While stability and access to talent work in its favor, high levels of regulation and relatively slow growth can restrict opportunities. 

Europe fared relatively well through the COVID-19 pandemic when businesses were ordered to close and people were under lockdown. However, the continent’s foreign direct investments (FDI) fell by 4% in 2023 compared to a year earlier, marking the first drop since the pandemic, according to the EY Europe Attractiveness Survey published Thursday. 

Investments in the form of goods and services are key to growing Europe’s economies. Take France, for instance—FDI influences nearly 35% of the country’s exports. Falling FDI could have ripple effects elsewhere in the economy, such as employment. 

It comes at a difficult time. The Eurozone and U.K. have just begun showing signs of a rebound after being throttled by high inflation and interest rates. Some of the region’s biggest economies like Germany have narrowly escaped recession but still remain weak. 

“Europe is in urgent need of foreign investment and this survey should serve as a wake-up call right across the continent,” said Julie Linn Teigland, managing partner for the Europe, Middle East and Africa regions at EY.  

The story wasn’t the same across Europe. France saw FDI projects drop by 5% to 1,194, although that was still the highest of any country. The U.K., which was in second place, experienced a 6% increase, while projects in third-placed Germany fell by 12%. 

Poland and Portugal also performed well, hitting the top ten for FDI. 

In terms of cities, London attracted the most investments, while Paris came in a close second.

What really drives FDI in Europe (or doesn’t)?

The factors that typically drive competitive economies also drive FDI, such as stability, strong economic conditions and general openness to business. But last year, several of these factors stopped working in Europe’s favor, EY found. 

For instance, geopolitical tension and high energy prices have weighed heavily on investor sentiment, as have tighter regulations and changes to working patterns in the wake of the pandemic.

“We need to make sure regulation doesn’t get in the way of innovation and enabling businesses in Europe to compete,” Teigland said.  

IT, software and manufacturing are some of the areas where investment dropped, though tourism FDI grew.   

While falling FDI may not exactly be good news for Europe, the situation isn’t so bad. Investors may be cautious now but are generally optimistic about the region in the long term, EY found. CEOs are just being careful where they put their money, but with economic pressures like high interest rates set to ease this year, Europe could become attractive once again. 

“Despite the overall FDI downturn, Europe still matters in current and future business plans and there is cause for optimism,” Teigland said.