How can Europe turn on the taps of foreign investment?

It is encouraging that an all-time high 67% of the businesses we surveyed have “plans to establish or expand operations in Europe over the next year,” a metric that has rebounded sharply since the pandemic and is up from 53% a year ago.

These plans for activity appear to be shared across many industries. The prospect of new investments by chemical and pharmaceutical companies will contribute to increasing European independence in these strategic sectors, while the service industry seems to be actively searching for a new footprint, especially in Southern and Eastern Europe.

However, sentiment is weaker among companies headquartered outside Europe: Only 53% report plans to expand or establish operations, compared with 77% of European-headquartered executives. While 60% of FDI projects in 2022 originated with European-based companies, that gap shows that Europe’s political and business narrative needs to be strengthened, and its call for a European “industrial sovereignty” could be clarified among overseas investors.

Another differentiator is company size: Fewer SMEs say they have plans to invest (56%) than larger firms (79%). Governments and multinationals must support their subcontractors and business partners, which employ about 100 million people, account for more than half of Europe's GDP and play a key role in creating value across all sectors.

R&D is a top priority for inward investment

Businesses’ perceptions of the three-year outlook for Europe are relatively stable, despite recent challenges. Sixty-seven percent expect Europe’s attractiveness to increase over the period, slightly more than in 2022 and 2021.

Encouragingly, 64% of executives expect to increase their European footprint in R&D over the next three years, while the strong dynamics of the commercial and business services activities reflect Europe’s economic power. The implications of the focus on R&D will need to be considered carefully, however. Developing technology tends to create a small number of high-value jobs, while building technology delivers the jobs. As recent geopolitical events have shown, there are strategic advantages in being able to do both, although financial considerations typically drive manufacturing to lower-cost countries.

In that regard, it is potentially concerning that just 33% of respondents plan to increase their investment in manufacturing. To prevent Europe from losing out on the global reshaping of supply chains, and ensure it builds the industrial capacity needed to reach net zero, this proportion surely needs to be higher.

For EU Member States, an important part of the recovery equation could be the EU Resilience and Recovery program. Designed to deliver a post-pandemic economic lift via support for digital, renewables and skills development, this funding — along with the Green Deal Industrial Plan — could materially change how Europe’s economy evolves. Its impact, however, will be influenced by developments beyond Europe, including the effects of the IRA in attracting investors to the US.

Europe still has significant advantages. In a world defined by uncertainty, many businesses are attracted to robust economies and large, resilient markets. With more than 500 million consumers and more than 20 million companies, Europe remains a formidable economic force. Now, it has an opportunity to capitalize on its strengths while attracting the investment that will fuel the industries of the future. Our findings clearly show that foreign investors are already involved in this strategic process, with the bulk of FDI allocated to the digital economy and advanced manufacturing.

The challenges ahead

Though our 2023 Europe Attractiveness Survey shows that foreign investment into Europe leveled off in 2022, we remain concerned about Europe’s weak manufacturing performance, which was flat after a strong comeback in 2021, despite the needs of companies embarking on supply chain reconfigurations.

Hanne Jesca Bax, EY EMEIA Markets & Accounts Leader, says: “In the drive for greater inward investment, the challenge is to strengthen Europe’s appeal and sustain its standing as a leading economic force. Meeting that challenge will be crucial if Europe is to seize the opportunities that lie ahead.”

In the second stage of the 22nd Attractiveness Survey report, we unpack investor thinking on future investment in Europe. We will also outline the policies needed to drive inward investment that will be critical for Europe's digital and green transformations.