The map for foreign direct investment is becoming clearer across Europe for all potential investors. In the past, executives had a difficult decision in terms of balancing risk against cost. Today, however, that decision is becoming focused on issues of transport and skills. The business continuity risks in most Eastern and Central European locations have all but disappeared.
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 foreign direct investment?
While the answers to some of these questions are straightforward, for others there are some surprising results.
Leading Locations
The leading locations for investment across Europe have not changed significantly during the past 10 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 a very strong track record. As a result, the Central and Eastern European countries remain outside the investment elite despite bursting onto the scenes a decade ago.
Of the Central and Eastern European economies, the big winners from foreign direct investment have been Poland, Hungary and the Czech Republic. These countries are within the top 10 locations for investment into Europe, although they were also in the top 10 a decade ago. In fact, in the case 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 the investment into Central and Eastern Europe as manufacturing investment sought a lower-cost location, but this has been affected by a number of 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 rates 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 spread the share of the cake widely, and thirdly, the large economies of the United States, Germany, France and the UK are now more likely to generate service sector investment projects than manufacturing projects. Central and Eastern European countries do not currently win a significant share of service sector investment.
Finally, Central and Eastern European countries do not win their share of U.S. Investment.
Pattern of Country Investment
While winners and losers have emerged in terms of locations for investment, the spread of foreign direct investment from different countries is not uniform. It is interesting to consider the largest sources of foreign direct investment into Europe during the past decade.
It is clear that the single largest generator of company investment projects into Europe has been the United States, which has generated more than double the next nearest provider, Germany, which in turn has generated more than double the third-placed Japan.
In every country, the ability to secure investment from the United States is the key to performance in capturing foreign direct investment.
The leading Western European nations benefit to a large extent from U.S. 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.
Pattern of Sector Investment
The European investment map is perhaps becoming clearest when differentiating between manufacturing and service sector investment. The manufacturers are now clearly favoring investment in the East while service sector investment (which has increased in importance) favors the West.
In examining the destination of sector investment, it is useful to consider the sectors which generate the most investment.
The leading sector by some distance in generating foreign direct investment is software. Beyond software, there 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 center.
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 foreign direct investment can be largely attributable to the leading position of the UK 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 chemical investment, Russia food investment and Ireland pharmaceutical investment.
The table further illustrates the relatively weak position of Germany in attracting any type of foreign direct investment considering the overall scale of its skill base and economy.
Hot Cities
Some cities have been transformed by foreign direct investment. 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 gaining investment gain a self-fulfilling prophecy of future investment.
The growth of cities is almost counterintuitive to the theory that information technology 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 centers have become even more important.
The table demonstrates the complete domination of London as a magnet for investment within Europe and the 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 10.
Companies considering low cost locations have not stimulated the Central and Eastern European locations to the extent that may have been predicted a decade ago. In fact, the low-cost investment is leaving Europe altogether. Within Europe, the lower cost locations of Hungary are winning chemical investment, 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.
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