China supplants Europe as favoured location for inward investment

Shanghai, China

But these investor perceptions are not yet backed up by the reality of investment flows. Although 41 per cent of business executives interviewed for the survey ranked China as the most attractive investment destination, it still draws less than 8 percent of global foreign direct investment (FDI) inflows according to the United Nations Commission for Trade and Development (UNCTAD).

While only 33 per cent of respondents ranked Western Europe as their top choice investment location, the region accounts for 37 per cent of global FDI inflows, according to UNCTAD.

“The world is becoming a level playing field when it comes to businesses’ perceptions of their cross-border investment options,” said Marc Lhermitte, Partner of Ernst & Young France. “The developed markets of Western Europe and the US are being challenged by competing equals. As they look ahead, businesses are chasing growth through Asian consumers’ spending power, but Europe and the US still remain vastly diversified and powerful markets.”

The number of FDI projects across Europe was up by 5 per cent to 3,712 in 2007, up from 3,531 in 2006. Yet  FDI-driven job creation fell by 18 per cent in 2007, with a total of new 176,551 jobs, down from 214,987 in 2006.

The top five countries for number of projects in 2007 remained the same, but Central and Eastern Europe countries rose quickly. UK, France and Germany maintained their top positions, with 713 projects attracted to the UK, 541 to France and 305 to Germany. The also topped the job-creation ranking.

The Czech Republic maintained its place, despite attracting 27 per cent fewer projects. And the country moved from fourth to third place in the job creation table despite creating 14 percent fewer jobs than last year.

Russia leapt to fourth position for jobs created, with an increase of 85 per cent and moved from 13th to 8th for number of projects, up 60 per cent.

Poland and Romania maintained their position in terms of number of projects. In terms of job creation, Poland fell to second, creating 41 per cent fewer jobs than last year.

Slovenia saw the biggest growth in terms of job creation, up by 458 per cent, and jumped to 15th position in the ranking.

The survey says that “how to” invest is becoming more important than “how much” for investors considering sustainable location options. Survey respondents pay more attention to political and legal stability (54 per cent) and telecoms infrastructure (51 per cent) than labour costs (47 per cent).

Russia, an outsider FDI destination in Ernst and Young’s previous four surveys, scored this year’s sharpest climb up the attractiveness ladder, rising nine points, to a 21 per cent rating.

The shift towards a knowledge economy in Western Europe is slower than the relocation of traditional industries from Europe. Western Europe is more active in services FDI (60 per cent of all jobs created through FDI in 2007, 43 per cent in 2006), but it is not yet snaring the large high-tech, high value-added services projects needed to replace its declining industrial base (30,000 fewer industrial jobs created in 2007 than 2006, a drop of 51 per cent).

When asked how to make Europe more attractive, respondents cited a combination of increased flexibility in European labour markets (42 per cent) and simplified regulations (39 per cent).

Investors are also calling for innovation in education and the supply chain. Alongside high technology clustering and research and development, respondents also seek innovation in high-performance communication channels (48 per cent), and supply chains (27 per cent) that will also allow them to prosper in mature economies. According to investors, the improvement of European innovation capacity is primarily a matter of culture and education (34 per cent each), rather than financial and tax incentives (31 per cent).