' (5%), 'talent shortage' (10%) and 'lack of capital' (11%).  

Evolution of UK FDI attractiveness over next three years

The research also considers the change in perceived attractiveness for FDI investment over the next three years into the UK. The results show a relative negative trend over the past two data points, March and October 2016, following a relatively stable outlook during 2014 and 2015. At the start of 2016 those reporting that they expect conditions to improve stood at 36%, down from 54% during the previous year, while those expecting attractiveness to decrease hit 16% from 5% the year earlier. In October of last year, those expecting attractiveness to decrease hit 34%, while those expecting it to improve dropped to 29%.

The European investors were particularly pessimistic about the UK’s FDI outlook, with 43% expecting a decline and 23% an improvement.

Top three countries in Europe for FDI in next 12 months

The study further asked respondents to rank the top (first choice) destinations for FDI investment into the UK, the firm notes that the results are only indicative of sentiment*. Two data points, one taken before the referendum decision and one prior, highlight that respondents have become slightly wearier of investment in the UK during the interim – down from 27% in March to 22% in October. Germany has seen interest increase slightly, up 2 percentage points to 40%, while France has seen an increase of 1 percentage point to 8%.

Top five of the most attractive European cities for foreign investment

The firm also asked respondents to rake Europe’s cities in term of attractiveness for foreign investment. London, which rans highly in diverse studies, takes the top spot with 54% of respondents’ pick, followed by Paris on 48%. Frankfurt and Berlin come in joint third place – the former favoured for financial services and the latter for its startup scene. Madrid takes the number five spot. Other contenders are cities such as Amsterdam, Dublin, Brussels and Barcelona.

The cities rank for their own distinctive reasons, however, key among them are English speak cosmopolitan atmospheres, strong infrastructure, entrepreneurial people, and world class infrastructure.

* 27 respondents answered this question.