Foreign investors look fondly on Europe despite the first downturn in three years, but a recovery is not guaranteed
In brief
- The post-COVID-19 recovery in European foreign direct investment (FDI) ended abruptly in 2023, with the number of projects decreasing 4% year on year.
- France secured the most FDI projects despite a 5% annual decline. The UK ranked second following a 6% increase. Germany came third after a 12% drop.
- Investors rank London as the most attractive city for investment. Paris is a close second.
Slow economic growth, spiralling inflation, soaring energy prices and a febrile geopolitical environment caused the first downturn in European FDI since 2020. Declining demand for new offices resulting from increased remote working also dented investment.
France secured the most investment despite a 5% annual decline in the number of projects, reveals the 23rd EY Europe Attractiveness Survey. The UK ranked second, where the number of projects jumped 6%. Germany came third following a 12% fall in investment.
Despite the annual decrease, the survey indicates that Europe remains an attractive investment destination in the long term: more than seven in 10 (72%) businesses plan to expand or establish operations in Europe in the next year, an increase from 67% last year. In parallel, three-quarters think Europe’s attractiveness will increase during the next three years.
That said, most new projects in the next 12 months will focus on expanding existing assets, rather than the new greenfield developments associated with high-potential industries such as electric vehicles, life sciences, digital technology and renewable energy.
In addition, there are clear risks on the horizon: increased regulatory burden and red tape, energy prices and supply issues, and political instability in a multi-election year. Urgent action is needed in these areas to address investors’ concerns and ensure Europe’s future attractiveness.
Foreign investment in Europe loses momentum
Europe’s FDI recovery stalls.
After two successive years of growth, the post-COVID-19 pandemic recovery of foreign direct investment (FDI) in Europe has stalled: 5,694 FDI projects were announced in Europe in 2023, down 4% from 2022. Measured by the number of announced projects, FDI remains 11% below the level in 2019, just before the pandemic hit Europe, and 14% below the record high of 2017. The number of jobs created by FDI projects in 2023 fell sharply, down 7% compared with 2022.
International investment decelerated due to disappointing economic growth, high inflation, rising global geopolitical tension and persistently high energy prices, especially when compared with the US.
Radical changes in working practices also impacted investment. Remote working and the growing use of collaborative technology, combined with an ever-increasing focus on cost control amid squeezed margins, means large office spaces are no longer required. Confirming this trend, the number of regional headquarters in Europe fell by more than half (51%) in 2023.
The success of the US Inflation Reduction Act (IRA) may also have diverted some investment from Europe to the US; the number of projects announced by US companies in Europe fell by 15% in 2023.
Given that foreign investment increased in other parts of the world during the same period, these figures will worry European policymakers. Data from the United Nations Conference on Trade and Development (UNCTAD), which tracks foreign investment flows globally, shows that greenfield FDI increased by 2% in the US, 8% in China and 17% across Asia in 2023, but declined by 20% in Europe.
Europe needs foreign investment as much as foreign investors need Europe. Policymakers and businesses should therefore work together to create the conditions in which investment can flourish.
Julie Linn Teigland
EY EMEIA Area Managing Partner
This downturn comes at the worst possible time for European business. According to the International Monetary Fund (IMF), economic growth in the euro area fell from 3.4% in 2022 to just 0.4% in 2023. This is significantly lower than in the US (2.5%) and Asia (5.6%). Foreign investment helps the European economy by creating jobs, stimulating innovation and boosting exports. For example, 3.9 million people are employed by foreign-owned companies in Germany. In the UK, foreign investors generate 29% of the approximate gross value added. In France, 35% of industrial exports stem from foreign companies.
“Europe needs foreign investment as much as foreign investors need Europe,” says Julie Linn Teigland, EY EMEIA Area Managing Partner. “Policymakers and businesses should therefore work together to create the conditions in which investment can flourish.”
FDI in services sectors declines, but manufacturing proves resilient
The number of FDI projects in software and IT services and business and professional services — traditionally Europe’s largest sectors for investment — fell by 19% and 27% respectively. Both are suffering from the effects of purse-tightening on the part of their clients and a general decline in outsourcing.
By contrast, investment in tourism and culture, which is the 17th largest sector for investment, increased by 130% in 2023. The sector continues to rebound as consumers return to vigorous spending on leisure and travel, free from pandemic-induced restrictions.
Foreign businesses are expanding operations in Europe to reshore supply chains, create efficiencies and accelerate innovation. This has created some pockets of high activity despite the general downward trend.
Marc Lhermitte
Partner, EY consulting, EY Global Lead FDI & Attractiveness
Investment in manufacturing proved resilient, declining only 1%. Businesses maintained manufacturing investment to ensure that they can meet future consumer demand, which is expected to rise. Ongoing efforts to reorganize supply chains and relocate production bases to Europe also maintained manufacturing investment levels.
“The flow of FDI into Europe has more undercurrents than ever before,” says Marc Lhermitte, Partner, EY Consulting at, EY Global Lead FDI & Attractiveness. “In addition to traditional drivers of investment, foreign businesses are expanding operations in Europe to reshore supply chains, create efficiencies and accelerate innovation. This has created some pockets of high activity despite the general downward trend.”
France stagnates, the UK rebounds and Germany falters
In line with the Europe-wide trend, investment in France fell by 5%. That said, 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.
The EY 2024 Europe Attractiveness Survey, which is based on insight from 500 business leaders involved in FDI, indicates that the downswing in investment will be only temporary.
When asked about the most attractive countries for investment, respondents ranked France first, ahead of Germany and the UK.
The UK bucked Europe’s negative trend with a 6% increase in FDI projects in 2023. However, this was achieved from a low base, following a 6% drop the previous year. After a 2022 marked by political uncertainty, high inflation and rising energy prices, investors perceived something of a return to stability to UK markets last year, with foreign software and IT providers particularly loyal to London.
FDI in Germany decreased by 12% in 2023, continuing a steady decline in projects since the onset of the COVID-19 pandemic. Industrial investors have been deterred by the recessionary environment, high energy prices and concerns about the security of energy supply. In parallel, low unemployment, complex bureaucracy and high labor costs limit Germany’s ability to attract more foreign businesses.
Most foreign investment in Europe is internal – a business located in one European country establishes or expands a project in another. Outside Europe, the top origin countries for investment are the US (accounting for 19% of projects), China (5%) and Japan (3%).
London is considered the top European city for investment: 32% ranked the UK’s capital as the most attractive city during the next three years, putting it marginally ahead of Paris in second place (31%). Zurich (selected by 22%), Munich (20%) and Barcelona (17%) complete the top five.
Mixed fortunes outside the top three
Several countries in Southern and Eastern Europe benefited significantly from businesses’ reorganization of supply chains and reshoring of production activities. The number of manufacturing projects decreased across the continent but increased in Spain (+7%), Turkey (+12%), Poland (+17%) and Italy (+18%). Investment grew even more in Serbia (+30%), the Czech Republic (+70%) and Hungary (+70%).
The war in Ukraine continues to impact investment in markets bordering either of those countries, including Romania (-13%), Finland (-32%) and the Baltic countries such as Latvia (-31%) and Lithuania (-40%). Despite its proximity to Ukraine, investment surged in Hungary due to a recovery in the number of projects in the transport sector.
Slowing investment in the digital and business services sectors impacted investment in countries for which these areas are traditional strengths. These include the Netherlands (which saw one of the lowest numbers of FDI projects in a decade in 2023), Belgium (-8%) and Ireland (-46%).
Top 20 destination countries by FDI projects in 2023
| Ranking | Countries | Number of projects in 2023 | Number of projects in 2022 | Change 22/23 | Number of jobs created in 2023 |
|---|---|---|---|---|---|
| 1 | France | 1,194 | 1,259 | -5% | 39,773 |
| 2 | United Kingdom | 985 | 929 | 6% | 52,211 |
| 3 | Germany | 733 | 832 | -12% | 14,261 |
| 4 | Turkey | 375 | 321 | 17% | 21,032 |
| 5 | Spain | 304 | 324 | -6% | 42,450 |
| 6 | Poland | 229 | 237 | -3% | 22,378 |
| 7 | Portugal | 221 | 248 | -11% | 18,259 |
| 8 | Belgium | 215 | 234 | -8% | 4,918 |
| 9 | Italy | 214 | 243 | -12% | 14,004 |
| 10 | Netherlands | 157 | 147 | 7% | NA |
| 11 | Ireland | 100 | 184 | -46% | 6,070 |
| 12 | Switzerland | 89 | 58 | 53% | 1,781 |
| 13 | Austria | 80 | 101 | -21% | 2,345 |
| 14 | Hungary | 77 | 50 | 54% | 11,349 |
| 15 | Serbia | 76 | 74 | 3% | 11,116 |
| 16 | Finland | 71 | 104 | -32% | 3,663 |
| 17 | Romania | 60 | 69 | -13% | 5,935 |
| 18 | Sweden | 55 | 68 | -19% | 6,024 |
| 19 | Greece | 50 | 47 | 6% | 6,425 |
| 20 | Denmark | 44 | 43 | 2% | 748 |
| Others | 365 | 390 | -6% | 34,947 | |
| Total | 5,694 | 5,962 | -4% | 319,923 |
