Foreign Direct Investment (FDI) Trends in Europe and the UK: Opportunities for SMEs in 2025

Foreign Direct Investment (FDI) remains a vital engine for economic growth and innovation across Europe and the UK. Recent data from leading sources, including EY’s 2025 European Attractiveness Survey and FT Location’s fDi Report 2025, reveal a nuanced picture. While FDI volumes have declined in some key markets, emerging opportunities and sectoral shifts offer fresh avenues for SMEs to consider as they plan international growth or partnerships.

This article analyses the latest European and UK FDI trends, highlighting what the data means for strategic planning, risk management, and opportunity identification in 2025.

1. FDI in Europe and the UK: A Slowdown but Not a Collapse

• Overall Decline in Project Numbers: According to EY, Europe saw a 5% decline in FDI projects in 2024 compared to 2023. This marks the second consecutive year of falling investment. The total number of projects reached a nine-year low, 19% below the 2017 peak and 16% below pre-pandemic levels.

  
  

• Key Markets Hit: France, the UK, and Germany — the top three FDI destinations in Europe by volume — each experienced double-digit drops in project numbers. France saw a decrease of 14%, the UK 13%, and Germany 17%. Greater London, Europe’s leading region for inward investment, experienced a 31% decline in projects1.

  
  

• Sectoral Shifts: Manufacturing FDI dropped by 9%, with greenfield projects down 20%. This signals caution in capital-intensive sectors. Software and IT services, historically the largest FDI sector, declined by 17% in Europe and 37% in the UK2.

  
  

• Job Creation Impact: Despite fewer projects, the UK led Europe in FDI-related job creation, with 38,196 new roles. This reflects a focus on higher-value projects such as R&D and manufacturing expansions1.

  
  

2. Why the Decline? The Bigger Picture for SMEs

• Economic and Geopolitical Headwinds: Slow economic growth, high energy prices, and geopolitical tensions—including trade uncertainties and US tariff policies—have made investors more cautious4.

  
  

• Shift Toward Quality Over Quantity: The UK’s Office for Investment strategy prioritises fewer but higher-quality projects. This focus is on capital and infrastructure investments, R&D (with a 32% increase), and headquarters projects2.

  
  

• Rise of Intra-European Investment: More than 60% of European FDI originates within Europe itself. This is often from SMEs investing in neighbouring countries, which may be less sensitive to global geopolitical shifts2.

  
  

3. Bright Spots and Opportunities for SMEs

• Emerging Growth Markets: Spain (+15%), Poland (+13%), Italy (+5%), Denmark (+86%), Austria (+31%), Switzerland (+25%), and Finland (+13%) showed notable FDI growth. This growth is driven by competitive costs, skilled labour, and EU funding programs like NextGenerationEU. There has also been a significant rise in business services and sales & marketing projects3.

  
  

• Sectoral Opportunities:

- Renewable Energy: This sector remains the top global FDI sector by capital investment globally, with $258 billion in 2024, of which $82.3 billion went to Europe. This offers SMEs opportunities in green technologies, supply chains, and services5.

- Communications: Investment more than doubled despite fewer announced projects. This indicates that a handful of mega-projects were behind these numbers3.

- Semiconductors: Capital investment surged by 140%, driven by Asian firms expanding in Europe and North America. This highlights opportunities in advanced manufacturing and tech3.

- Pharmaceuticals: Project numbers saw the largest sectoral increase of 27%, with capital expenditure up 116%. This signals very strong growth in life sciences4.

• UK’s Strategic Position: Despite declines, the UK remains Europe’s most attractive FDI destination, attracting 1,006 projects. It is especially appealing for tech, life sciences, and HQ investments. Its diverse investor base, including growing ties with India and Commonwealth countries, offers SMEs access to broader networks and markets4.

  
  

4. What This Means for Corporate Strategy

• Reassess Market Entry and Expansion Plans: SMEs should consider the evolving FDI landscape. Traditional hubs face challenges, but emerging markets and sectors offer growth. Spain, Poland, and the Nordics may provide cost-effective and skilled environments for expansion.

  
  

• Focus on High-Value, Strategic Investments: Align growth initiatives with sectors attracting capital, such as renewables, digital infrastructure, semiconductors, and pharmaceuticals. These sectors benefit from government support and global demand, reducing risk.

  
  

• Leverage Intra-European Investment Trends: SMEs can capitalise on regional cross-border investments, which are less affected by global geopolitical shocks. Collaborations and partnerships within Europe can be more stable and agile. This can also offer a highly developed ecosystem of business supports.

  
  

• Prepare for Regulatory and Cost Challenges: High energy costs and regulatory complexity remain concerns. SMEs should invest in compliance expertise and energy-efficient operations to mitigate these risks.

  
  

• Explore Government and EU Funding: Programs like NextGenerationEU provide substantial funding for innovation and infrastructure projects, particularly in Southern and Eastern Europe. SMEs should actively pursue these opportunities to supplement private investment.

  
  

• Monitor US and Global Policy Impacts: US trade policies and incentives influence investment flows. SMEs with transatlantic operations or supply chains should stay alert to tariff changes. They should consider diversification strategies as these not only affect US-related investment but also countries reliant on US aid to fund their investment promotion programs.

  
  

5. Conclusion: Navigating a Complex but Opportunity-Rich Environment

The 2024-25 FDI data underscores a period of adjustment rather than decline for Europe and the UK. While headline numbers have softened, the quality and strategic focus of investments are improving. Clear sectoral and regional winners are emerging.

The key takeaway is to adopt a nuanced, data-driven approach to international growth. This means targeting markets and sectors with momentum, leveraging intra-European investment dynamics, and aligning with broader economic and policy trends.

By doing so, SMEs can not only survive but thrive amid shifting global investment patterns. This will help secure long-term growth and resilience in an uncertain world.

Ravelyn Consulting helps SMEs decode complex market trends and develop actionable international growth strategies. Contact us to learn how your business can capitalise on evolving FDI landscapes.