The Global Race to attract FDI

Startup Nation

Last month I travelled to Tel Aviv to attend the annual Ecomotion Expo and Summit. Due to the war, few foreigners attended. I was one of only five foreigners, three of whom were from FDI (foreign direct investment) offices. Israel has the world’s highest ratio of startups per capita (1 for every 1,400 citizens), making it an attractive destination for FDI offices. 

Over a beer on the opening night I chatted to Scott Hiipakka (from Michigan), who told me about his work: “I am a super-connector, I connect Israeli startups to the Detroit and Michigan ecosystem, offering them a free office for the first 6 months.”

The next day I attended Scott’s talk, which included a via Zoom to Justine Johnson, Michigans’ Chief Mobility Officer. She invited Israeli startups to join the myriad other foreign companies operating in Michigan, with the inducement of grant funding. It sounded compelling. 

I caught a lift back to Tel Aviv with the Head of International Business for Luxembourg’s FDI office (Luxinnovation).  I asked him why businesses should relocate to Luxembourg and not other European countries. On hearing that I had set up a business in Paris, he quipped, “In Luxembourg we treat entrepreneurs as heroes not criminals.”  Luxembourg has one of Europe’s lowest tax rates and least red tape;  and to qualify for their support you only need to have one employee based there. 

The competition for FDI has never been greater. By bundling a bunch of incentives, countries, regions or cities can attract massive foreign investment that brings in jobs and revenue. 

The Deindustrialization of Europe:

European leaders are understandably concerned about the de-industrialization of Europe, but do not seem to have a cohesive plan on how to combat it. Growth in the US (in constant dollars) has been twice as fast since 2010 compared to the UK and the EU’s big 4 economies — Germany, France, Italy and Spain. In addition, America is actively targeting Europeans to move their businesses across the pond. German companies committed $15.7 billion in US projects last year, up from $8.2 bn in 2022. And with VW investing €5 billion in Rivian, 2024 looks likely to be another bumper year. 

By comparison (according to EY’s recent survey on European Attractiveness) FDI to Europe slowed in 2023, with 5,694 FDI projects announced in Europe, down 4% from 2022. What’s more, FDI remains 11% below the 2019 level and 14% below the record high of 2017. While the number of projects announced by US companies in Europe fell by 15% in 2023. 

Source: fDi Markets – fDi Markets tracks cross border investment in a new project or expansion of an existing investment. M&A and other equity investments are not tracked.

The reasons for the downturn in FDI, other than a global slowdown, include European red tape, high energy prices, inflexible labour laws, and the uncertainty created by the recent anti-immigration rhetoric. (Yesterday, my ten-year-old daughter asked if I would be sent back to Africa if the National Rally came to power.)

Nvidia, (founded by Jensen Huang, whose Taiwanese parents sent him to live with his uncle in Washington when he was 9) increased its valuation in a decade by $2 trillion. That’s the equivalent value of the whole German stock market, which traces its origins back to 1585. Europe missed out on having one of its companies join the league of Big Tech, and it is also late to the party when it comes to climate tech and AI. It would be simply too expensive to fund catch-up companies. The answer for Europe surely lies in playing to its relative strengths, and partnering with foreign investors, skills, and capital to build winning synergies. 

Lost in Translation

Photo by urzine/iStock 

With Biden’s IRA dispensing dollars at an unprecedented rate, Americans are less and less likely to invest in Europe. If Europe wants its Green Deal to work and to get ahead on AI it will have to open up more to Chinese investors. 

Chinese manufacturers have hit peak demand at home and are blocked by tariffs in America. They want to build factories in Europe, with Hungary and France as their first choice destinations. But a lot gets lost in translation.  In 2021, BYD closed its Bus factory at a former Michelin plant in Beauvais-Allonne, 100km north of Paris. The decision came four years after the manufacturer announced it was investing €100m in the new facility with the aim to supply mainland Europe with 200 electric buses annually. The reason for their withdrawal was lack of demand; insiders say it came shortly after they lost out on an RATP contract for Paris buses. European governments are unable to guarantee offtake deals in exchange for investment, so the investor takes an upfront risk. Understanding how to sell and win tenders across Europe is extremely complicated and expensive. This complexity favours incumbent companies that have built up the knowledge and networks over decades and is yet another reason why foreign companies are bypassing Europe. 

The Bottom Line

Europe needs FDI more than ever to create new industries, new jobs and, dare I say it, new billionaires. Ruchir Charma argues in the FT (Capitalism is in worse shape in Europe) that European leaders have been favouring entrenched billionaires with state bailouts at the cost of the economy. In addition, excessive European regulation favours mega-firms, which have the money, the lawyers and the contacts to turn such regulation to their advantage. 

In recent decades billionaire wealth grew faster as a share of GDP in the UK and the EU Big 4 than in the US. France now has both an unusually bloated government, with spending equal to 58% of GDP, and an unusually dominant billionaire class, whose total wealth is equal to 22% of GDP, ahead of even the US.

I have worked with a number of European FDI offices, including London, Paris and Berlin. Unfortunately, they are more focused on pulling business away from each other, than they are from taking it off Detroit, Michigan, for example. The answer is for European offices to come together and build a “Choose Europe” strategy. Unless they do so, FDI to Europe will continue to fall.

Photo by Rob-Potvin/Unsplash
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