Confidence undimmed

22 Oct 13
Few can doubt the severity of the financial crisis that continues to impact Europe, admits Marc Lhermitte. But the bad news has not destroyed foreign investors’ faith in the continent — far from it

By Marc Lhermitte | 22 October 2013

Few can doubt the severity of the financial crisis that continues to impact Europe, admits Marc Lhermitte. But the bad news has not destroyed foreign investors’ faith in the continent — far from it.

To think of Europe in 2013 is to think of a continent of many countries, languages and regions. A continent rich in history and culture, but one that is struggling to shake off the effects of the financial crisis. Beset by a toxic whirlwind of contracting economies and surging joblessness, policy-makers from Germany to Greece, from Sweden to Spain, have rarely been faced with such a tide of negativity. Or so it seems.

EY’s recent European attractiveness survey, which measures Europe’s attractiveness for foreign direct investors, revealed some all too rare good news. Europe remains the world’s leading destination for Foreign Direct Investment (FDI), for example, and, importantly, the number of jobs created by this investment increased by 8% in 2012. Business leaders are also optimistic, with 38% planning to establish operations in Europe in 2014, a big increase from the 26% recorded in last year’s survey. Such findings suggest that Europe’s future may not be as bleak as one might imagine from today’s 24/7 media cycle. But that doesn’t mean to say we’re out of the woods, or that there aren’t important lessons to learn.

First, some context. Europe is in the midst of its worst ever economic crisis, one that continues to inflict huge damage, pain and misery on Europe’s businesses and  citizens. Investment has been reduced by €350b; the current Eurozone recession is now into its sixth quarter; and, the most insidious of all, a total of 19.2 million people are now out of work in the region. Think about that for a moment. It’s not just a number. More than 19 million households across the region are currently coping with vastly reduced earnings and it’s getting worse, not better.

With this grim backdrop in mind, the thoughts and actions of foreign investors inject some much-needed hope and optimism. These companies see Europe with positive eyes that many Europeans may not have any more. They speak with voices that differ from those which are heard every day in the media, in company hallways and political speeches across Europe.

Investments on the move

Our research has established that the global investment map is shifting but not exactly as one might have expected. Brazil’s attractiveness rating has gone up more than any other, and it is now the world’s fourth most attractive investment destination. And also moving up the ladder is Russia, which gets 20% of votes. Interestingly, China, while still perceived as the world’s most attractive place to invest, is less popular this year, and India, too and also suffered a fall, largely because of several infrastructure and reform bottlenecks. And Europe? With 32% of investors ranking it as the best place to invest, Europe — both east and west — remains among the most attractive global regions.

But while perception is important, one of the striking illustrations of our survey is the gap between perception and reality. Europe is in fact the number one investment destination with 22% of all global FDI inflows, with China, by contrast, representing just 9%. It might not be dynamic, but there is strength and there is mass. There is no growth, but there is resilience. The number of FDI decisions in Europe has increased and even returned to pre-crisis levels.

were made in Europe and these projects have brought approximately 170,000 jobs across 44 countries in Europe — an important sign that foreign investors are staying the course and continue to be attracted to the world’s largest single market. Intra-European investment remains the number one source of FDI in Europe, followed by the US, which funds approximately 25% of the projects. And we also see that rapid-growth economies are not only critical as markets, this year they are also the source of about 250 new deals and 12,000 new jobs in Europe. A record.

Shaping Europe’s future

But what about Europe’s future economy? As new technologies sweep aside old ways of doing things, survey respondents continue to stress the role of information and communication technologies (31%), the energy sector (28%), the pharmaceutical and biotech industry (23%) and the cleantech sector (20%) as the engines of European growth in the coming years. Yet there is a long way to go before these intentions turn into real investments. For example, in 2012, the cleantech sector accounted for just 3% of FDI projects into Europe and biotech for 2%. Clearly, much work is needed in new policies and regulations, incentives and investments to see projections turn into reality.

With this in mind, our survey showed very clearly that Europe needs to find new ways of delivering a high-quality proposition at a better price. Yes, innovation ranks high on Europe’s policy agenda, but its foreign investors gave us the clear message that Europe must become more competitive, more disciplined and more flexible. Europe also needs new global hot spots. Of the top 10 cities where the next Google is seen likely to appear, survey respondents identified three in India, two in China, and one in Japan, leaving three in the US and London as the only European option.

The good news is that our survey also says there are local solutions that governments haven’t been able to create or implement at the national or European levels. Europe needs to stick together but at the same time keep one of its core strengths, which is its diversity of markets, opportunities and talents. With investors insisting they need more support for high-tech industries and innovation, Europe’s policy-makers also need to educate, and to invest in skills and talent. At the same time, business needs to become even more entrepreneurial, with a better backing for small and medium-sized enterprises.

In other words, Europe needs to behave as if it is itself an emerging market. After all, there is no such thing as an old world and a new world. There is one world. But there are old ways of doing things, and new ways that are more agile, more creative, and quicker. Europe is blessed with foreign investors who see its opportunities and who admire its size and leadership. At the same time, these investors have expectations. Europe needs to step up to meet these expectations — if it does so, a more prosperous future will emerge on the horizon.

This article was first published in the August edition of Citizen Today

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