Luxembourg’s post-Brexit boom in financial sector relocations and foreign direct investment is over, according to an EY study on the Grand Duchy’s attractiveness that was released on Tuesday.
Foreign Direct Investment, FDI, in Luxembourg witnessed a major shift last year as business services investments slowed due to the combined effects of the Covid-19 pandemic and fading post-Brexit financial sector investments while industrial investments, particularly in manufacturing, saw a steep increase in their total share of the pie.
According to the EU Luxembourg Attractiveness Survey 2022, the combined share of the business services and finance sectors in FDI dropped to 28 percent last year, after it accounted for 78 percent of total FDI in 2020.
The share of the financial sector in total FDI fell to 20 percent last year from 44 percent a year earlier. Across Europe, the financial sector makes up for a relatively small part of overall foreign investment projects, or 5.5 percent, according to EY.
No relocation effect last year
Speaking at a press conference, Olivier Coekelbergs, managing partner at EY Luxembourg, attributed the decline to the combination of a “very strong Covid effect” with the “end of Brexit effect”, referring to the fact that, after an initial wave of relocations to Luxembourg in the years that directly followed the 2016 Brexit vote.
“There was no relocation effect in 2021,” he said.
EY advised Luxembourg to consolidate its position as a leader in asset management, referring to its ability to attract and retain talent as the two biggest risks to the attractiveness of the country as a financial hub.
‘Talent topic must be tackled’
“To maintain its status as the largest investment fund center in Europe, the talent topic must be tackled, especially in technology and sustainability which are expected to transform the industry shortly,” the EY study said.
On the flipside, manufacturing investments increased last year due to increasing interest of companies in near-shoring and reshoring, bringing back production capacity that had earlier been relocated to regions outside Europe such as China. Manufacturing sites and R&D centers represented 44 percent of total investments last year.
“Many initiatives that were put on hold during the health crisis have been resurrected, while businesses have begun to rearrange supply chains, innovate and respond to the e-commerce boom,” the EY report said.
Europe saw a return of foreign direct investment last year with an increase of 5 percent in the number of greenfield and expansion projects in 43 countries, to a total of 5,877 projects. This level however is still 12 percent below the record set in 2017.
France takes top spot in Europe
With an increase of 24 percent in the number of projects, France was considered the most attractive place to invest, followed by the UK, which witnessed a rise of 2 percent. While the number of projects in Germany decreased 10 percent last year to 841, Germany was the third destination in Europe last year.
EY said Luxembourg, with an increase of 39 percent to 25 foreign investment projects, ranked first when measuring the number of projects per capita.
The EY study was based on an assessment of the number of projects that innovate and create jobs and did not mention specific investment numbers for FDI in Luxembourg last year. According to the World Bank’s balance of payments database, total FDI in Luxembourg stood at 62.4 billion dollars in 2020, up from 14.8 billion in 2019.
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