Foreign Direct Investment up in Europe but Brexit remains concern

While Foreign Direct Investment has climbed to record highs across Europe, uncertainty over Brexit looks set to slow growth.

Big Four consultancy EY has released a new study into international investment in the Eurozone, reporting record levels of new projects across the EU in 2016. The report found that last year, foreign investors launched more projects in Europe than ever before, which will create a projected quarter of a million jobs in order to pursue Europe’s perceived opportunities. However, with lingering uncertainty surrounding Brexit, questions remain unanswered about how long the UK stands to benefit from this for.

Over the course of the research, EY surveyed 505 international decision-makers, 81% of whom had a presence in Europe. Of the non-European companies questioned meanwhile, 34% had established operations in Europe. The results showed that in 2016, Foreign Direct Investment (FDI) increased by 5,845 new projects, marking a 15% rise from the year preceding. Of these new arrivals, the UK, Germany and France attracted just over half (51%) of the continent’s FDI for the year.

Employment meanwhile looks set to receive a large boost from the new investors, with 259,673 jobs being created by the projects, representing a 19% increase on 2015’s figures. EY’s research asserts that the recent upsurge in investment from overseas reflects a long-awaited return to economic growth throughout almost all of Europe, while reading this as a sign that international investors have finally regained some of their confidence in Europe since the worst of the financial crisis.

Investing in Europe

The UK (1,144), Germany (1,063) and France (779) topped foreign businesses most desirable destinations for new projects over the year, while Spain reinforced its fourth position (308), with Poland (256) rising one position in the FDI rankings, becoming the first country in Central Europe to enter the top five investment destinations. Of the top three destinations, France achieved the highest increase with 30% growth in FDI projects over the previous year, followed by Germany (12%) and the UK (7%). Germany, with 1,063 projects, strengthened its challenge to the UK’s longstanding European FDI leadership.

Among the top 20 countries, Sweden, Italy and the Czech Republic were top growth performers, with increases of 76%, 62% and 57% respectively since the end of 2015. Only the Netherlands (-5%), Belgium (-5%) and Switzerland (-2%) recorded negative growth overall, a slowdown compared to 2015 when they all registered positive growth.

Europe’s ability to attract increasing numbers of FDI projects confirms the endurance of its economic environment, in so far as it is seen broadly as a region of stability. As shown by figures in a recent report by EY’s Big Four rival KPMG, foreign businesses rank political stability as the most attractive aspect of the UK economy in particular, citing it as a key reason they would chose to base projects in Britain over rival nations.

Europe more generally seems to benefit from this perception, with EY’s findings also citing the recent votes in which far-right populists Geert Wilders and Marine Le Pen were routed in the Dutch and French elections. While they were touted by pollsters as serious threats to the region in the run-up to each vote, normal service seems to have been resumed, while Angela Merkel also seems set to consolidate her position as German Chancellor. With EU members broadly seeming set for a return to a centrist consensus, business confidence in the region seems set to remain high. Notwithstanding uncertainty around the current geopolitical climate, 65% of investors interviewed were confident about the future of the European Union.

However, while businesses building in mainland Europe seem to have gambled well on a return to political stability, Brexit and Article 50 are likely to impact FDI growth, at least in the UK, after this year. Respondents to EY’s study indicated they had little desire to relocate following a turbulent 2016 – with 80% of investors stating they had no plans to change or withdraw operations – however, among the 505 executives interviewed globally, only 28% plan to expand their European operations in the next year, down four percentage points from 32% in 2015.

In terms of investor sentiment, Greater London retained its position as the most attractive European city, accounting for 40% of new FDI projects in the UK. However, its appeal to those responding to EY’s poll fell markedly from 52% in 2015 to 32% this year. Paris and Berlin were ranked by investors as the second and third most appealing investment destinations – although their appeal has declined compared with the previous year in favour of other European cities, including Frankfurt, Munich and Amsterdam.

Trouble ahead

When asked about the likely impact of Brexit on their operations, four out of five investors established in Europe said they have no plans to change or relocate; however, the respondents also highlighted concerns around possible tax, administrative and regulatory consequences. Businesses still lack a comprehensive view of the tax and regulatory consequences of Brexit, with meaningful negotiations postponed until the conclusion of the German and UK elections. As clarity emerges about the detail of the UK’s separation from the EU, the report suggests some companies will inevitably alter production of goods and services, and even review the location of their headquarters, following the lead of Swiss transnational food giant Nestle, who in April announced the relocation of 300 jobs from York to Poland.

Today, the UK’s public perception of relations with Europe are defined by a collective unease, and while on the continent the far-right may have been rejected by the French and Dutch electorates, politics has continued to fragment in Britain. Despite narrowing polls, the UK’s snap general election looks set to return incumbent Prime Minister Theresa May to office on a “Hard Brexit” mandate, threatening to remove the country from the Single Market, and end freedom of movement for labour over its borders.

Commenting on how European and UK businesses might best prepare to appeal to FDIs, and brace themselves amid continuing geo-political uncertainty, Andy Baldwin, an EY Area Managing Partner for Europe, Middle East, India and Africa said, “The introduction of robotics and artificial intelligence is also serving to reinforce Europe’s traditionally strong manufacturing and business services sectors.”

Echoing a recent calls from UK consulting industry network, the Management Consultancies Association (MCA), to prioritise an “education arms race”, Baldwin concluded businesses and policy makers needed to build on Europe’s strong position around the development of a booming software industry, as well as growing services and talent.

“To foster Europe's digital future and our own tech giants, we need to see a continued focus on the creation of a digital single market; to connect and support the various tech ecosystems; and see more investment in education and skills, particularly around STEM subjects.”