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Europe's west still best at attracting inward investment

Fears of investment being diverted from a high-cost EU into Eastern Europe and India are challenged by a new study of cross-border capital flows. 

Global capital still isn't flowing the way that naïve ROI calculations would predict, according to the latest annual Investment Monitor from accountants Ernst & Young. The 15% rise in foreign direct investment (FDI) into Europe went mainly to the west, with the east's main New Member States (Hungary, Poland and the Czech Republic) seeing falling numbers of new FDI projects in 2006. Romania and Bulgaria saw inflows increase in the run-up to their membership this year, but Russia also saw foreign enthusiasm decline, despite a booming consumer market. Convergence of wages towards EU levels faster than productivity, as labor markets tighten, may already be ending the trend for west-to-east “nearshoring” in favor of moves to more distant shores in Asia and other emerging-markets.

In the 'old' EU Britain remained the biggest national destination, with London and the south-east raising their proportion of the total despite congestion, tighter labor markets and escalating property prices. After the US, India was the second largest source of FDI into the EU and UK, as its companies' efforts to break into higher-income manufacturing and business service markets outweighed the migration of call centers and back-office services into the subcontinent. Whereas China can serve its new manufactured export markets from a distance, India's conquest of the global software and services market requires it to move closer to high-income customers.

Britain captured 19.4% of Europe's FDI last year according to E&Y, with France (with 16%) falling back after previously narrowing the gap, and Germany staying third with 13%. Whereas its lead in the 1990s centered on car-making and lighter manufacturing, Britain's FDI is now focused on business and financial services, electronics and software. While continued strong economic growth may be part of the explanation, the English language and London's concentration of financial markets have long been cited as attractions that are less closely linked to the state of the country's own economy. But the sustained inflow of foreign capital, financing a perennial current-account deficit, is an important factor in the economy's resilient growth. (financeweek.co.uk)