Foreign direct investment linking growth in different territories

A better understanding of FDI inflows and their effects on cities and regions helps to embrace the benefits of globalisation and prevents potentially negative effects. With the ‘right’ policy framework FDI in Europe can support financial stability, promote economic development and enhance well-being in societies.

Productivity gains among local firms are higher in services in urban areas. Productivity gains from foreign owned-firms can emerge through different channels for hosting territories: (1) increased labour mobility; (2) learning from foreign firm production processes, so-called imitation or demonstration; (3) increased efficiency and faster adoption of new technologies; (4) new export possibilities and (5) vertical links between firms. These are direct relationships between foreign and domestic owned firms, for example local buyers and suppliers.

While non-European owned firms on average represent some 1% of the total number of firms, they account for 5% of employment, 11% of production and 9% of value added. There are large territorial differences in the share of foreign-owned enterprises per country. This ranges from 11% in Luxembourg to 0.1% in Belgium, Greece, Spain, Italy, Poland, Slovakia and Bosnia and Herzegovina. The share of employment in foreign-owned firms is highest in Luxembourg, followed by the UK, Hungary, the Czech Republic and the Netherlands. The value added is highest in Hungary, the UK, Luxembourg, the Netherlands and the Czech Republic.

Direct impact of non-European owned-firms is highest in urban regions, in particular capitals and metropolitan areas. 69% of all non-European owned firms in Europe are in urban regions, while 25% are in intermediate regions, and only 6% in rural regions. The focus on urban regions is more pronounced when analysing productivity spill over effects such as employment and value added (see map).

Non-European owned firms in urban regions account for 83% of employment and 81% of production (measured by operating revenue) generated by these firms across all regions. European capitals in particular benefit from foreign-owned firms.

Good domestic institutions and infrastructure support productivity gains from FDI. FDI is highly flexible. Urban areas are in general more popular due to close proximity between suppliers and buyers. The economic and financial crisis made differences between regions in their levels of global integration even clearer. The crisis reduced investment flows mainly in southern and eastern European countries. In 2007 southeast and eastern European countries received EUR 55 billion from FDI, which decreased to 23 billion in 2009.