ANNOUNCEMENT: Expert Investor is now PA Europe. Read more.

5 factors that risk undermining Europe’s attractiveness to foreign investors

Some business view environmental legislation as a threat – not an opportunity


Pete Carvill

The long-term attractiveness of Europe to foreign investors hinges on five priorities, said EY in its latest attractiveness survey.

The professional services firm has just released How will Europe compete for investment amid ongoing turbulence?. While business owners said that the continent remained attractive for long-term foreign investment, several factors could undermine that situation.

Policymakers, said EY, should pay attention to:

  1. Redoubling digital assets.
  2. Securing Europe’s edge in sustainability
  3. Creating the skills needed to transform Europe’s business
  4. Promoting tax flexibility and pragmatism
  5. Refreshing support for SMEs

When it comes to digital investing, the authors wrote: “Businesses have made huge investments in technology since the onset of the Covid-19 pandemic to facilitate remote working, automatisation, and e-commerce. The increased digitalisation of services and industry explains why the level of technology adoption by consumers, citizens, and administrations is now the most-important factor that determines where businesses invest. Last year, this only ranked joint fifth. It is likely that businesses view this as a proxy for countries with an abundant supply of workers with technology capabilities, which they will increasingly need to maintain and accelerate their investments in innovation.”

Strike a balance

According to EY, Europe is already viewed as a ‘green leader’ within investment circles, with climate and sustainability policies ranked as the second most-important factor in investment decisions. However, those same businesses reportedly view environmental legislation as a major threat.

Wrote the authors: “It seems that companies want policymakers to proceed with caution and strike a careful balance between promoting sustainability and not overburdening business. Policymakers also need to build a democratic consensus for Europe’s sustainability drive, and ensure that businesses and individuals that might be adversely affected are supported in their sustainability journey.”

The firm also said that a common theme was that of a need for new skills, and cited the International Energy Association’s estimate that 14 million new jobs will need to be created in that sector by 2030. This, opined EY, is a ‘rallying call’.

It added: “[Governments] must work with businesses and academia to ensure that the right skills are being created. Timing is all important. Produce skills too late, and Europe’s digital and green transition will be slowed. But produce skills before they are needed, and individuals may move out of Europe to where they are required.”

SMEs falling behind

Another issue raised by respondents was around tax and compliance, with many wishing for as simple a system as possible.

“[When] complex issues arise,” wrote EY, “they want tax authorities to demonstrate a degree of pragmatism and flexibility. This is why the degree of digitalisation of tax authority systems is the most important tax-related factor that determines where businesses invest. Digital communication channels also enable more frequent and direct interactions with tax authorities, which is all the more critical at a time when they need to adapt quickly.”

Lastly, those businesses with less than €1.5bn in annual revenue were those hit hardest by the pandemic. This has led to them not rebooting their foreign investment plans at the same rate as their larger brethren.

EY cited the fact that 83% of large business plan to expand or establish European business in the next 12 months, versus 44% of SMEs. Policymakers, the firm said, should step in.

It wrote: “Policymakers need to work with these businesses to understand their specific requirements and tailor their support accordingly. They also need to make sure that access to support does not require a huge volume of time and resources, which many of their management and staff simply do not have. This is vital: SMEs employ about 100 million people, account for more than half of Europe’s GDP and play a key role in creating value in all sectors.”

Despite these challenges, EY said that Europe’s attractiveness was set to grow, despite the ‘short-term dent’ in confidence. Foreign investment, said the firm, grew in 2021 after falling 13% in the previous annum. “In total,” the authors wrote, “businesses announced 5,877 projects and a 5% annual increase. That said, investment levels are still 12% below the record high levels in 2017.”