Investment and the EU economy (10/04/2012)

On 10 April 2012, the EU and US agreed on a Statement of Shared Principles for International Investment. It is one step in the EU's overall commitment to open and stable investment regimes.

How does investment boost economic growth? 

Foreign Direct Investment (FDI) is one of the most important channels through which financial globalisation benefits the economy.
Open economies tend to grow faster than closed economies .

Europe’s openness to FDI increases our competitiveness. Equally, the ability of our firms to invest abroad enables them to grow globally and create jobs both at home and abroad.

In particular, the EU receives a net positive income from FDI with the rest of the world of around €75 billion per year. This positive net income creates demand for European labour across all sectors in the economy  .

FDI improves the competitiveness of EU firms by reducing costs and allowing for economies of scale. This in turn is positive for jobs at home. Firms investing abroad experience 25%higher employment after 3 years compared to the firms in the same activity sector which did not invest abroad.
Productivity gains from outward FDI have increased EU GDP by €20 billion. Of the €20 billion, EU workers have benefited of €13 billion.

Impacts of FDI on the wider economy in terms of growth

  • Increases in factors of production, such as increases in capital stock. “Greenfield” investments are less likely to crowd out local investment than Mergers & Acquisitions, and thereby increase capital stock and output (Ries 2002).
  • Increases in productivity from increased investments in Research & Development, intangible assets, technology, and human capital.
  • These growth enhancing drivers may be reinforced by increased technology diffusion, the acquisition of new skills and better organisational and management practices.

What attracts foreign investment?

Economic studies show that a primary condition to attract FDI flows is an open investment policy. This has to be complemented by solid guarantees for the protection of investors and of their investments, a level playing field and an effective system to resolve disputes.
The World Bank 2010 report "Investing Across Borders"  indicates that:

  • Restrictive and obsolete laws and regulations impede FDI
  • Good regulations and efficient processes matter for FDI
  • Red tape and poor implementation of laws create further barriers to FDI
  • Effective institutions help foster FDI

In addition according to 2011 Ernst & Young survey , when considering where to invest in 2010, companies view transport and logistics infrastructure (63%), telecommunications infrastructure (62%) and stability and transparency of the political, legal and regulatory environment (62%) as the most critical factors. The next set of criteria addresses the ability for companies to remain productive (57%) in a very competitive world: finding skilled workers (50%), making sure that labour pools are reliable (54% want a stable social climate), while maintaining competitiveness (50% cite labour costs, ranked only seventh).

What is the EU doing on investment?

The Treaty of Lisbon included investment as part of the EU Common Commercial Policy, an exclusive competence of the EU. As a consequence, the European Commission can now negotiate on behalf of the EU 27 Member States on both the liberalisation and protection of investments.

Upon the entry into force of the Lisbon Treaty on the 1st of December 2009, the total number of Bilateral Investment Treaties worldwide raised to approximately 2750 treaties. According to the UNCTAD 2011 World Investment Report , in 2010 a total of 54 Bilateral Investment Treaties were concluded, 20 of which were signed between developing countries and/or transition economies. A bit less than half of the Bilateral Investment Treaties existing worldwide are concluded between EU Member States and third countries. The EU's intention is to gradually replace those Treaties by Investment Agreements at EU level.

Therefore, the European Commission has presented a proposal for a Regulation of the Council and the European Parliament to ensure the legal certainty under EU law of the existing Bilateral Investment Agreements of the EU Member States with third countries (IP/10/907).

The European Commission is currently negotiating on investment as part of the FTA talks with Canada, India and Singapore.

Is outsourcing/delocalisation responsible for unemployment?

The EU is the first destination for international investment projects creating or preserving jobs. It attracted 33% of those investment projects in 2010 against 27% for the US and 25% for Asia and Oceania
In 2010, the number of FDI projects in Europe rose by 14% year-on-year and 137,337 new jobs were created as a result, i.e. a 10% increase year-on-year .

India and China are successfully investing in Europe (even if these investments represent a small share of foreign investments, thus creating new jobs, maintaining existing jobs (such as Volvo, Jaguar, Range Rover ) and contributing to EU economic growth.

Jobs displaced or relocated abroad represent only a marginal share of total job layoffs: between 0.5% and 2.0% .

For every 100 jobs going abroad, at least 50 new jobs are created immediately in the same firms  .

  1. Estimates point to average gains of 4% of national income for a reduction of 10% of trade restriction. OECD (2003), “The Sources of Growth in OECD Countries”, Paris.
  2. Copenhagen Economics – Impact of EU outward FDI. The Study is available at the following link:
    http://trade.ec.europa.eu/doclib/docs/2010/june/tradoc_146270.pdf
  3. Hijzen, A., S. Jean and T. Mayer (2009), The Effects of Initiating Production Abroad: Evidence from Matched French Firms, University of Nottingham Discussion Paper 24.
  4. Copenhagen Economics – Impact of EU outward FDI.
  5. Agence Française pour l'Investissement International – 2010.
  6. Ernst&Young, 2011 European attractiveness survey.
  7. Agence Française pour l'Investissement International – 2010
  8. Ernst&Young, 2011 European attractiveness survey.
  9. Without Chinese and Indian investments these companies could have disappeared. They are now successfully exporting a substantial share of their production outside Europe.
  10. Copenhagen Economics – Impact of EU outward FDI.
  11. Ibid.