As U.S. companies strive to maintain a competitive edge in the global economy, they continue making forays into markets around the world.

With its abundance of traditionally favored cities and a growing number of fresh bets, Europe continues to be one of the hottest destinations for U.S. companies.

Historically, the United States has been the greatest driver behind foreign direct investment projects in Europe. But in recent years, U.S. projects have been on the decline in Europe, according to Ernst & Young’s latest European Investment Monitor (EIM) Report, which has tracked inward investment across Europe since 1997.

The United States still accounts for the majority of investment projects in Europe, however, providing double the number that second place Germany provides, according to the EIM.

The USA market share in foreign direct investment in Europe is currently 26 percent, said Douglas van den Berghe, senior manager for Ernst & Young’s office of International Location Advisory Services Europe in the Netherlands. It has decreased in the past years from 44 percent in 2001. Since 2001, intra-European investments have taken the lead over the investment from outside Europe.

van den Berghe noted that U.S. headquarters projects have increased from a share of about 10 percent in 2001 to almost 20 percent during the past two years (2004 and 2005, second quarter).

When it comes to where U.S investors are planting European roots, the United Kingdom is still by far the frontrunner, receiving about 30 percent of U.S. investments. France and Germany follow as popular choices.

Collective Assets for Singular Needs

While an expansion into Europe represents a highly singular decision for a company, certain critical questions must always be answered.

Is the company expanding to increase market proximity or to access new technologies? Is it undergoing realignment measures for cost reasons? Has there been an acquisition or joint venture?

Once a company has a clear operational focus, it can begin the important task of narrowing the geographic playing field to find the right location.

“Access to labor, overall business environment, internal and external political stability, total operational costs, and logistics costs are key concerns for U.S. companies launching operations in Europe,” said Christopher Steele, senior manager with Ernst & Young’s Real Estate Advisory Services Practice in Boston.

In the past, U.S. companies have frequently turned to the United Kingdom and Ireland, partially because of the similarities in language and culture.

Dublin, Ireland, has proven to be a solid favorite for U.S. software firms and projects continue to unfold there.

Earlier this year, California-based QLogic Corp. established a new Europe, Middle East and Africa (EMEA) headquarters in Blanchardstown, Dublin.

The company is a provider of storage area network infrastructure components that are used in servers, workstations and other products by major information technology (IT) companies.

The Ireland operation will perform final manufacturing, customization, packing and storage of products for rapid delivery to the EMEA market.

“Our first few months in Ireland have served to be very successful for the company,” said H.K. Desai, chairman and CEO of QLogic. “We have found Blanchardstown to be the ideal location for our headquarters.

“The availability of highly skilled and trained people was influential in our decision, and Dublin has the caliber of people we require to provide the best service possible to our clients,” he added.

According to van den Berghe, London and Paris rank alongside Dublin at the top of the list as far as favorite cities for U.S. software companies.

Eastern Europe Interest Increases

Aside from software firms, U.S. companies tend to flock to specific cities that have proven track records for various industries.

Perhaps one major change from years gone by is the fact that U.S. companies now have more choices than ever when it comes to the best location for establishing or expanding business roots in Europe.

U.S. companies are no longer only turning their focus toward Western Europe.

“There is a greater emphasis on Eastern Europe, both as a cost savings play and as an untapped pool for trained labor,” Steele said. “Current events (oil/transportation costs) may also make Eastern Europe a more attractive alternative to Asia Pacific for manufacturing of bulky products [for European and possibly U.S. markets], where the transportation costs are significant.”

Computer Associates International (CA) is one U.S. company that has recently announced plans to expand its operations in Eastern Europe.

The Islandia, N.Y.,-based company is creating its first worldwide Mainframe Center of Excellence in Prague, the Czech Republic.

Officials close to the project said the company chose Prague because of its highly qualified and educated work force, a strong program of mainframe education at Czech universities, and Prague’s strategic location at the geographic heart of the European Union.

CA has maintained operations in Prague since 1998 and employs 20 people at its existing sales offices in Prague and Bratislava, Slovakia. The company offers a variety of mainframe software solutions for IT organizations.

Other changes revolve around the growing European Union (EU). When asked how the EU is impacting U.S. investment in Europe overall, Steel said it remains an open question.

“Paradoxically, it will likely reduce some countries’ abilities to nimbly respond to companies’ specific needs,” he said. “It may also reduce competitiveness among EU member-countries.”

Where to Site a Euro Facility

In the big picture, a host of Western European favorites and an emerging set of new Central and Eastern European cities continue to attract U.S. investment.

“The UK definitely holds the largest share in U.S. investments [about 30 percent] followed by France and Germany,” Ernst & Young’s van den Berghe said. “The same top three can be seen for cities and regions: London (greater London), Paris (Ile-de-France), and Muchen (Oberbayern). Other top 10 countries are Belgium, Ireland, Switzerland, the Netherlands, Czech Republic, Spain and Italy. Other top 10 cities are Dublin; Stockholm; Barcelona, Spain; Brussels, Belgium; Moscow, Prague and Amsterdam, the Netherlands.”

No matter which city a U.S. company decides to expand in, Steele offers some sound advice when it comes to deciphering which European location would be best for a business.

“Confer either with peer companies that have gone before or with consultants,” he said. “There are many cultural and business nuances in Europe or any other offshore location that need guidance. Issues such as revenue repatriation, legal systems, taxation, incentives, labor customs, etc. can be significant pitfalls if not understood and taken into the risk/benefit matrix.”