FDI flowing into the EU plummeted 40% in 2008, while FDI into developing economies continued to grow by 17%. The economic and financial crisis has exacerbated shifts in the FDI landscape, with a growing importance of developing economies as recipients of FDI and the declining role of the EU. Indeed, in 2008, developing economies attracted a historic 43% share of global FDI flows, while the EU share declined from 40% in 2006 to 30% in 2008. The prospects for the near future are also a cause of concern: only four EU countries appear among the United Nations Conference on Trade and Development (Unctad) World Investment Report 2009’s 15 most attractive locations for FDI in 2009-11, with the UK (sixth) the best positioned.
A new debate about the need for a common effort to promote FDI into the EU is slowly emerging. To some extent, a decline in FDI is natural in low value-adding activities such as assembly and labour-intensive manufacturing, which have progressively been offshored to low-cost locations. This is seen as an unavoidable outcome of the globalisation processes and as a symptom of economic upgrading.
But the biggest fear is that the EU might also be losing attractiveness for high technology and innovative industries or functions, which stand at the heart of its economic development strategy. Take the following quote from a recent Green Paper from the European Commission: “Globalisation of research and technology is accelerating and new scientific and technological powers (China, India and other emerging economies) are attracting considerable and increasing amounts of R&D investments. These developments… raise the question of Europe’s ability to sustain a competitive edge in knowledge and innovation.”
Besides the necessary reforms to improve the investment climate, these trends call for a more active and efficient promotion of the EU as an investment destination, in particular for innovation and technology-intensive investments. Within the European Single Market, countries compete against each other and have steadily increased the scale and scope of resources devoted to attracting FDI. The importance attached to national and sub-national investment promotion agencies has also increased. But the current challenge is the need to increase co-operation among member states to attract more (and higher quality) international investments into the EU as a whole.
Several initiatives have recently emerged in response to this challenge. For example, the European Attractiveness Scoreboard was launched in 2007 as a joint initiative of the governmental investment promotion agencies of France and Germany. Its objective is to give insight into Europe’s investment climate and to provide a comprehensive overview of Europe’s business strengths to help investors make informed decisions.
The benchmark study compares Europe with competing investment locations, including the US, China, Japan, India and Brazil. It offers a comprehensive range of indicators highlighting the advantages of Europe in terms of market and business vitality, human resources, infrastructure and innovation. Its aim is to demonstrate the attractiveness of the EU as an investment destination using objective quantitative data which is compiled and analysed by experts from the ESCP-EAP European School of Management in Berlin, and the HEC School of Management in Paris.
Another interesting development is the Europe+ Foundation, founded by Ernst & Young and the PGA Group. This foundation intends to provide the EU, its member states and its regions with a tool for the governance of public policies in promoting Europe’s attractiveness. Europe+ Foundation is also the organiser of the annual World Investment Conference in La Baule, France, which counts with the support of the European Commission and brings together hundreds of global business leaders, top European officials, academics and experts from around the world.
More recently, the EU chapter of the World Association of Investment Promotion Agencies (WAIPA) has taken action. WAIPA is composed of about 200 investment promotion agencies (both national and sub-national) from all over the world.
Its EU chapter, currently chaired by Invest in Spain, comprises investment promotion agencies from all the EU member states (with the exception of Luxembourg). Invest in Spain has been working on a first draft of a promotional document titled ‘Why Europe?’ that has been presented and discussed with the other EU investment promotion agencies. The intention is to make the document a marketing tool for the EU as a whole and to serve as an investment guide for international dissemination.
These efforts are most welcomed, but they are also rather narrow in scope since they primarily focus on the elaboration of promotional documents and investment guides. The next issue – and a more controversial one – is whether the EU should move a step further and develop common investment promotion policies and tools,
with a broader mandate.
Looking to the US
In March 2007, the US government announced the establishment of Invest in America, a new directorate within the Department of Commerce focused exclusively on promoting inward FDI. In the past, this role was left to the state and local governments, but it was felt that a stronger commitment at the federal level was needed to deal with mounting international competition for FDI.
Invest in America complements state efforts, but remains neutral in any competition between them, especially when asked by investors about specific locations within the US. With a limited resources structure (just five employees at its Washington, DC, headquarters), Invest in America works as a first contact point for foreign investors, providing information on investment incentives and on the contact details for FDI services in the 50 states. It has also developed a strong policy advocacy role in Washington to address the business climate concerns of foreign investors. Invest in America efforts are aided by commercial service officers of the US Department of Commerce stationed in nearly 80 countries.
Which way forwards for Europe?
The long-awaited, much-debated Lisbon Treaty, which entered into force on December 1, 2009, has given the EU expanded powers to act on the world stage, including the ability to enter into treaties. From our perspective, the big novelty is the inclusion of FDI within the scope of common commercial policy. This implies a transfer of competencies to the EU, which now has the ability to conclude international investment agreements (see Article 188B, which also includes a reference to the “progressive abolition of restrictions on FDI”). Up to now, member states had full competence over FDI, and the EU role has been very limited.
The trends that we have discussed and the broader implications of the Lisbon Treaty create a new scenario for FDI promotion in the EU. Should the EU set up a European investment promotion agency? Or should it limit itself to agreeing upon a common promotional document, along the lines of the recent initiatives described above? The key challenge is to balance competition among member states with the need to forge stronger co-operation in order to better compete globally as a regional block.
Much of the recent progress made by the EU in strategic areas such as R&D and innovation are often poorly communicated abroad and hard to understand by foreign investors. Thus, a first focus of common FDI policies could be to internationally promote the strengths of the EU as a location for innovation and R&D, through marketing campaigns, the development of a website, seminars, missions, and so on.
This links well with current efforts to further develop the so-called European Research Area, with new instruments such as pan-European research infrastructure and industry-led technology platforms, which need to develop linkages with foreign sources of knowledge, foreign markets and, thus, foreign investors.
Just like Invest in America, the hypothetical EU investment promotion agency should be neutral and focus solely on efforts to promote the EU as a whole. However, it may also stimulate collaboration and synergies between national investment promotion agencies. It could also act as a helpdesk to provide information and services to foreign investors, in particular about the mechanisms to benefit from European research funding programmes and to engage in European R&D networks.
The debate is now open.
José Guimón is a lecturer in international economics at Universidad Autónoma de Madrid. Oscar Álvarez is the director of the Economic Intelligence Division of Invest in Spain. The views and opinions expressed here are solely those of the authors, and do not represent those of Invest in Spain or the Universidad Autónoma de Madrid.