June 16, 2024
Investment

The U.K. is bucking the trend as Europe bleeds foreign direct investment. Here’s why


In a surprising turn of events, the U.K. emerged from recession with 0.6% growth in the first quarter of 2024, the fastest rate in two years. The country appears to be diverging from the rest of Europe, which according to the 2024 EY Europe Attractiveness Survey is facing significant challenges.

Our survey reveals that Europe’s foreign direct investment (FDI) fell by 4% compared to 2022 and is now 11% lower than before the pandemic. While the U.K. is defying this trend, the rest of Europe is experiencing a real decline, with France and Germany seeing their FDI-supported projects decrease year-on-year in 2023, despite maintaining their status at the top of the European investment league table. Given that foreign investment increased in other parts of the world during the same period, these figures should worry European policymakers.

Despite the challenges, Europe remains an appealing destination for investors. However, it’s important to look at the reasons behind the decline if we are going to find ways for Europe to remain competitive in the global market.

Europe faces challenges while tech and finance boost the U.K.

In 2023, Europe experienced slow economic growth, soaring inflation, rising energy costs, and a precarious geopolitical landscape. Foreign investment is essential for job creation, innovation, export growth, and a strong economy—but investors are cautious.

France, the U.K., and Germany continue to attract around half of European FDI, maintaining their positions as the top three destinations. Although France emerged as the leading market by leveraging its research and development (R&D) capabilities and attracting major banks post-Brexit, it still experienced a 5% decline in 2023. However, the number of jobs created by FDI increased by 4%, underlining the ongoing benefits of business-friendly reforms and a comparatively healthy economy relative to other European countries.

FDI in Germany decreased by 12% in 2023, continuing a steady decline since the onset of the pandemic. Industrial investors have been deterred by the recessionary environment, high energy prices and concerns about the security of energy supply. Complex bureaucracy and high labor costs also continue to limit Germany’s ability to attract more foreign businesses.

In contrast, the U.K. bucked the trend, with a 6% FDI growth in 2023—although it remained significantly below pre-Brexit levels. After a 2022 marked by political uncertainty, high inflation, and rising energy prices, investors perceived something of a return to stability in U.K. markets. Foreign software and IT providers were particularly loyal to London, which moved above Paris into the top spot as Europe’s No. 1 investment region. London’s attractiveness to the finance sector also proved significant, with London seeing a 20% increase in financial services projects.

Unlocking Europe’s potential

Despite a challenging landscape across Europe, there is cause for optimism. As well as looking at FDI numbers, we asked business leaders about their future plans, and 72% of them said they plan to expand or establish operations in Europe within the next year—up from 67% in 2022. This indicates that Europe is still a key territory in future business plans.

Our survey also identified the key growth areas business is focusing on. Innovation and client-facing services are key, with over half (55%) of organizations telling us that they intend to increase R&D and sales and marketing spend in Europe in the next three years. FDI in manufacturing held steady with just a 1% overall dip, but significant increases were seen in Southern and Eastern Europe as organizations reorganized their supply chains. Tourism and culture saw a huge 130% surge in investment as pandemic restrictions eased. Europe’s leaders must play to these kinds of strengths and focus on where the demand is to kickstart the recovery.

Conversely, investors voiced concerns about several issues, including regulatory burden, volatile energy prices, and political instability. Investors believe an increase in regulation could stifle business growth and innovation and Europe needs to make sure that regulation, although important, doesn’t turn into red tape. The energy crisis of the past two years continues to be a major concern, and uncertainty in the run-up to the European elections as well as rising social tensions and political radicalism is spooking investors too.

There is no room for complacency here. Europe is facing increasingly stiff competition from the U.S. and Asia. European policymakers must take bold and decisive action now to boost the old continent’s business attractiveness and secure the best chance of a recovery.

A change in public policy right across Europe would encourage foreign investors to invest more. Key questions remain: How to harmonize regulation, restore confidence in energy supplies, remove the most immediate barriers to investment, and facilitate access to capital. To answer them, Europe must design long-term industrial policies.

European leaders must prioritize these questions and lean into the continent’s strengths—if it is to remain competitive in the years to come.

Julie Linn Teigland is EY’s EMEIA area managing partner The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.

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