EY Attractiveness Survey: Luxembourg Ranks 1st for No. of Foreign Direct Investment Projects Per Capita

Luxembourg has ranked first in terms of the number of foreign direct investment projects per capita in the recently published (and very first) EY Luxembourg Attractiveness Survey.

According to EY Luxembourg, one of the key drivers of growth is a country or region's ability to attract investment. By analysing the attractiveness of more than 40 countries as a combination of image, investor confidence and the perception of their ability to provide the most competitive benefits, the attractiveness survey has been widely recognised as a key source of insight into foreign direct investment (FDI) in Europe for 21 years. For the first time, Luxembourg has also participated in the study.

The two-fold methodology of the study mirrors both the reality of FDI in the country through the analysis of the number and destination of investments that create new facilities and jobs and by a survey reflecting the perception of international decision-makers.

In 2021, foreign investors made a comeback to Europe: 5,877 locations and expansions were announced in 43 countries (up 5% compared to 2020). However, the damage of the COVID-19 pandemic has not yet been erased, as the number of investments decreased by 12% compared to the record level of 2017.

Overall, the appetite to invest in Europe remained high: 53% of executives said they intended to establish operations in Europe during the next year, which represents an increase of 13% compared to 2020. Luxembourg’s results regarding its attractiveness in view of executives was slightly below the European average at 43%. Still, the Grand Duchy was ranked the 9th most attractive destination in Europe.

France has made strong progress between 2020 and 2021 (up 24% in the number of projects) and the country retained first place in the ranking with a share of 21% of all FDI projects in Europe. In the United Kingdom (UK), the number of projects increased by a modest 2% in 2021. According to the survey, the country’s attractiveness is struggling after Brexit, due to persistent concerns about trade restrictions and labour shortages. Germany saw a 10% drop in announced projects in 2021 but remained in the lead for manufacturing projects and still retained 14% of all FDI.

With a 39% increase and 25 foreign investments announced in 2021, Luxembourg ranked 26th in terms of FDI share. Due to its size, the Grand Duchy might not own an important share of FDI, but it stands out as being in first place for the number of investment projects per capita (number of projects per 100,000 inhabitants) with 3.94 projects per capita. This surpassing Ireland (up 30%), a country with which Luxembourg shares many features, including its reputation as a fund domicile of choice and a wide array of investment funds. Lichtenstein (2.56), Finland (2.24) and Malta (2.13) completed the top five.

At the European level, most investments have been made into manufacturing sites (up 5% compared to 2019, the previous peak), logistics platforms (up 23%) and research and development (R&D) centres (up 11%). Many initiatives that were put on hold at the height of the health crisis have been resurrected, while businesses have begun to rearrange supply chains, innovate and respond to the e-commerce boom. This is also true in Luxembourg where manufacturing sites and R&D centres represented 44% of investments in 2021.

Manufacturing and logistics recovery has been offsetting the downswing in business and professional services sector projects as, on the other hand, the relative weight of business services declined from 78% to 28%. Long-lasting changes in working habits due to the pandemic impacted office-based sectors. New investments slowed down as hybrid working and digitalisation changed investors' real estate strategies.

Despite the net increase in assets under management (AUM), there has also been a relative slowdown in foreign direct investment in the financial sector. This can be credited to the "end of the Brexit effect" – companies that were due to relocate their activities to the Grand Duchy have now done so.

EY Luxembourg specified that FDI is distinct to portfolio type investments. In the context of the study, FDI projects exclude portfolio investments and mergers and acquisitions (M&A). As such, the progression of AUM of a country has no impact on FDI statistics. In fact, 2021 was a record year for Luxembourg investment funds, with AUM at an all-time high of €5.9 trillion, equivalent to a year-on-year increase of 17.8%. Luxembourg continues to be the largest investment centre in Europe, and second worldwide only to the United States (US).

The survey of decision-makers pointed out the same challenges in Luxembourg as in the rest of Europe: Reducing taxation, promoting innovation and supporting high-tech industries and small and medium-sized enterprises (SMEs) were identified as main pillars.

With the Grand Duchy being the largest investment fund and asset servicing hub in Europe, EY Luxembourg deemed it important to analyse the challenges that need to be faced in this sector – especially as the survey has been showing a decrease in the appetite of investors in launching new headquarters or developing their business presence in Luxembourg. 

Over 65% of C-Suite cited the ability to attract and retain talent as the two biggest risks to the attractiveness of Luxembourg as a financial hub. To maintain its status as the largest investment fund centre in Europe, the talent topic must be tackled, according to the survey.

Across Europe, the degree of digitalisation of tax authority systems was deemed the most important tax-related factor influencing location decisions. This factor was even perceived as more important than the absolute rate of corporate tax. Pragmatism and flexibility of tax authorities were considered as the fourth most important factor when investing. As agility is considered one of the strengths of Luxembourg, this aspect did not seem like a threat – if it is nurtured in the future.

According to EY Luxembourg, as more companies are inclined to relocate to Europe and to regionalise their supply chains, Luxembourg should develop and build on its industrial legacy, become key player in logistics and become a test bed for "Smart Factories". Green- and cleantech companies also bring the opportunity to scale up and work on their perception to lead the way to an eco-friendlier business centre.

Through the Attractiveness Survey, foreign investors have clearly defined the criteria that guide their investment choice, whether it is technology, sustainability or the availability of trained manpower. EY Luxembourg concluded that the Grand Duchy should encourage investors by giving them more visibility on the measures and prospects envisaged to meet these challenges, but also by demonstrating its ability to build a tax, regulatory and normative ecosystem that is evolving and encouraging the development of sectors of the future, such as the ecological transition.

The full results of the EY Luxembourg Attractiveness Survey 2022 are available online at: https://www.ey.com/en_lu/attractiveness/luxembourg-attractiveness-survey