foreign direct investment

The map for Foreign Direct Investment (fdi) is becoming clearer across Europe for all potential investors. In the past all decision-makers had a difficult decision in terms of balancing risk against cost; that decision is now becoming focused on issues of transport and skills. The business continuity risks in most Eastern and Central European locations have all but disappeared. By Nigel Wilcock, Senior Adviser to Ernst & Young.

If the map has become so clear, it is useful to examine a number of questions – where do most companies invest? Do companies from certain countries congregate in certain economies? Which sectors are making the most investments across Europe? Are some countries clearly winning locations for certain sectors? And where are the hot cities for fdi?

While the answers to some of these questions are straightforward, for others there are some surprising results. For a start. the leading locations for investment across Europe have not changed significantly over the last ten years. In every year the leading locations have been the UK, France and Germany. Furthermore this ranking has consistently remained in place.

Beneath the Big Three the rankings have not remained so steady, although Spain and Belgium have very strong track records. As a result the Central and Eastern European countries remain outside the investment elite, despite having burst onto the scenes a decade ago.

Among these economies, the big winners from fdi have been Poland, Hungary and the Czech Republic. These countries are within the top ten investment locations for investment into Europe, although they were also top competitors a decade ago. In fact, in the cases of Poland and Hungary, the share of total investment projects secured has fallen from 1997 to 2006.

A decade ago, many commentators would have predicted a tremendous upsurge in investment into Central and Eastern Europe as manufacturing investment sought a lower cost location, but the outcome has been affected by a number of other factors.

The first reason is the China effect. If a remote low-cost location represents a sound strategy, why limit the cost savings to Eastern European levels when China (and other Far Eastern economies) can offer even greater savings?

A second reason is that more and more Central and Eastern European locations have emerged to share the cake and spread it more widely. Third, the large economies of the US, Germany, France and the UK are now more likely to generate service sector investment projects than manufacturing ventures. At present Central and Eastern European countries do not win a significant share of service sector investment. Nor, as a fourth adverse factor, do these Eastern European countries win an equivalent share of US investment.
While winners and losers have emerged in terms of locations for investment, the spread of fdi from different countries is not uniform. It is interesting to consider the largest sources of fdi into Europe over the last decade:

It is clear that the single largest generator of company investment projects into Europe has been the US. The US has generated more than double the projects of the next nearest provider, Germany, which in turn has generated more than double those of third-placed Japan.

In every country the ability to secure investment from the US is therefore the key to performance in capturing fdi. The accompanying chart divides the three largest providers of investment among the ten leading recipients of investment, complete with the percentage of investment provided.

Largest sources of investment 1997-2006

It can be seen that the leading Western European nations benefit to a large extent from US investment – the English-speaking Ireland and UK notably so. Conversely the Eastern European nations have benefited from significant German investment. Beyond this there is also the important influence of geography. The UK is a significant investor for France; in turn French companies make up significant investment in Spain and Germany; the Germans benefit from Swiss investment; while Austria is an important investor in Hungary.

The European investment map is perhaps becoming clearest when differentiating between manufacturing and service investment. The manufacturers are now clearly favouring investment in the East, while the service sector (which has increased in importance) favours the West.

In examining the destination of sector investment, it is useful to consider the sectors which generate the most investment (see table).

Sectors generating most investment 1997-2006

The leading sector by some distance in generating fdi is software. Beyond software are a number of similarly placed sectors. Of course, the total number of projects does not give the full picture since one chemical plant is likely to represent significantly greater levels of investment than a software development centre.

The accompanying table considers the leading sectors in generating investment and examines the countries which gain most from the different leading sectors of investment:

Leading sectors and investment destinations.

It can be seen, therefore, that in all the leading sectors UK and France interchange the top spot for attracting that sector of investment. In general France leads when the sector considered is manufacturing investment. The pre-eminence of the UK in attracting fdi can be largely attributed to the country’s leading position in attracting the most significant sector for investment – software.

Outside of the big two however, the Czech Republic is developing strong credentials as a leading automotive location, while Hungary continues to attract investment in chemicals, Russia in food and Ireland in pharmaceuticals.

The table further illustrates the relatively weak position of Germany in attracting any type of fdi; surprising in view of the overall scale of its skill base and economy.

As for cities, some ‘hot’ ones have been transformed by fdi. A strong growth in investment generates a multiplier effect and the critical mass gained in service sector investment generates further investment. As a result the leaders in winning investment gain a self-fulfilling prophecy of future investment.

The growth of cities is almost counter- intuitive to the theory that IT and telecommunications will spread wealth and allow greater levels of remote working, In fact in the service sector economy the importance of networking and idea creation seem to mean that urban centres have become even more important.

Cities securing most investment

The table demonstrates the complete domination of London as a magnet for investment within Europe and asthe finest example of critical mass and momentum. The table also illustrates the reinvention of Barcelona as a leading city within Europe and one of only two non-capital cities within the top ten.

To sum up, companies considering low cost have not stimulated the Central and Eastern European locations to the extent that might have been predicted a decade ago. In fact, low-cost investment is leaving Europe altogether. Within Europe the lower- cost locations of Hungary are winning chemical investors, while the Czech Republic is securing automotive investment.

Of the Western European economies, France leads in manufacturing investment. But in the new post-industrial Europe, the UK remains the place to be – especially London.

Nigel Wilcock is a Senior Adviser to Ernst & Young, whose European Investment Monitor is the authoritative guide to trends in fdi. E-mail: nwilcock[at]uk.ey.com

The articles published here in the Thinking CEO are internet updates of the latest management knowledge and practice, which have been commissioned by Sovereign Publications for their bi-annual magazine, CEO Today, and will appear later in the first 2007 issue of this publication. To contact Sovereign and CEO Today, go to:

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