How Foreign Investment Is Reshaping Europe While Widening Regional Divides

Europe attracts vast foreign investment, but most of its benefits are captured by a small number of regions with strong skills, innovation, and infrastructure, leaving many areas and SMEs behind. Without targeted, place-based policies to strengthen local capabilities and link SMEs to global firms, foreign investment risks deepening regional divides rather than driving inclusive growth.

Foreign investment has long powered Europe’s economy, bringing capital, technology and jobs. Yet a new OECD report shows that while Europe attracts vast amounts of foreign direct investment (FDI), its benefits are spreading less evenly than many policymakers hoped. Produced by the OECD Directorate for Financial and Enterprise Affairs and the OECD Centre for Entrepreneurship, SMEs, Regions and Cities, with support from the European Commission’s Directorate-General for Regional and Urban Policy, the study examines how foreign investment connects with small and medium-sized enterprises (SMEs) across the EU, and why that connection often fails.

On the surface, Europe remains a global investment magnet. The EU hosts about USD 12.4 trillion in inward FDI, roughly a quarter of the world's total. Multinational companies are deeply embedded in European supply chains. But investment flows have become highly unstable. After peaking in 2015, inflows collapsed during the pandemic, plunged again in 2022 amid energy shocks and geopolitical tension, and have only partly recovered. For SMEs, this volatility makes long-term planning harder and weakens opportunities to build lasting partnerships with foreign firms.

A Continent Split Between Winners and Bystanders

The report’s most striking finding is how unevenly foreign investment is distributed. A small number of metropolitan regions , often capital cities or major industrial hubs, attract most new projects, while many regions receive little or none. Inequality in FDI across regions is more than three times greater than inequality in income. Crucially, most of this gap exists within countries rather than between them, reflecting growing divides between booming urban centres and struggling regional economies.

What makes this pattern worrying is how persistent it is. Over the past two decades, about 85% of EU regions have remained stuck in the same position in the investment ranking. Even major crises, from the financial crash to COVID-19, changed volumes but not the map. Foreign investors tend to return to familiar locations, reinforcing “winner-takes-most” dynamics and limiting opportunities for lagging regions to catch up.

Green and Digital Investment Raises the Stakes

At the same time, the nature of foreign investment is changing. Digital activities now account for more than one-third of new inflows, while clean energy has surged to around one-fifth, driven by Europe’s climate goals and industrial strategy. Traditional manufacturing remains important but no longer dominates.

These shifts create new opportunities but also new barriers. Digital and clean-tech investments demand skilled workers, strong research capacity and reliable infrastructure. Regions that already have these assets are best placed to benefit, while others risk being left further behind. As a result, Europe’s green and digital transitions may widen regional gaps unless more places can meet these higher requirements.

Why Local Conditions Matter More Than Money

The report shows that attracting foreign investment is only half the battle. What matters more is what happens after it arrives. Regions with skilled workforces, active innovation systems and good transport links are better at anchoring foreign firms and turning investment into productivity gains. To capture this, the OECD created an “FDI Readiness Index” combining education, R&D spending and infrastructure.

Some regions in Central and Eastern Europe have improved on all three fronts and are beginning to attract more investment. But overall differences remain large. Regions with similar income levels often perform very differently, depending on whether their conditions reinforce one another or remain weak.

SMEs Hold the Key to Lasting Benefits

Small and medium-sized enterprises sit at the heart of this story. SMEs account for 99% of EU firms, yet their ability to connect with multinational companies varies widely. Where SMEs are productive and active in technology-intensive sectors, foreign investors are more likely to buy locally, share know-how and support innovation. Where SMEs lack scale or capabilities, investment often stays isolated.

Firm-level evidence from Germany, Italy and Romania shows that foreign investment raises productivity mainly among SMEs, not large domestic firms. The biggest gains occur when foreign companies source from local suppliers. Manufacturing SMEs benefit most, while service firms see weaker effects. Importantly, when investment does reach poorer regions, SMEs there often see larger productivity gains than those in richer areas, showing that the potential payoff is high, even if the chances are low.

Making Investment Work for More Places

The OECD’s message is clear: foreign investment does not automatically deliver inclusive growth. Attracting projects is not enough. Governments need place-based strategies that invest in skills, innovation, and infrastructure, upgrade SME capabilities, and actively connect local firms to global investors. Without that effort, Europe risks entering its green and digital future more globally connected than ever, but increasingly divided at home.