Investors turning to Paris over London as Brexit fears bite

French capital ranked first for foreign direct investment by 37 per cent of businesses in Ernst & Young report

A picture taken on June 4, 2018 from the observatory deck of the Montparnasse tower in Paris, shows a view  the Eiffel tower and the Defense business district in background. / AFP / LUCAS BARIOULET

Paris has overtaken London to become the most attractive European city for investors for the first time in more than a decade as Brexit fears begin to taint the UK capital, according to a report.

The French city was ranked No 1 for foreign direct investment by 37 per cent of businesses in an Ernst & Young report published on Monday. Britain’s departure from the European Union and the election of French President Emmanuel Macron were among the reasons Paris overtook London for the first time since the EY survey began in 2003. The British capital came in second, followed by Berlin and Frankfurt.

The report, based on a survey of 502 companies and data from EY and International Business Machines, showed FDI in Europe grew 10 per cent last year, its lowest since 2013. While the UK topped the league tables with 1,205 of the 6,653 new FDI projects, the number was only 6 per cent higher than in 2016, showing a slowing in growth. France won 31 per cent more investments last year, and projects in Turkey increased 66 per cent.

“We’ve worked tirelessly to get London out of the doldrums of the ‘90s and into the top spot as the best city in the world for business,” said Jasmine Whitbread, chief executive officer of London First. “This must be a rallying cry for us all to redouble our efforts and keep our capital at the top of the global charts.”

Brexit was one of four main risks affecting 2017 investor sentiment in Europe, according to the report. The biggest concerns were geopolitical instability, such as the recent UK steel and aluminium tariffs on the region, and a rise in populist feeling. The UK, Germany and France were the most attractive countries overall for foreign investment.

One key Brexit-related effect was a reduction in the number of companies setting up or relocating their headquarters to the UK last year. In 2016, 51 per cent of new headquarters in Europe were placed in Britain, while only 26 per cent of businesses picked the country for their top hub last year.

A number of businesses are looking at moving headquarters and offices around Europe in response to the UK’s decision to leave the single market and the customs union after Brexit. Faced with the prospect of regulatory divergences and tariffs, businesses are trying to shore up their bases on both sides of the Channel to avoid being caught out.

While the Netherlands has been chosen by a number of entities as a post-Brexit base, including the European Medicines Agency, investment inflows fell 17 per cent last year. One factor may be rising wages, which averaged €34.80 (Dh150.9) an hour last year. While wages are also growing in some central eastern European economies, they’re still far lower at €9.40 in Poland and €11.30 in the Czech Republic, according to Eurostat. The average hourly wage in the UK for 2017 was €25.70.

With “protracted Brexit negotiations between the UK and mainland Europe, governments in Europe need to remember that it’s the relative attraction of the whole that keeps investment momentum,” said Andy Baldwin, EY area managing partner for Europe, the Middle East, India and Africa.