EU Economy
In 2013 China alone received more FDI inflows than all EU countries together
By Michael Hennigan, Finfacts founder and editor
Aug 26, 2014 - 6:53 AM

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The European Union has lost its leading position as the world’s most important recipient of foreign direct investment (FDI). While the countries of the EU accounted for 50% of global FDI inflows in the early 2000s, the share has fallen to less than 20%. By contrast, the BRIC (Brazil, Russia, India, China & South Africa) countries have more than doubled their share in global FDI inflows since 2007. In 2013 China alone received more FDI inflows than all EU countries together.

While economists at Deutsche Bank say that although the share of investments coming from non-EU countries is rising, still more than 60% of total inward FDI flows into European countries are intra-EU investments. For the EU as a whole, this means that the majority of recorded FDI does not constitute genuinely new investment from abroad, but rather a shift of capital between EU member states.

The economists say that a new OECD benchmark definition (BMD4) will make FDI data more transparent in the future. So far, FDI data are sometimes heavily upward biased as they include also purely financial flows. For a few EU countries which are well known as investment locations, such financial flows are more than 10 times higher than genuine investments in some years.

This misleading data has resulted in the American Chamber of Commerce in Ireland making fantastical claims in recent years e.g. in 2013:

In the past half decade, US firms have invested more capital in Ireland than in the previous half century."

 

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A Deutsche Bank report [pdf] says that the evolution of FDI activity across the Eurozone is very uneven. The highest  inflows during the previous two years were recorded for Spain and Ireland. While Germany and Italy experienced an increase in FDI activity in 2013, it decreased strongly in France.

A rise in retained earnings related to corporate tax avoidance is counted as an inflow.

Ireland has higher outflows than inflows and US companies with headquarters in Ireland are treated as Irish companies.

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The economists say that FDI flows are very volatile and do not instantaneously track changes in business conditions. However, countries such as Italy and Greece are attracting much less foreign investment capital than comparable EU countries over a prolonged period, which is likely to reflect competitiveness deficits as well.

"While the contribution of FDI to GDP growth is sometimes overstated, FDI would be particularly valuable for the Eurozone periphery in the current situation. After all, the majority of domestic companies is financially constrained and has problems to access financing via conventional channels. This means that the
availability of capital to make large-scale investment in the economy is scarce.

By international standards the countries in the EU are already very open for foreign investors. Despite some efforts to promote FDI in the EU, a higher attractiveness for investments from abroad can only come from structural improvements of the economic conditions."

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