Global investors are bullish on Europe’s post-pandemic recovery and plan to ramp up regional activities at a rate not seen for more than a decade, according to EY’s latest Attractiveness Survey published June 7.

The digital economy and countries with tech-savvy workforces are tipped to drive European growth, while protectionism and trade policies have risen to become the biggest threats to its investment appeal.  

Of the 550 business leaders surveyed worldwide, 40% plan to establish or expand European operations over the coming year. In the two years prior, that figure was 27%. “Appetite to invest in Europe is at its highest level since the financial crisis,” the report states. 

Other findings that point to a recovery in foreign direct investment (FDI) are 62% of respondents believing Europe’s attractiveness will improve over the next three years, and 58% saying Covid-19 hasn’t negatively impacted their European investment programmes for 2021. The pandemic has caused just 4% to substantially reduce their plans for this year.

The research, conducted in March and April 2021, “indicates that FDI may rebound quickly to previous levels,” but the report also attributes investors’ spike in appetite to pent-up demand after a year of lockdowns and uncertainty. “The data cannot be interpreted as a glowing endorsement of Europe’s long-term attractiveness,” it warns.

The greatest threats to the region’s appeal over the next three years stem from government actions. Protectionism has risen to become the biggest risk, followed by uncertainties over trade policy, tariffs and the evolution of legislation on digital services. Some 20% believe the EU without the UK is a main risk.

Skills of tomorrow

During site selection, political and regulatory stability is the most common prerequisite followed by the strength of local labour markets. Some 92% of respondents cite a workforce with tech skills as an important determinant of where they invest. “It shows that companies are moving to put tech as one of the most important players of the future. We all knew that already, but we probably didn’t estimate that figure would be that high,” Julie Teigland, EY’s managing partner for Europe, the Middle East, India and Africa, told fDi. The report notes that “many businesses analyse which universities create graduates with broader technology skills, and factor this into their location decisions.”

Sustainability is another vital ingredient in a country’s attractiveness, with 90% of respondents describing it as important for their investment strategy. It follows that the sectors tipped to drive Europe’s growth in the coming years are those connected to the digital economy (such as IT, telecoms and media), followed by cleantech and renewables. 

Released just days after finance ministers from the G7 countries agreed to a global minimum corporate tax rate of 15%, EY’s report states that a uniform rate would not eradicate tax as a factor impacting countries’ attractiveness. “Countries may look at other ways of remaining competitive, such as the rates of indirect taxes or the extent to which new types of tax, such as environmental taxes, are implemented,” it states.

Change of course

The findings suggest that much of last year’s zeal for reshoring and nearshoring after Covid-19’s disruption has subdued, with businesses now preferring more nuanced changes to their supply chains. In the 2020 survey, 83% were planning on nearshoring to low-cost areas, close to the EU and in Africa. This year, just 20% plan to reshore and 23% to nearshore closer to customers. 

“Last year everyone was re-evaluating supply chains, and they still are. But they aren’t so much considering such broad sweeping changes, like bringing offshored and nearshored activities back home,” said Ms Teigland. “They are being much more targeted, looking at de-risking certain suppliers and automating offshore centres. They aren’t revamping it entirely.”

The respondents’ preferred course of action is to reduce dependence on single or dominant countries. But 30% indicate that they do not plan to make any changes at all — up from 2% a year ago. “Currently, many companies would prefer to avoid disruptive and costly reorganisations,” the report reads. “Asia is showing solid signs of recovery, and multinationals will maintain a presence there for now.”