We believe that positive and stable dynamics of Foreign Direct Investment is important for both emerging markets and advanced economies.
Joint positive dynamics of FDI flows during the year and accumulated FDI at the end of the period (Stocks) indicates the interest of investors in the country's economy in the medium and long term. Such investment give impuls to the development of industries or the economy as a whole. CDP Center experts have prepared a brief overview of FDI dynamics in European countries covering 2019-2023, as well as the first 2 quarters of 2024.
The European Union is both one of the largest world investors (32.6% of global FDI in 2023) and an attractive destination for foreign direct investment from other countries (25.3% of global FDI).
Despite the crisis associated with the 2020 pandemic, by the end of 2023, the total share of EU FDI in global investment in other countries increased by +2 p.p. (2019 to 2023), while FDI from other countries to EU increased by only 0.5 p.p. over the same period.
Interestingly, most of the largest European countries investing in other economies reduced their FDI volumes, except for the Netherlands (+1 pp outward FDI), Luxembourg (+2.6 pp) and Malta (+1.3 pp).
The list of countries with the largest volume of inward FDI by the end of 2023 still includes three countries among the largest outward investors - the Netherlands (+1.4 pp inward investments), Luxembourg (+1.6 pp) and Malta (+0.8 pp). At the same time, the Netherlands became the only country that increased incoming FDI more than outwards FDI.
It is also interesting to note that most EU emerging markets (Czech Republic, Hungary, Poland, Latvia, Lithuania, Estonia, Romania, Croatia, Bulgaria, Slovenia), as well as Finland and Sweden, increased FDI to other countries from 2019 to 2023.
The list of EU countries with emerging markets that attracted more FDI by the end of 2023 compared to 2019 is much narrower (Poland, Estonia, Lithuania, Latvia, Serbia). This trend may indicate that, through active FDI, investors in these countries continue to diversify risks and expand their presence in other countries.
Of course, when analyzing the dynamics of incoming FDI, it is important to understand the importance of FDI for the country's economy.
Stock non EU FDI to Gross Domestic Product
In 19 EU countries, by the end of 2023, the percentage of inward FDI from non EU countries to the country's GDP exceeds the percentage of outward FDI to GDP. The TOP-10 countries include Malta, Cyprus (+139.8% and +130.1%, respectively), Serbia, Estonia, Bulgaria (+73.6%, +65.1% and +56%), Latvia, Czechia, Portugal, Croatia and Slovakia (in the range from +47% to +41%, respectively). This means that inward investment is a significant driver of the development of these economies.
And only in 11 EU countries, by the end of 2023, the percentage of outward FDI to non EU countries to GDP is greater than the percentage of inwards FDI. Mainly these are countries related to the largest historical European and world financial and industrial centers: Austria, Norway (with a slight excess of +9% and +9.5%, respectively); Sweden, Finland, France, Germany, Denmark and Belgium (in the range from +19.3% to +30.3%); Switzerland, the Netherlands (+37.9% and +63.2% respectively) and the absolute leader Luxembourg. According to the results of 2023, outgoing FDI stock in relation to Luxembourg's GDP exceeds incoming FDI by +575.5%.
FDI outlook for 2024
According to Eurostat, for the first half of 2024, in nominal terms in the national currency of the country, the majority (15 out of 27 countries) of the European Union are in the group with negative Net positions at the end of the period. This means that they invest more in other non EU countries than attract foreign direct investment. According to the results of the second quarter of 2024, the negative net position increased compared to Q2 2023, but this is not a negative factor. Rather, we are talking about the fact that foreign investors (not from EU countries) continue to expand their investments, as they consider these markets and countries promising. Estonia and the Czech Republic slightly shifted the balance in favor of inward investments in the second quarter of 2024, but continued to remain in a negative Net position.
12 out of 27 EU countries have positive Net positions in nominal terms at the end of 2Q 2024, i.e. they attract more foreign direct investment than they invest in the economies of other countries. At the same time, 5 countries - Sweden, the Netherlands, Belgium, Finland and Cyprus - shifted the balance towards investments from other non EU countries at the end of Q2 2024 compared to Q2 in 2023 (increased investments in other countries more than they attracted themselves), but still remained in a positive Net position.
According to the results of the Q2 2024, the TOP-10 EU countries, leaders both in attracting foreign non EU investments and outward non EU investments, includes the largest economies (Germany, France, Spain and Italy), as well as economies with leading financial and IT sectors (the Netherlands, Luxembourg, Ireland, Belgium, Cyprus and Malta).
GFCF & FDI flow
It is also important to note that European countries are divided into several groups in terms of GFCF (Gross Fixed Capital Formation) dependence on changes in the annual FDI flow (inward FDI flaw during the year, not for the entire period as a cumulative total).
The first group of countries with super high dependence (the average annual incoming FDI flow greatly exceeds the average annual GFCF of the country) in the period 2019-2023: this group includes only two countries Malta +378.8 pp and Cyprus +177.0 pp.
The second group of countries with significant dependence (the average annual incoming FDI flow exceeds the country's GFCF by 20-30%) in the period 2019-2023 includes four countries Serbia +31.6 pp, Estonia +26.8 pp, Greece +21.1 pp and Poland +20.7 pp.
The third group of countries (13 countries) with moderate dependence (the average annual inward FDI flow exceeds the country's GFCF by 10-20%) is the largest in the period 2019-2023: Portugal+19.4, Bulgaria +19.2 pp, Ireland+18.5 pp, Latvia+18.2 pp, Sweden+16.3 pp, Croatia+16.0 pp, Hungary+14.5pp, Denmark+13.0 pp, Czechia+12.6pp, Lithuania+12.4 pp, Slovenia+11.0pp, Romania +10.9 pp and Spain +10.6 pp..
The fourth group of countries with low dependence (the average annual inward FDI flow increased faster than the country's GFCF by less than 10 percentage points in the period 2019-2023) includes mainly countries with a high level of economic development relative to the average European level: Finland +8.7 pp, Belgium +8.7 pp, Germany +5.4 pp, France +5.4pp, Norway +5.3pp, Slovakia +4.2 5pp, Austria +4.0pp, Iceland +2.8 pp and Italy +2.3pp.
And the fifth group of countries in which the average annual volume of inward FDI decreased relative to the volume of the average annual GFCF of the country: Switzerland -23.4 pp, Netherlands -36.7 pp and Luxembourg-285.1 pp.