Foreign Investors in Europe post-COVID
The COVID-19 crisis has exposed some major weaknesses in the global trade and investment ecosystem. According to the United Nations forecasts data in 2020, the global foreign direct investments (FDI) fell by 40% and the year 2021 is no different. In Europe, the COVID-19 crisis led to a 13% decline in foreign direct investments in 2021.
Therefore, urgent intervention is needed to ensure Europe reverts to its long-term foreign direct investment attractiveness post-COVID-19. As European governments continue with their efforts of fighting the pandemic, we are witnessing a surge in foreign investors establishing and restarting investment projects that were halted last year when the pandemic started.
As we expect the foreign direct investment in Europe to rebound, it’s important to understand that the fundamentals that investors need are also shifting. The Coronavirus pandemic has made investors consider more factors when it comes to choosing the ideal location to put up an investment. Therefore, decision-makers must ask themselves how attractive will Europe be for foreign direct investments (FDI) in the post-COVID-19 era.
According to the 2021 Europe Attractiveness survey’s data that was recently released, it indicated that 90% of investors consider the environmental stability of a certain market when determining their investment strategy. Apart from a stable working environment, the outbreak of the COVID-19 pandemic has accelerated the need for businesses to have digital strategies.
Moving forward, we expect foreign investors to be attracted to investment destinations that can provide them with skilled workers who have high digital proficiencies. This is a critical need that European nation’s policymakers must address in addition to a robust infrastructure network, political stability, and bigger sustainable markets for them to remain attractive to foreign direct investment.
Europe should use the COVID-19 pandemic crisis as a catalyst to build a better foreign direct investment destination that is will accommodate the changing investors’ priorities in the post-COVID-19 economic recovery era.
An outlook of Europe foreign direct investments in different economic sectors
The 13% decline of FDI in Europe that was experienced in 2020 was the lowest level for the last decade. We can attribute this decline to some of the sectors of the economy that were hard hit by the impact of the COVID-19 pandemic. However, it’s also important to note that there were a few economic sectors that recorded growth during this crisis period. Segments like the health sector recorded growth in FDI because most foreign investors pumped a lot of money into this sector to try and meet the growing global demand for COVID-19 vaccines, personal protective equipment, and treatment support materials.
European countries that were very successful in containing the COVID-19 pandemic from the onset remain top destinations for foreign direct investments. According to the EY European Investment Monitor 2021, countries like Germany, France, and the UK attracted the most FDI projects.
The manufacturing sector suffered the most as a result of supply chain disruptions, national lockdowns, restriction of movements, and less demand. On the other hand, the logistics FDI projects were on the rise as there was a surge in online trade to cater for the supply and deliver essential products and services.
The long-term outlook of foreign direct investment in Europe seems promising. A recent business survey indicated that 40% of foreign investors are already planning to establish or expand their business operations in Europe in the next one year. However, there are some key areas that need to be improved to increase investors' confidence going forward.
In this guide, we will share some of the considerations that Europe needs to put in place in order to remain competitive as one of the top attractive foreign direct investment destinations.
1. Improving Europe digital skill’s capital
If there is one sector that has been accelerated by the COVID-19 pandemic is the digital economy. Digital skills are increasingly becoming a core competitive advantage for governments that want to attract foreign direct investments. Sophisticated automation of systems and production lines, changing online customer experience and remote work is increasingly becoming essential requirements for investments.
Post COVID-19, we expect to see Europe investing more in equipping its workforce with relevant technological skills (Artificial intelligence, cloud computing, and data analytics) in order to continue cementing its FDI attractiveness. For effective workforce digital skills capacity building, European governments must collaborate with existing industries and business leaders so that workers can become more competitive.
Other technological-related factors that foreign investors will be paying more attention to when determining whether Europe is an ideal location to put their investments include:
- Innovation levels, digitization uptake by the population
- Tax policy in regards to global tech companies
- Network for start-ups and research institutions
- IP rights protection
- Stringent data protection laws
- Investment financing options such as venture capitalists
- The level of government support and regulatory bodies in driving the digital economy
- The rate of 5G rollout rate
2. Unwavering commitment to environmental sustainability
The negative impact of climate change continues to be experienced globally and environmental sustainability will play a center stage when it comes to investment strategies. Post-COVID-19 pandemic, environmental sustainability will continue to become one of the factors that will influence foreign investors’ decisions when choosing the most ideal investment locations.
Europe continued commitment to environmental sustainability will play a critical role in attracting foreign direct investments. Europe has always positioned itself as a “green leader” and businesses should continue operating more sustainably in order to preserve our environment. Therefore, there is a need to review direct regulatory requirements by incorporating stakeholders' views so that Europe can create a conducive sustainable working environment.
Investors are choosing their investment locations based on certain environmental factors including; availability of renewable energy, established public transport systems that reduce overreliance on private vehicles, and recycling provisions.
Post-pandemic, the expectations that stakeholders will have towards businesses and FDI will continue to rise beyond environmental sustainability. Experts predict that businesses that will thrive in Europe going forward are the ones that will start focusing on creating long-term value for their employees, customers, investors, and society at large.
Moving forward, it will be imperative for European investors to start addressing common societal problems such as income inequality, unemployment, and ethical issues that arise with new technological innovations and their impact on the environment.
3. Stimulus packages and longer transformation agenda
The COVID-19 recovery stimulus plan package will play an important role in reviving the economy in the short term and accelerate long-term stability. The EU’s COVID-19 recovery package that was unveiled as Europe’s Recovery and Resilience Facility (RRF) has given loans and grants to EU member states to aid in rapid economic recovery.
A total of €672.5B in loans and grants will play a critical role in boosting economic recovery after experiencing a sudden downswing last year as a result of the COVID-19 pandemic. Most businesses were negatively affected by the pandemic and it was imperative for the European member states to make affordable loans and grants available to investors.
The EU’s economic recovery and resilience plan will positively influence foreign investors when it comes to making investment location decisions. Both the national and European stimulus packages are aimed at achieving both short-term and long-term economic and societal transformation. Moving forward, we are going to see more funding being allocated by policymakers to drive positive reforms so that Europe can strengthen its FDI attractiveness in the long term.
Some of the key economic areas that Europe’s Recovery and Resilience Facility (RRF) will address are environmental sustainability and digital transformation. More funding will be allocated to EU businesses that promote environmental conservation, innovations, and technological advancements.
4. Proper tax harmonization and increased transparency
The existing taxation regime is one factor that investors consider when choosing a country’s attractiveness to foreign investments. Although the EU and other multilateral organizations have played a significant role in tax harmonization and stimulus, much needs to be done to create a conducive business environment in the long term.
There have been proposals for countries to adopt a global minimum rate of corporate tax but that’s something that’s yet to be implemented even in Europe. For countries to improve their attractiveness, there is a need to have a broader interpretation of tax harmonization and implementation strategies.
For instance, EU member states must start looking for new ways indirect taxes, environmental taxes, and digital taxes can be administered. Favorable tax regimes enable businesses to remain tax compliant and countries in Europe can benefit greatly by having a competitive edge over other regions when it comes to attracting foreign direct investments.
A proper review of the current taxation laws in EU member states and increased transparency levels will play a great role in making Europe an attractive investment destination for foreign investors.
Europe foreign direct investment post-COVID-19 future is promising. However, it will depend on policymakers’ commitment to helping businesses recover by creating a conducive working environment. A fair investment screening is also necessary to ensure that European Union member states can maintain an open and liberal trading environment that encourages foreign investors while at the same time protecting national security.