Estimated reading time: 4 minutes
Foreign direct investment (FDI) into Europe saw a decline in 2023, decreasing by 4% from the previous year and now stands 11% lower than the pre-pandemic levels of 2019, as per the findings of the annual EY European Attractiveness Survey 2024, which is regarded as the most thorough annual examination of FDI into the continent.
France, the UK, and Germany remain the primary recipients of FDI, collectively accounting for about half of all projects. France experienced a 5% reduction in FDI projects, totalling 1,194, while Germany saw a 12% decline, with 733 projects. Contrarily, the UK experienced a growth, surpassing Germany to take second place with an increase of 6% in FDI projects, bringing the total to 985.
Despite expectations for a post-pandemic recovery of FDI into Europe, factors such as sluggish economic growth, escalating inflation, rising energy costs, and a volatile geopolitical climate have led to the first decrease in European FDI since 2020.
In 2023, global businesses announced 5,694 greenfield and expansion projects across 44 European countries, a decline from 5,962 in 2022, marking a year-on-year decrease of 4%. Investment is now 14% below its peak in 2017, and the total number of jobs created in Europe due to FDI dropped by 7% year-on-year to 319,923.
Investors have expressed concerns over increasing regulatory challenges, fluctuating energy prices, and political instability as the primary risks affecting investment decisions.
Europe’s leadership in introducing new regulatory measures in fields such as artificial intelligence (AI), sustainability, and data protection has raised concerns about potential restrictions on business growth.
The ongoing energy crisis, the uncertainty surrounding the upcoming European elections, and rising social tensions and political radicalism are additional factors worrying investors.
Julie Linn Teigland, EY EMEIA Area Managing Partner, said, “Europe is in urgent need of foreign investment and this survey should serve as a wake-up call right across the continent. Policymakers must work together with businesses to create the conditions where investment can flourish and business thrives.
“Foreign investment builds the European economy by creating jobs, stimulating innovation and boosting exports. Despite the continued disappointing trajectory for investment in 2023, there are reasons to be optimistic about the longer-term future. But urgent action must be taken now to help ensure Europe remains competitive in the face of increasingly stiff competition from the US and China.”
While France’s investment declined, the UK showed resilience with a 6% increase in FDI projects in 2023. After a year marked by political instability, high inflation, and soaring energy prices in 2022, investors perceived a semblance of stability in UK markets last year, particularly favouring London, which surpassed Paris as Europe’s leading investment region.
FDI in Germany continued its downward trend with a 12% decline in 2023, compounded by the recessionary environment, high energy costs, and concerns over energy security. Complex bureaucracy and high labour costs also continue to hinder Germany’s capacity to attract more foreign businesses.
In the manufacturing sector, Southern and Eastern Europe saw benefits from the reorganisation of supply chains and the reshoring of production activities. Though the number of manufacturing projects slightly decreased across Europe, increases were noted in countries such as Spain, Turkey, Poland, Italy, Serbia, the Czech Republic, and Hungary.
However, slowing investment in the digital and business services sectors affected investment in countries where these sectors are traditionally strong, like the Netherlands and Belgium.
The ongoing conflict between Russia and Ukraine continues to negatively impact investment in neighbouring countries, including significant declines in Romania, Finland, and the Baltic states such as Latvia and Lithuania.
While the services sectors saw a decline in FDI, manufacturing remained resilient, decreasing by only 1%. Businesses continued to invest in manufacturing to meet rising consumer demand and the ongoing efforts to reorganise supply chains and relocate production bases to Europe have supported investment levels in this sector.
Despite a generally bleak outlook, there is a basis for optimism as 72% of the businesses surveyed plan to establish or expand operations in Europe within the next year, up from 67% in 2022. This indicates that Europe continues to hold significance in current and future business strategies.
Investors remain positive about Europe’s long-term prospects as the economic situation is expected to gradually improve. However, the increased regulatory framework, energy price and supply issues, and political instability are seen as the top three threats to Europe’s attractiveness over the next three years, particularly with the upcoming European elections and rising local social tensions and political radicalism.