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Business News 2009
Business News->European inward investment stalls as recession looms
European inward investment stalls as recession looms

London 4 June 2009

Swiss Re building in the City of LondonThe UK retained its position as the most attractive destination for inward investment in Europe in 2008, according to Ernst & Young’s latest Country Attractiveness Survey published today. However, inward investment into Europe was flat in 2008, demonstrating the global recession’s toll on investment projects into the region. Retaining its ranking as the most attractive European location for FDI, the UK attracted 686 investment projects in 2008 - 4% less than in 2007. The largest investor in the UK remained the US (263 projects), followed by India (49), France (46), Germany (42) and Japan (30). Investment in London fell by 13% in the same period.

The 7th annual report, which examines figures for international investments into Europe, new projects or expansions, revealed that in 2008 Europe secured 3,718 investment announcements, six more projects than in 2007. The number of projects remained steady but the impact of the impending recession on new employment was severe. The number of jobs created fell 16% to 148,333, accelerating a downward trend underway since 2004.

“Five years of sustained inward investment growth in Europe came to an end in 2008,” said Marc Lhermitte, Partner at Ernst & Young and author of the report. “But, the true picture of how the global recession has hit inward investment has yet to emerge. Investment decisions for 2008 will have been made many months earlier, which explains why in 2008 Europe secured as many FDI projects as the year before. We expect 2009 to tell a very different story.”

UK number one for job creation

Ernst & Young’s study, now in its 7th year, analyses both actual inward investment over the last 12 months and attitudes of global investors regarding their plans over the short to medium terms.

Retaining its ranking as the most attractive European location for FDI, the UK attracted 686 investment projects in 2008 - 4% less than in 2007. The 686 investments created 20, 000 jobs (16% fewer jobs than 2007), ranking the UK as the number one location for FDI job creation in Europe.

The largest investor in the UK remained the US (263 projects), followed by India (49), France (46), Germany (42) and Japan (30). Indian investment surged ahead of traditional investors, France and Germany, for only the second time in the last 12 years.

The leading recipients of FDI in Europe showed little change, despite the economic turmoil. France, Germany and Spain, which have been the most important countries for the attraction of foreign investment since 1997, remained top four countries.

Winners and losers

There were positive or relatively stable trends in Germany, Switzerland, Sweden, Italy and Ireland. Germany’s 28% increase - was fuelled by new regional headquarters for German or Eastern European markets, and by industrial demand for business services and software.

Ireland, although bruised by plans to shift manufacturing jobs to more cost-competitive countries, had a 35% increase in project numbers as British and US companies continue to invest.

Some industries are so far weathering the recession better than others. Machinery and equipment saw a 19% increase in FDI projects due to a surge of projects to supply wind turbines, solar components, fuel cells.

Marc Lhermitte said: “One of the biggest winners has been the renewable industries due to new green market opportunities, with almost 6,000 new FDI jobs in 2008. Astute businesses will be positioning themselves to take market share and gain access this sector.”

IT outsourcing, financial and business services were early victims of the downturn as their clients struggled, especially in the UK, France and Spain. New jobs from these sectors and countries slumped by 33% in 2008. Former FDI hotspots such as the Czech Republic, Slovakia or Turkey, saw numbers fall dramatically especially in automotive and electronics.

Where the investment is coming from

Europe's inward investment market remains mostly fueled by European (German, British and French mostly) and US investors (51% and 25% respectively). BRIC investors contributed to a relatively small number of projects into Europe (6%), but the trend is rising fast: projects from China and India have jumped from 118 to 182 projects. This has particularly benefited the UK.

2009 outlook

The recession will impact European FDI even more in 2009. Provisional data from the first quarter already indicates an 8% drop in project announcements compared with the first quarter of 2008. For the rest of the year, 53% of business leaders interviewed in the study say they have no green field or expansion plans for 2009.

London’s attraction

Ernst & Young’s study uncovered some revealing results for global cities and their ability to attract inward investment. Investors clearly have greater confidence in the ability of cities with international qualities – or global cities – to emerge from the current situation than in the recovery capacity of their second-tier rivals.

London, which retained its position as the most attractive city for inward investment in Europe in 2008 for the 7th year in a row, secured 262 projects. However, London was not completely immune to the grip of the downturn with a 14% decline compared to 2007, halting a four year growth spurt. But, in comparison to its closest European city rivals, the capital received a relatively high number of projects, with Paris coming in second with 222 projects and Madrid third on 80.

Marc Lhermitte elaborated, “However, the primacy of long-established centres in the developed world – including Europe’s capitals – is being challenged by emerging Asian cities such as Shanghai and Bangalore and by regional cities acquiring international expertise. When business leaders from our study were asked where the next Google or Microsoft will emerge, Shanghai and Mumbai were seen as the more credible alternatives than New York and Silicon Valley, or London.”

Europe as a refuge – emerging economies lose favour in short-term

The uncertain climate has resulted in a temporary mood-shift amongst investors to more familiar markets. For the immediate future, businesses see Europe as the safer option to make their investment.

According to the survey, which interviewed 809 global investors in February 2009, Western (40%) and Central and Eastern Europe (39%) were neck-and-neck as the “safest” regions for being the most attractive regions in which to establish or expand operations.

There has been a retreat in investor sentiment from the emerging BRIC markets (Brazil, Russia, India and China). After topping the attractiveness table in 2008, China loses the lead as the most attractive region in which to establish operations in 2009, ranking third. India is fifth, behind North America, whilst Russia and Brazil, previously rising stars, trail in sixth and seventh place respectively.

Marc Lhermitte said: “Today, business leaders are focused on living through the crisis and maximising returns on existing assets. Though entering and operating in new markets can offer tremendous opportunities, this can also increase risks which decision-makers can ill afford.

“The BRIC regions are not providing the absolutely safe ground international investors are looking for. Europe is seen as predictable and safe. Investors are showing greater loyalty to their countries of origin and historical markets, launching fewer projects in Emerging Europe. And that’s why – for the moment – at least they’d sooner stay at home than venture abroad.”

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