European Investment Monitor 2008: Foreign direct investment (FDI) in Ireland remained strong in 2007 according to Ernst & Young's latest European Investment Monitor (EIM) published today. The 10th annual survey revealed that in 2007 Ireland attracted 80 FDI projects, up from 74 in 2006.  This is the highest level of investment since 2000 when 113 projects were secured. Across Europe, a record number of foreign direct investments (FDI) took place for the fourth year in succession, with a total of 3,712 FDI projects recorded - a 5% increase on 2006. This upward trend is unlikely to continue in 2008.

The UK leads with 716 projects and Netherlands in 10th place, received 123 projects.

Investors in Ireland

Although overall share of investment from the USA (down 9% to 47%) and United Kingdom (down 9% to 12%) declined, they still represent the top two FDI investors in to Ireland. Canada, Germany and Bermuda all increased their levels of investment in 2007 (Canada, (up 4.8% to 7.5%); Germany, (up 2% to 5%) and Bermuda (up 4% to 5%)). The 80 projects created a total of 4,052 FDI jobs in 2007, a decrease of 44% on 2006. However, 17% of these new FDI jobs were in research and development, far above the 6% European average. 

The majority of projects (34) in 2007 were in the Dublin area, with 11 in Cork followed by Clare with seven and both Galway and Limerick attracted four.

Top 10 locations for FDI in Europe by number of FDI projects in 2007

Software sector leads the way in Ireland & Europe

The software sector attracted the highest level of investment for the second year running, accounting for almost a quarter of the investment in Ireland (24%).  This was followed by Pharmaceuticals (up 2% to 14%) in second place.  Both Financial Intermediation (down 7% to 11%) and Business Services (down 2% to 10%) experienced drops in the level of investment. The Electronics sector which was ranked fifth showed an increase from 6% in 2006 to 9% in 2007.  A total of 64% (51) of the projects in Ireland were new and 29% (23) of the projects were a result of expansion by companies who had already invested in Ireland.

In Europe, Software was also the leading sector in generating investment with 474 projects attracted in 2007, followed by Business Services (467 or 30%), Financial Services (235 or 15%), Machinery and Equipment (205 or 13%), and Electronics (203 or 13%).

Transaction Advisory Service Director, Garry O'Rourke at Ernst & Young Ireland said: "Along with the rest of Europe, Ireland benefited from overall growth in the software sector in 2007.  The jobs created here are also high value R&D positions. However, the impact of the US economic downturn will not filter through until this year or next year, as many companies rethink their growth and investment plans." 

Credit crunch and FDI

There has been no measurable impact of the credit crunch affecting the levels of foreign investment in 2007. "This was not a complete surprise," explains Nigel Wilcock, , Regional Development Director at Ernst & Young. "Since companies plan foreign investment months in advance, FDI projects were already committed up until the later half of 2007, prior to the emergence of financial difficulties.

"Companies making a foreign investment decision will take market confidence into consideration as much as any other factor. The credit crunch will have caused potential investors for 2008 and 2009 to re-think or more likely, delay their plans to invest," said Wilcock.

Between 2000 and 2002 FDI into Europe declined by 15% fuelled by a US economic down turn. The effect was particularly felt in the UK and Ireland, which were (and are) disproportionately reliant on US service sector investment, with a reduction of 36% in FDI projects recorded over the two year period in UK and 55% reduction in Ireland. 

Overall trends across Europe

The UK retained its position as the most attractive destination for inward investment in Europe in 2007, a position it has held since EIM was launched 10 years ago in 1997.  The UK held a 19% market share of the number of projects announced in Europe in 2007, ahead of France in second place with 15%, Germany (8%), Spain (7%) and Belgium (5%).

Over the last ten years, 'European super cities', which have an increased concentration of service sector investment, have emerged as a significant success factor to the major economic regions of Europe. London attracted 42% of the FDI projects into the UK, well above the European average of 35.77% (projects that will locate in the leading city region in any given country).

Since the report began, there has been a dramatic shift from manufacturing investment to service sector investment, which has transformed the type and level of FDI into Europe. In 1997 manufacturing represented 54% of European FDI compared to just 27% in 2007. Over the same period of time, business services investment has increased by 402%.

 "We expect to see a decline in European FDI projects with a disproportionate effect on Western Europe in the next two years, due to the global economic slowdown. The scale of the impact on the domestic market will depend on which sectors bare the brunt of the slow down.

"2007 is likely to be a high water mark for a while in the attraction of FDI in Europe", said Wilcock.

The US remained the largest source of investment projects last year, accounting for 941 projects - 25% of all FDI projects into Europe. Whilst this represents a small absolute reduction in percentage share compared to 2006, the next nearest country was Germany with 454 projects, highlighting the potential impact of any US economic slowdown.

Is the attractiveness of the BRIC economies stalling investment into Europe?

After ten years of uninterrupted growth in terms of the number of in-bound projects from China and India into the UK and the rest of Europe, 2007 saw a change of direction.  Whilst the number of projects from countries like Germany, France and Japan coming into the UK were either at a record high or at a level not seen since 1999, the Chinese figure was the same as 2006 and the Indian figure was the lowest for 4 years. 

At the same time according to the Ernst & Young European Attractiveness Survey (EAS) which is closely linked to EIM, China is perceived to be the most attractive destination to foreign direct investment by business leaders across Europe, ahead of Eastern and Western Europe. 

Marc Lhermitte, Partner at Ernst & Young in France, said: "The world is becoming a level playing field when it comes to businesses' perceptions of their cross-border investment options. The developed markets of Western Europe and the US are being challenged by competing equals."

Romania emerges as Eastern and Central European investment capital

The flow of investment to Eastern and Central Europe continued to stall in 2007. Of the leading locations of Poland, Hungary and the Czech Republic, only Hungary recorded an increase in 2007, although Serbia (178%), Ukraine (69%) and Russia (60%) all showed a strong percentage growth improvement.

As well as attracting actual projects on the ground the EAS revealed that Russia also scored the sharpest climb up the European attractiveness ladder in 2007.

In 2007, Romania emerges as the most successful Eastern/Central European economy in attracting FDI with 150 projects taking it to 6th position in the EIM league table, mainly due to securing electronics and automotive component investment.  "This suggests that lower cost Romania is now displacing investment from other Eastern and Central European economies. However there is little evidence that the leading central Eastern European economies are challenging significantly for the business services investment which is driving investment in Western Europe," concluded Wilcock.