[SINGAPORE] Investors are largely optimistic about Europe's attractiveness as an investment destination in the medium term, according to Ernst & Young's 10th annual European Attractiveness Survey.

The report combines an analysis of international investment in Europe over the last year with a survey of 840 global executives on their views about how and where global investment will take place in the next decade. Conducted early this year, the survey shows that more than 80 per cent of respondents are confident that Europe will overcome the ongoing economic crisis.

Given the fragility of the eurozone economy, only 26 per cent of respondents have plans to establish operations in Europe in 2013, a drop from 33 per cent who were planning to invest in 2011. More than 25 per cent, however, are eyeing possible acquisitions - a sign that many European assets are expected to become available as vendors adjust their expectations on recovery prospects and valuations.

Given the fact that many companies are sitting on cash, mergers and acquisitions (M&A) could be an important complement to greenfield investment in 2013.

Among survey respondents, 36 per cent foresee an improvement in Europe's future attractiveness. This figure rises to 51 per cent among investors from the United States, India, China and Japan, which demonstrates Europe's enduring strong attraction to investors. This is in line with Western Europe, and Central and Eastern Europe ranking second and third respectively behind China as the most attractive destinations for foreign direct investment (FDI).

Said Marc Lhermitte, head of Ernst & Young's International Location Advisory Services and author of the report: "Despite the current turmoil in Europe, its fundamental strengths continue to endure. While the spotlight has focused on the world's rapid-growth economies, Europe too remains a key destination for foreign investors. It remains the world's largest single economy and the attraction of its 500 million high-spending consumers, together with a stable and transparent legal and regulatory environment, remain a powerful draw for investors."

In terms of FDI, the survey showed that inward investment continued to rise in Europe in 2011. There was a 2 per cent increase in projects across Europe, from 3,757 in 2010 to 3,906 in 2011, with the total number of projects significantly higher than pre-crisis levels.

Despite Europe's economic volatility, the average project was markedly larger and FDI job creation was up 15 per cent, with the US continuing to be the largest investor in Europe. Results showed a 6 per cent increase this year (1,028 projects, 26 per cent of the total) compared to the number of projects that the US invested in last year, and is the highest figure this decade since the survey began.

The UK remained the most attractive country in Europe for investments in 2011 with 679 projects (17 per cent of the total). The French total fell to 540 and was overtaken by Germany for second place, which secured 579 projects in 2011, reflecting its relatively strong economic performance.

Interestingly, Spain achieved a 62 per cent increase in the number of projects to 273 (+104 FDI announcements over 2010) as investors saw opportunities in its provision of relatively low labour costs and a highly skilled and educated workforce.

The business services and software sectors were the main recipients of FDI projects in Europe with an increase of 19 per cent to 666 and 15 per cent to 436 respectively, and accounted for 28 per cent of total projects in 2011, providing more than 16,000 jobs. The automotive sector also saw an increase in FDI projects from 258 last year to 270, and it was also the sector that created the highest number of jobs at 37,790. The sectors that saw the biggest declines were financial intermediation (16 per cent drop) and electronics (8 per cent drop).

Mr Lhermitte also said: "Despite investors remaining cautious, early indications show that foreign investment in Europe is holding up. However, given the current economic climate, it remains to be seen if this will hold true for the rest of the year."

Indications for 2012 appear encouraging despite the impact of the weakening European economy and ongoing political challenges on FDI flows into Europe.

Mark Otty, Ernst & Young area managing partner for Europe, Middle East, India and Africa, said: "Against the backdrop of the eurozone crisis, it is essential that solutions are found to Europe's pressing educational, entrepreneurial and innovation challenges. These issues must be addressed to create the conditions for balanced and sustainable growth. Continued strong FDI will be pivotal in achieving this goal."