Olan McEvoy
Research expert covering the European Union for society, economy, and politics.
Get in touch with us nowFDI allows foreign companies to more easily compete in the domestic market, while the domestic economy is boosted by this investment, both in terms of increasing production, as well as in boosting human capital of domestic workers and fostering technology transfer. Key examples of FDI in Europe in recent years include American car-maker Tesla's investments in its production facilities in Eastern Germany, while the company's Chinese rival BYD opted to invest in Hungary. Foreign-controlled enterprises, particularly those in the banking, finance, pharmaceutical, and technology industries, play an outsized role in the economies of several smaller European countries, with foreign companies being attracted to invest in countries such as Luxembourg and Ireland due to their more lenient investment, taxation, and corporate governance regimes.
Inflows, outflows, and FDI stocks
Both inward and outward flows of foreign direct investment in Europe experienced a downturn in 2022, largely due to the crisis caused by Russia's invasion of Ukraine in February of that year. As investors were wary to invest in Europe at a time of geopolitical instability, poor economic performance, and high inflation, inward flows of FDI turned sharply negative, with foreign investors disinvesting almost 150 billion U.S. dollars in the final quarter of 2022. The European countries with the largest inward stock of FDI are the Netherlands and the United Kingdom, with both of these countries having stocks worth over 2.7 trillion U.S. dollars each, while the Netherlands is also the leading country in terms of outward foreign direct investment, with almost 3.4 trillion U.S. dollars in outward FDI stock. The small Western European country of Luxembourg overshadows all other European countries when it comes to FDI stocks compared to the size of the national economy, with Luxembourg's outward stocks being worth almost 20 times its GDP.'Derisking' foreign investment in Europe
In spite of its salience for the European economy, governments and institutions have become more wary of the effects of allowing lightly regulated foreign investment into their countries in recent years, particularly as this can pose national security issues. These concerns have arisen in light of growing tensions between the EU and geopolitical rivals such as Russia and China. Calls for the EU to 'derisk' - that is, to attempt to limit risks through regulation - its economic relationships with these powers led to the introduction of an FDI regulation in 2020 to address these challenges, with larger investments from outside of the EU undergoing screening procedures to ensure they do not negatively impact security and public order. Nonetheless, many European countries are reliant on FDI and therefore aim to keep investment channels open, with this being reflected in the generally low levels of investment restrictions in most EU countries.
