E&Y: FDI stagnates in Europe due to crisis; Czech Republic remains in the top 20

Foreign direct investment stagnated in Europe last year as the global economic crisis took its toll on this area. This is according to a survey conducted by Ernst & Young on investment projects in Europe. Despite the downturn, the Czech Republic remains among the world’s twenty most attractive investment destinations. In an overall ranking according to the number of implemented foreign projects, however, the Czech Republic fell from ninth to fourteenth place, even though it received 5% more FDI projects in 2008 than in 2007. The country registered a 63% decline in the number of newly created jobs. A similar trend can be seen in other European countries. Even though the number of investments in Europe practically did not change in 2008, the recession’s impact on employment is substantial.

The uncertainty brought about by the economic crisis temporarily changed the priorities of investors, who are now concentrating on more traditional markets. According to the survey, in which 809 investors from around the world were questioned in February, Western Europe (40%) and Central and Eastern Europe (39%) were equally assessed as “the safest” regions, i.e. as regions that are the most attractive for establishing a subsidiary or for further expansion of a subsidiary’s operations. Investors’ interest in Brazil, Russia, India and China temporarily declined. The most attractive region for foreign direct investment in the subsequent three years will be Central and Eastern Europe. Fifty-two percent of the surveyed investors are convinced of this.

“For the leaders of the global economy, the priority today is to get through the crisis and maximise the return on existing activities. Even though entering new markets offers tremendous opportunities, it also brings greater risks. Europe is seen as predictable and safe. Besides that, investors are more loyal to their home countries and historical markets; they would rather stay home than invest abroad. The good news is that, according to our survey, in the next three years Central and Eastern Europe will be the most attractive region for foreign direct investments,” says Magdalena Souček, managing partner at Ernst & Young in the Czech Republic. 

The number of projects in Europe essentially did not change in 2008. However, the ongoing recession has had a substantial impact on employment. Last year 3,718 projects were announced in Europe, six more than in 2007. Conversely, the number of jobs newly created by investment projects fell by 16% to 148,333.

“Based on the data from 2008, however, it isn’t possible to paint a complete picture of how the real impact of the economic crisis on foreign direct investment will appear. Investment decisions implemented in 2008 were approved a number of months before the crisis began, which is the reason why the number of projects in Europe remained practically unchanged in comparison with 2007. I’m afraid that the situation in 2009 will be completely different,” says Magdalena Souček, managing partner at Ernst & Young in the Czech Republic.

In 2008 the Czech Republic received 5% more projects than in the previous year, though in the overall ranking according to the number of implemented foreign projects, it fell from ninth to fourteenth place. The company recorded a rapid decline of 63% in the number of newly created jobs (5,626 jobs in comparison with 15,102 in 2007).

Winners and losers

Among the first victims of the crisis are information technologies and financial and economic services, due to falling demand from their clients for such products. The steepest decline was recorded by Great Britain, France and Spain. In 2008 the number of new jobs created in these countries in relation to foreign direct investments in these sectors fell by one-third.

Recently popular destinations for foreign direct investments such as the Czech Republic, Slovakia and Turkey also saw a significant decline, particularly in the automotive and electrical-engineering sectors.

According to CzechInvest, the size of new investments is decreasing in the long term.  “Whereas in the 1990s the Czech Republic was attractive for large projects on greenfield sites that required massive investment in buildings, machinery and equipment, today the Czech Republic is being chosen to an every greater extent by companies that do not need expensive equipment but that are investing mainly in training and education of their employees – programmers, designers, researchers and so on,” says Alexandra Rudyšarová, acting CEO of CzechInvest.

 “The year 2008 brought a substantial change in the composition of new investments. For the first time ever, services – including research and development – comprised the majority of new projects. Most investments were undertaken by firms engaged in software development – whereas a few years ago new investment projects in the automotive industry predominated.  Now sectors involving services rather than manufacturing are of comparable importance,” adds Alexandra Rudyšarová.

Conversely, some sectors have managed to withstand the crisis better than others. For example, foreign direct investment in the mechanical-engineering industry increased by 19% in Europe. With nearly 6,000 newly created jobs, one of the most successful sectors of 2008 was renewable sources of energy, for which a range of new opportunities is arising on the market.

A positive, or at least stable, trend in the area of FDI is shown by Germany, Switzerland, Sweden, Italy and Ireland. Germany owes its 28% growth in volume of foreign direct investment mainly to two factors: foreign investors often select a location not only for their local operations, but also as headquarters for the entire Eastern European market; and secondly, demand for economic services and software.

Great Britain ranks first among the most successful European countries in terms of the number of foreign direct investments. In 2008, 686 investment projects were implemented in Great Britain, which is only 4% less than in the previous year. Despite the economic crisis, the European leader in the area of foreign direct investment recorded only a minimal decline. Having been among the most popular destinations of global investors since 1997, France, Germany and Spain maintained their positions in the top four.

 Outlook on 2009

The impact of the economic crisis on foreign direct investment will be more perceptible in 2009. Preliminary data available for the first quarter already indicate that the number of newly announced projects declined by 8% in comparison with the same period last year. With regard to the rest of 2009, 53% of leading investors that were addressed in the course of the survey are not planning any new investments or expansion of existing ones this year.

“The financial crisis has brought a halt or restriction of new investments. This has affected the Czech Republic just as it has Germany or China, for example. Of course, the outlook for the next several years is important. According to research, Central and Eastern Europe will remain the world’s most attractive region for future investments. If we look to the past, we will find that the Czech Republic actually profited form downturns in the global economy.  At the beginning of the millennium the complicated economic situation motivated individual companies to look for more favourable locations. Thanks to its sophisticated system of support for investors, the Czech Republic was prepared to welcome new companies and to create suitable conditions for them. Even though the Czech economy has changed significantly since then, business costs are still lower here than in Germany or France, for example. In addition, we have managed to build up the country’s reputation as being advantageous for services, and we must focus on that type of investors,” says Alexandra Rudyšarová, acting CEO of CzechInvest.

 Where investments come from

European (mainly German, British and French) and American companies are the most prominent investors in Europe, with a 51% and 25% share, respectively. Investors from Brazil, Russia, India and China finance a relatively small number of projects (6%), though their share is increasing. For example, the number of Chinese and Indian projects grew from 18 in 2007 to 182 last year. Most of those investments were implemented in Great Britain.

 Attractiveness of global metropolises

For the seventh consecutive year, the most attractive European metropolis is London, which received 262 investment projects last year. Nevertheless, not even the British metropolis is completely immune to the effects of the global crisis; following four years of growth, last year the city’s total number of projects was 14% lower than in 2007. However, London’s lead over its nearest competitors is still substantial: Paris finished in second place with 222 projects, Madrid in third with 80 projects. The dominant position of traditional centres of the developed world, including European capitals, is under threat from rapidly growing Asian metropolises such as Shanghai, Bangalore and other cities that are acquiring foreign knowledge and experience.

 “Not even the economic crisis can prevent the powers of economic attractiveness from gradually shifting from west to east and from north to south. Those who continue to believe in opportunities in developing markets are surely not mistaken. According to one study recently published by Ernst & Young, Brazil, Russia, India and China will account for 40% of the global economy’s growth between 2009 and 2020,” says Mark Otty, managing partner at Ernst & Young for the EMEIA region (Europe, the Middle East, India and Africa).

About the sure

The 2009 Survey of European Attractiveness for Foreign Investors, which was conducted by Ernst & Young over twelve months last year, employs original methodology.  This is based on two information sources taking into consideration the following factors:

• “Objective” attractiveness of European countries for foreign investors. This information is taken from the Ernst & Young European Investment Monitor (EIM) database containing data on FDI projects on the basic of which new operations were established or new jobs were created. The data do not include portfolio investments or mergers and acquisitions, and thus give an honest picture of foreign investments in manufacturing operations or services across the continent.
• “Subjective” attractiveness of European countries and their competitors from other parts of the world for foreign investors. The attractiveness of a country or region is given by the following factors: image, investors’ trust and the ability of the country or region to offer investors competitive advantages. This information is compiled by the independent agency CSA, which in February and March of this year contacted a representative sample of 806 upper-level managers.

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