EY Luxembourg Attractiveness Survey: Highest-Ever Intention to Invest Recorded

On Friday 14 June 2024, EY’s third edition of the Luxembourg Attractiveness Survey found high optimism in response to the new government plan, post-election.

Described by EY as “tangible” this new optimism is expected to bring with it transformations likely to influence future foreign direct investment.

The Luxembourg Attractiveness Survey is a widely recognised study aiming to assess what makes the country competitive on an international level and the main barriers to growth as perceived by (potential) investors. According to EY, one of the key drivers of growth is a country or region’s ability to attract investment.

At the European level, the study has been serving as a benchmark for 23 years. It uncovers both the reality of foreign direct investment (FDI) in the country through the analysis of investments that create new facilities and jobs and the perceptions of international decision-makers via a survey.

The launch of the first Luxembourg Attractiveness Survey in 2022 provided a first-time benchmark of Luxembourg's foreign direct investment (FDI) performance against other European countries. With the release of the second edition in 2023, new comparisons were made about Luxembourg’s change in FDI. In this election year, Luxembourg’s national objectives became a critical topic of discussion for the future attractiveness of the country. Now, the third instalment of the research arrives at a moment when “significant change is on the horizon”, EY stressed.

European foreign direct investment (FDI) has contracted by 4% in 2023, with 5,694 projects announced, remaining 11% lower than pre-pandemic levels and 14% behind the 2017 peak. EY noted that this is “surprising”, given that 67% of executives cited plans to invest in Europe in 2023, and 53% the year prior.

Looking at the top countries for FDI, France keeps the leading position but experienced a 5% drop in FDI, UK comes in second with a 6% increase (recovering its -6% drop in 2022), while Germany sits in third place with a decrease of 12%, prolonging its decline in projects since the onset of the pandemic. Firms in the US, the biggest contributor to Europe’s FDI, declared 15% fewer projects in Europe in 2023.

Overall, manufacturing investment in Europe dipped by 1%, yet supply chain reorganisation benefitted some Southern and Eastern European nations. Investment in business services, sales and marketing activities at the European level remained strong, growing by 12% and 6% respectively. Interest in Europe’s traditionally largest sectors for FDI (software/digital and IT services, as well as business and professional services) diminished due to cost-cutting and a general decline in outsourcing.

Turning to perceptions, EY underscored that the outlook is positive with 72% of executives planning to invest in Europe over the next year, and 75% optimistic about Europe's attractiveness increasing over the next three years. Yet, only 52% of firms with operations outside the region expect Europe’s attractiveness to increase.

Luxembourg ranked first in the total FDI projects per capita (per 100,000 inhabitants), with 5.67 projects per capita, down from 5.83, for the third consecutive year. The Grand Duchy saw a slight decline in FDI projects from 37 in 2022 to 36 in 2023.

FDI was directed mostly into the finance (28%), business & professional services (22%) and software/digital & IT services (14%) sectors. Investors mainly established “business services” projects, which account for 44% of all FDI activity, down from 54% in 2022. This is followed by manufacturing (14%) and headquarters (14%) projects.

Investor interest in Luxembourg has surged, with 72% (up from 46%) planning to invest within the next year, and 60% (up from 51%) expecting Luxembourg's attractiveness to increase over the next three years. Executives expect financial services and utilities to be the biggest drivers of future growth, with software/digital and IT services dropping from tied first in 2023 to fourth place in 2024.

Talent continues to be a key risk factor for the allure of Luxembourg's financial and non-financial sectors. Nonetheless, the tight labour market poses less of a concern in Luxembourg compared to other nations: only 17% view it as a risk, versus 41% in the UK's non-financial sector, 32% in Ireland, 29% in Belgium and 21% across Europe. Consistent with the previous year, executives maintain that to stay competitive, Luxembourg should concentrate on supporting high-tech industries and innovation, as well as providing support for small and medium-sized enterprises (SMEs).

The intention to invest in Luxembourg has never been so high, EY emphasised. It is possible that some of the positive perceptions around intentions to invest could be influenced by both the results of the election and the comprehensive coalition agreement of the new government, which has made balancing business expectations and national interests a clear priority. Now, with investor perceptions at their most positive, the government is primed to grasp this short window of opportunity to convert intentions into concrete foreign direct investment.

Strategic organisation and prioritisation will be needed to enable the timely execution of plans, with a particular focus on the investment fund centre, industry 4.0, innovation and R&D, startups and SMEs, talent development and tax reform, EY added. 

According to EY, Luxembourg's investment fund sector must act swiftly to differentiate and grow, innovating to stay ahead without overhauling its core.

EY emphasised the importance of streamlining modernisation, particularly in administration and strengthening ties with the US to enhance political and business engagement. Attracting top talent through incentives and improving those for management and investors is crucial, EY noted. Effective ecosystem coordination and embracing trends like ELTIF 2.0 and AIFMD 2, while maintaining a leading role in sustainable finance, were also described as “essential”.

Luxembourg executives highlight supporting high-tech industries, innovation and SMEs as top priorities. The successful model in the space sector, driven by consistent FDI and a thriving ecosystem of over 80 companies, should be replicated in health tech and defence sectors, aligning with the country's land and energy challenges, noted EY. Plans to mobilise land for housing and industrial use are progressing, with effective implementation being key. Securing efficient, cost-effective energy sources is “vital”, given Luxembourg's commitment to sustainability and decarbonisation, which investors recognise as integral to meeting foreign investment expectations and fostering future industries.

Delivering on tax pragmatism, certainty and transparency, as outlined in the coalition agreement, is also critical, according to EY. Perceptions of Luxembourg's tax policies have improved, with optimism about tax certainty, stability, management compensation and sectoral tax incentives, though the corporate tax rate is viewed less favourably, as per the survey’s findings. The new government's reform discussions and preliminary measures are positive steps, but the business community seeks substantial legislative transformations. Aligning the corporate income tax rate closer to the European average and ensuring legal certainty in tax law will be crucial to addressing concerns about litigation risks.