FDI trends - Europe still attractive, Serbia slightly gaining in appeal

Europe is the world`s second most attractive destination for doing business, right behind China. Of all European countries, Poland reported the largest FDI growth in 2012. Serbia ranks 11th in the number of foreign direct investments attracted and 6th in the number of new jobs these investments secured. However, foreign investors are of the opinion that the appeal of local market is still worse than it really is, Ernst&Young`s 2013 survey on the attractiveness of the European market shows.

According to the Ernst&Young European Attractiveness Survey, Eurozone problems did not endanger the FDI inflow in the European market in 2012. This survey, which has been carried out for as many as 11 years, combines an analysis of international investments in Europe in the previous year and a poll on investment destinations for the next decade conducted among over 800 executive directors worldwide.

According to this survey, despite the recession, the number of FDI projects in 2012 dropped only 2.8 percent from 2011 (from 3,906 in 2011 to 3,797 in 2012). On the other hand, the investment level remained higher than in the pre-crisis period with the number of new jobs increased 8 percent from 2011 to 170,434. Despite the competiveness of emerging markets, Europe still remains the world’s most attractive FDI destination, although its share in global FDI declined from 28.6 percent in 2011 to 22.4 percent in 2012.

Marc Lhermitte, a leading consultant for investment destinations at Ernst&Young and the author of this report, says that the crisis has forced foreign investors to actively seek scarce opportunities and restructure their production in Europe.

- As a result, we witness the return of investments to key destinations such as Great Britain, Germany and Ireland, but also Poland and Russia. Foreign investors seem optimistic that the continent will weather these hard times and emerge stronger - Lhermitte points out.

Great Britain still in the lead

The UK and Germany remain Europe’s top destinations for foreign investors, with 697 and 624 FDI projects (up 3 and 5 percent from 2011) respectively. Among the Western European countries that attracted significantly more projects in 2012 than in the previous years are Spain (273), Ireland (106), Belgium (153) and Finland (62). These investments primarily resulted from a decrease in the cost of manpower, which has contributed to the improvement of competitiveness.

Another group of Western European countries, including France (471), the Netherlands (161), Switzerland (61) and Italy (60), has attracted relatively fewer projects and jobs. The reasons for this range from a stagnated growth in France and Italy to high operating costs in the Netherlands and Switzerland.

Central and Eastern Europe (CEE) regained traction as an FDI destination in 2012 after two disappointing years. Though the number of investment decisions slipped 4.8% on the year, the region secured a remarkable 26.1% more jobs. That meant that CEE overtook Western Europe to become the leading recipient of FDI jobs in Europe.

European investments dominant in Serbia

Serbia ranks 11th in Europe in FDI projects in 2012 with the number of projects going up 16.4 percent from 2011 to a total of 78. Last year saw the creation of 10,302 new jobs, in Serbia, which is the sixth best result in Europe when it comes to jobs generated by foreign direct investment. Nearly 90 percent of all projects in Serbia were implemented by European companies with over 50 percent of jobs secured by Italian companies. Germany and Austria are also large investors in production. Italy's car maker Fiat SpA has announced plans to build EUR 1.3 billion worth of production facilities in Serbia. This company has also complimented the measures taken by the Serbian government through joint investments and incentives, including tax reliefs, infrastructure and the education of workers.

Poland was the continent’s strong performer in 2012, attracting 22.3% more projects than in 2011. Within the CEE region, Poland (148) outpaced Russia (128) to become the leading destination for FDI projects last year. Serbia too ranks high with 78 FDI projects in 2012. On the other hand, investments in Turkey (95) and Czech Republic (64) were on a slight decline.

Perceptions different from reality

Once again, Germany is perceived to be the most attractive country in Western Europe for FDI, responses to the survey have shown. Germany is seen as the world’s most competitive automotive hub for innovation and product quality. Its economy is among the most resilient in Europe, benefiting from its strength as an exporter. In Western Europe, France is rated second, a whisker ahead of the UK.

In CEE, the respondents saw Poland as by far the most attractive country. For other CEE countries, including the Czech Republic, Hungary, Romania and Ukraine, investor perception roughly matched the reality of FDI inflows.

Meanwhile, Turkey and Serbia show a different kind of perception gap. Only 2% of the investors picked Turkey as the most attractive FDI destination in CEE, and Serbia scored only 1%. Yet, in reality, Turkey scooped up 13% of the CEE FDI projects in 2012 and Serbia another 11%. This glaring mismatch suggests these countries face perception problems among foreign investors.