While Europe is still number one in attracting foreign direct investments, both Western and Central and Eastern European zones lost 13 points in their attractiveness score - from the previous year, in favor of China and India which provide direct competition at a global level.

Faced with these competitors and others from emerging markets, CEOs urgently request several strong reforms.

Investors' priorities focus on greater flexibility (47%), simpler administrative procedures (44%) and more support for innovation (35%).

Foreign direct investments: +15%, a new record for Europe in 2007

• Inward investment activity in Europe reached a record in 2006 with 3,531 project announcements, representing an annual increase of 15.2% (3,065 projects in 2005). 2006's increase was significantly above that of the previous year (5.3%). Among these investments, 71% were "Greenfield" projects, a further sign of investment intensity.
• The UK and France remained the top two destinations for FDI, with the UK's lead becoming more pronounced. Almost a fifth (19.4%) of the total number of FDI projects in Europe in 2006 was directed towards the UK, while France attracted 16% of projects.
• Investment in other European countries fell well behind these two market leaders, with the closest challenger, Germany, attracting 8% of projects. Romania experienced the highest growth in number of projects announced, from 86 in 2005 to 140 in 2006.
• Investments by European players continued to dominate investment flows, representing 50.4% of investments announced for 2006. BRIC countries (Brazil, Russia, India, China) increased their investments significantly, from 112 in 2005 to 163 in 2006, whereas US investors' interest declined from 35% in 2002 to 30% at the end of 2006.
• International investments resulted in the creation of a record 211,300 jobs (+8.3%). Poland was number one in terms of FDI job creation (15% of the total). UK and France remained second and third respectively (27,481 jobs created in the UK and 20,509 in France). Averages of 101 jobs were created per project across Europe. Investment projects in Central and Eastern Europe were particularly labor intensive. While Central and Eastern Europe attracted only 26% of investment projects, they benefited from 51% of the new jobs created by foreign investors. This represented an average of 217 jobs per project, compared with 64 jobs per project in Western Europe.

Investors perceptions: New emerging competitors gain ground on Europe (-13 points).

• Western Europe's attractiveness for foreign investors declined significantly in 2007, along with Central and Eastern Europe. Both European areas lost 13 points in their attractiveness rating between 2006 and 2007. Although European mature economic markets retain their global lead for headquarters functions, investors prefer the Asian zone for many production operations and call center functions.
• China and India reshuffle the cards: China ranked second on the attractiveness podium for 48% of CEOs surveyed, reducing the gap with Western Europe to seven points. India (26%) also gained ground to reach the fifth place in the CEOs' top 10 economic zones. Nonetheless, these two zones do not yet meet the demands of investors for high added-value activities.
• Europe's economic focus continues to move Eastward. As a result France and Spain no longer enter into the top 10 preferred countries for investment, although Germany and the UK maintain their position. Poland and the Czech Republic strengthen their position in the ranking.
• Central and Eastern Europe's favorable labor environmental image is more and more challenged (the number of respondents ranking it top for this strategic location factor in 2007 fell to 18%, from 27% in 2006) and the region appears to be having difficulty in convincing investors of its merits as an "all-round" business location. The 2007 survey reveals that Central and Eastern Europe has ceded its second position to China in the ranks of regional attractiveness, after maintaining a consistent second place in Ernst & Young's previous surveys.

Labor flexibility, simplified regulations, and strong support for R&D: urgent reforms needed

• Despite the gain in popularity of more dynamic FDI destinations, business leaders express confidence in Europe's future, with 56% believing its attractiveness will improve over the next three years. Most of the improvement in perceptions is related to the prospects for Central and Eastern Europe, with almost three-quarters (71%) of our global panel believing its attractiveness will improve. Half of respondents plan to develop their activities in the enlarged Europe.
• In order to improve Europe's attractiveness, investors cite, above all, the need for reforms providing greater flexibility (47%), simpler administrative procedures (44%) and more innovation support (35%).

Is Europe's eco-attractiveness the key to making a difference?

• Over two-thirds (67%) of respondents take the environmental performance record of their target area into account in their choice of location, with 30% considering environmental issues play a strong part in their decision making process. Only 9% of those surveyed stated that environmental issues played no part whatsoever in their implantation preferences.
• Over half (56%) of respondents believe that the adoption of new environmental regulations by European countries would provide a means of increasing its attractiveness and help to differentiate itself from other investment destinations.
• Potential investors pay the strongest attention to the level of environmental infrastructure (84%), while the level of environmentally-related taxation and regulations are also given serious consideration (81%).

"Aside from their obvious impact on the environment, decision makers estimate that the principal benefit to a country of eco-responsible industrial strategies is their stimulation of innovation and R&D (44%)," comments Marc Lhermitte, Partner Ernst & Young

Methodology:
The Ernst & Young European Attractiveness Survey uses two main information sources: a database of actual investment projects and expansion activity in the region (the European Investment Investor Monitor (EIM) created in 1997 by Ernst & Young), and the analysis of the perceptions and expectations of international senior executives following telephone interviews with 809 international decision makers by the independent market research company CSA between February and March 2007. The sample of companies interrogated was established to reflect the profile of European investors identified by EIM since 1997.

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