Analysis reveals that the COVID-19 pandemic disrupted many business plans leading to the delay or cancellation of 35 percent of 2019 foreign direct investment (FDI) projects into Europe, according to the 20th edition of EY Europe Attractiveness survey. This comes as analysis of 2019 projects highlights stronger YoY performance compared to the 2018 (0.9 percent, up from -4 percent)
Based on research conducted in April 2020, 49 percent of respondents believe Europe is at risk of becoming a less attractive investment destination amid concerns over future economic instability as a result of the pandemic. However, in the near-term, investors remain bullish, with 51 percent of business leaders expecting a minor decrease in the number of new projects initiated, while 11 percent of respondents expect no deviation from their plans in 2020.
Alongside this, 80 percent of leaders surveyed in April 2020 stated that government stimulus packages influence their investment decisions and will favor nations with stronger COVID-19 pandemic stimulus support measures in place.
“Europe can remain attractive to investment if it acts and responds decisively in three major directions: technology adoption, sustainability and supply chain shock resistance, as these will influence future investment decisions. It is important for Europe to remain a favorite destination for investment projects, and in this regard, it is vital that governments adopt a business-specific mindset, work towards innovation and create new strategies to attract foreign direct investment, not only to reduce unemployment but also to support balanced economic growth”, says Bogdan Ion, Country Managing Partner EY Romania & Moldova and Chief Operating Officer for EY South-East & Central Europe and Central Asia (CESA).
Data reveals that 52 percent of FDI projects between 2015-2019 originated from countries within Europe, demonstrating FDI from Europe can be an incredible economic and transformational force for Europe. Analysis of projects in 2019 found that seven of the top ten investor countries were within Europe. Almost a quarter (23 percent) of projects originated from the United States.
The analysis of FDI destinations found that in 2019 France saw the largest increase in new projects up 17 percent YoY, with 1,197 new projects – resulting in France overtaking the UK as the most attractive destination in Europe for the first time. Despite a drop-in the number of investment projects into Germany in 2018, analysis reveals that projects into the country remain level in 2019 (2019: 971 projects, 2018: 973 projects).
However, the United Kingdom remains attractive as investment increased by 5 percent, closely behind France with 1,109 projects in 2019. The UK growth aligns with a reduction of investors’ Brexit concerns, as just under a quarter (24 percent) of respondents (vs 38 percent in 2018) cite Brexit uncertainties as one of their top three risks to attractiveness across Europe.
The report highlights that sectors that require a specialized workforce, such as construction, saw projects rise by 158 percent in 2019 (209: 124 projects, 2018: 48 projects), while the Information, Communications and Media (ICM) sector also saw a significant increase in FDI projects by 117 percent (2019: 241 projects, 2018: 111 projects).
Despite strong performance in the textiles and clothing sector from Western Europe, FDI projects into central and eastern European countries fell, resulting in an overall sector decline of 22 percent. However, the survey found that almost four in ten (37 percent) businesses are considering an increase in their manufacturing presence in Europe.
While data suggests that projects within the digital sector have fallen slightly (-1 percent YoY), 55 percent of organizations surveyed plan to enhance their digital customer experiences and business-to-customer interactions, while 82 percent expect technology adoption to accelerate in the next three years – a direct result of the COVID-19 pandemic creating new challenges and opportunities for businesses.
FDI projects and job creation in Europe – a critical crossroad
Between 2003 and 2017, FDI projects accounted for over 11m new jobs within the European Union. However, due to the COVID-19 pandemic, the report reveals a potential decline of up to 50 percent in the number of new jobs created following the completion of FDI projects. To safeguard against such potential downturns, governments must adapt their education and training and development systems to help make sure it can offer a workforce with the right skills in the post-COVID-19 landscape.
Data suggests that the digital and business services sectors (including professional and legal services) generated almost a quarter of new jobs (24 percent) in 2019. Nations such as Ireland, Poland and Portugal, which attract FDI projects focused on service-orientated, software development and R&D, are likely to see new job creation rates remain high.
While the outbreak of COVID-19 is having an impact on numerous sectors and industries, the transportation sector (including automotive and aeronautic manufactures and suppliers) is facing the biggest risk. The sector accounted for 23 percent of new jobs in 2019 (down from 25 percent in 2018). Research shows this sector has experienced the greatest supply chain disruption and revenue losses, leading to a greater proportion of projects being delayed, downsized or cancelled than in other sectors.
Supply chains, sustainability and the impact of COVID-19
The disruption of supply chains as a result of the COVID-19 pandemic is widespread, but to recover operations and help ensure resiliency is built into future supply chains across Europe, respondents have plans to reconfigure them, with a new mix of reshoring, nearshoring and offshoring.
Many respondents believe COVID-19, the risk of future pandemics, climate change and an increase geopolitical tension will reinforce the need for agile, future-ready supply chains; with 83 percent of businesses expecting to see regionalized supply chains replace their existing global infrastructure.
Alongside the demand for regionalized supply chains, the COVID-19 pandemic has enhanced consumer awareness of and demand for sustainability, with almost six in ten respondents (57 percent) renewing their focus on climate change and sustainability within the next three years.