EY Europe Attractiveness Survey: Game changers of 2018

Foreign direct investment (FDI) is part of Europe’s economic lifeblood.

EY’s Europe attractiveness survey has been tracking these investment decisions since 2000. Investors’ strong enthusiasm for Europe comes against a backdrop of accelerating growth in both developed and emerging markets, and recovering global trade flows. 

The accelerating pace of growth in projects recorded over the past three years (averaging annual growth of +15%) has markedly slowed (+10% between 2016 and 2017). This changing dynamic was influenced by four powerful under-currents, which we think are true game changers.

Figure 1: FDI projects in Europe

Source: EY analysis

1. Geopolitical risk is the No. 1 concern

Geopolitical factors are gradually choking investment flows to some countries, redirecting them elsewhere. Nationalism, nativism, and isolationism impact investment confidence and affect the way decisions are made. For example, in Germany, surging growth in project numbers has eased, which may partly due to a long period of political uncertainty in 2017.

2. Brexit: a phased downgrade of the UK is firmly under way

The UK’s decision to leave the EU has influenced decisions, spurred project outflows and eroded Europe’s total. Financial services and the digital industry saw FDI flow out of the UK (toward the continent, up more than twice on 2016)

In 2017, Europe’s top two destinations for foreign investment, the UK (+6%) and Germany (+6%), underperformed in 2017, while a surging France (+31%) is now a fiercer competitor.

Figure 2: 2017 FDI projects and growth rate in UK, Germany and France

Source: EY analysis

Also, in our perception survey, Paris (37%) leapfrogs London (34%) to be seen as Europe’s most attractive city for FDI. Housing shortages and worries about access to talent may be weighing upon London’s score. Paris, Frankfurt, Amsterdam and Dublin clearly benefit from rising investor interest as alternative locations to London – particularly for financial services.

3. New location factor change the centers of gravity in Europe

Tight labor markets and fast-rising wages are making Central Europe a suburb of Western Europe.

Central European economies are closing the gap with their Western counterparts. They benefit from rising wages, growing consumer markets and more value-added projects, but face increasing shortages of qualified workers.

CEE countries still offer the benefit of faster economic growth than Western Europe, under the umbrella of EU membership. Hourly labor costs, at around €10.00, remain less than half the EU 2017 average of €26.80. However, last year, hourly wage costs in Poland surged 8.7%, and in the Czech Republic (where March’s unemployment rate had fallen to 2.2%) by 11.3% .

Figure 3: Hourly labor costs of EU and CEE

Source: EY analysis

For labor-intensive projects, investors increasingly explore further south and east. In Russia, Serbia and Turkey investment projects grew by 50% in 2017.

4. Superpower rivalry, trade tensions and BEPS tax form upend investment planning

Trade tensions threaten international supply chains and location decisions. A coordinated international effort to end tax base erosion and profit shifting (BEPS) by multinational companies is altering incentives, making financial decisions even more complex and uncertain.

Download full report.

The information on this page may have been provided by a contributor to ChinaGoAbroad, and ChinaGoAbroad makes no guarantees about the accuracy of any content. All content shall be used for informational purposes only. Contributors must obtain all necessary licenses and/or ownership rights from the relevant content owner(s) before submitting the same to ChinaGoAbroad for publication. ChinaGoAbroad disclaims all liability arising from the publication of content received from contributors. Links may direct to third party sites out of the control of ChinaGoAbroad, and such links shall not be considered an endorsement by ChinaGoAbroad of any information contained on such third party sites. Please refer to our Disclaimer for more details.