Building Europe’s Green Economy: The New Dynamics of Cleantech, FDI, and SMEs

The report by the OECD explores how Europe’s cleantech manufacturing is transforming through foreign direct investment and SME integration, positioning the continent at the center of the global green industrial race. It argues that coordinated policies and stronger local linkages are vital to turning the green transition into lasting economic competitiveness and technological leadership.

The report “The Evolution of Cleantech Manufacturing: Implications for FDI and SME Linkages across Europe”, prepared jointly by the OECD Centre for Entrepreneurship, SMEs, Regions and Cities (CFE) and the OECD Investment Division, offers a sweeping analysis of how Europe’s clean technology manufacturing sector is reshaping its economic and industrial future. It argues that cleantech manufacturing now sits at the intersection of climate ambition, industrial policy, and economic competitiveness. The study explores how foreign direct investment (FDI) and SME participation can accelerate Europe’s green transition while strengthening domestic supply chains and regional resilience.

A New Industrial Revolution Rooted in Sustainability

Europe’s green transition is unfolding amid fierce global competition for clean manufacturing leadership. The United States has supercharged its renewable and battery industries under the Inflation Reduction Act, while China’s Made in China 2025 strategy continues to dominate global solar and EV supply chains. In response, Europe has rolled out the Green Deal Industrial Plan, the Net-Zero Industry Act (NZIA), and coordinated investment through Important Projects of Common European Interest (IPCEIs). The OECD study highlights that this surge of policy activism reflects not just environmental urgency but also a strategic bid for industrial sovereignty. The continent’s challenge, however, lies in converting political ambition and foreign capital into genuine local capability.

FDI as a Catalyst, and a Cautionary Tale

Foreign investors play a decisive role in scaling up Europe’s clean manufacturing base, bringing with them advanced technologies, expertise, and global market access. Yet, as the report cautions, FDI can be a double-edged sword. If investment inflows are not embedded within local ecosystems, the result may be economic enclaves rather than inclusive growth. Data from the report reveal that cleantech-related FDI tends to cluster in regions with established industrial infrastructure, skilled labor, and supportive policy environments. Northern and Western Europe have become powerhouses in renewable energy and electric vehicle production, while Central and Eastern Europe, especially Poland, Slovakia, and Hungary, are emerging as attractive hubs for component manufacturing. The OECD warns that unless these flows are paired with strong local linkages, they risk deepening regional disparities rather than closing them.

Empowering SMEs for the Green Transition

The study positions SMEs as the “connective tissue” of Europe’s cleantech value chains. These smaller firms provide the innovation, engineering precision, and agility that make large-scale green manufacturing feasible. Yet, many SMEs remain excluded from global value chains due to financing constraints, certification barriers, and technological gaps. The OECD calls for a strategic upgrading agenda, one that blends digitalization support, innovation grants, and integration into industrial clusters. Public procurement can also be leveraged to open opportunities for SMEs in renewable energy, hydrogen, and battery supply chains. The report emphasizes that without a deliberate policy push, SMEs risk becoming spectators rather than participants in Europe’s cleantech renaissance.

Bridging Policy Silos for Industrial Resilience

A central critique of the report is Europe’s fragmented policy architecture. Investment promotion, innovation policy, and regional development often operate in parallel rather than in synergy. The OECD urges governments to pursue policy coherence, ensuring that every euro of FDI not only creates jobs but also strengthens technological sovereignty and local value creation. The study spotlights how industrial policy is being rewritten in real time, with the rise of European gigafactories serving as a symbol of this shift. These massive battery plants, often developed through public-private partnerships, exemplify how collaboration between global investors and local firms can anchor new industrial clusters. The revival of solar photovoltaic production in Europe further underscores the potential of coordinated industrial policy to reclaim lost technological ground.

Europe’s Green Future: Cooperation Over Competition

The report offers a balanced yet urgent message. Cleantech manufacturing is not just an environmental priority; it is the foundation of Europe’s next industrial chapter. Achieving this vision demands a new model of governance that bridges global capital with domestic innovation. Europe must resist the temptation of protectionism and instead cultivate open, resilient ecosystems where multinationals, SMEs, and research institutions co-create value. The OECD believes that Europe still holds a competitive edge: world-class research infrastructure, skilled labor, and a strong regulatory tradition. But time is short. To remain a leader in the clean manufacturing revolution, Europe must transform its fragmented investment landscape into a unified industrial strategy, one that turns sustainability into its greatest source of strength.