EY Luxembourg at a press conference on 15 June presented the second edition of their Luxembourg attractiveness survey, which explores Luxembourg’s performance in foreign direct investment (FDI) and how its competitiveness is perceived.

The EY Europe Attractiveness Research, which has existed for 22 years, looks at the number of announced FDI projects throughout Europe during a calendar year. The second element of the research--which consists of a survey conducted in early 2023--gathers perceptions of a country’s attractiveness.

“In this election year, now more than ever, Luxembourg’s national objectives are a critical topic of discussion for politicians, lawmakers, business owners and citizens alike,” said , country managing partner of EY Luxembourg, in his foreword to the report. “The strategies set out now will play an important role in attracting or discouraging FDI in the country over the next few years.”

Here are a few takeaways from the survey.

67% plan to invest in Europe, 46% plan to establish or expand in Luxembourg

EY’s research found that a total of 5,962 FDI projects were announced in Europe in 2022, a very slight increase of 1% compared to the year before and 10% below the peak of 6,653 projects in 2017. Reasons for this may include economic uncertainty and Russia’s continuing war in Ukraine.

Despite this stagnation, however, the survey found that 67% of investors plan to invest in Europe in the next year. This figure is the highest it’s been in 20 years. 46% of respondents said that they plan to establish or expand operations in Luxembourg. “It’s the highest ever,” said , EY Luxembourg’s head of communications, during the press conference. “Even if it’s lower than the European result, it’s still a very good result. Now we need to see how this appetite will translate in the future.”

37 projects for the grand duchy in 2022

Luxembourg counted 37 FDI projects last year--an increase of 48% compared to 2021 (when 25 projects were counted)--and remains the number one country for investment projects per capita, said the survey.

The finance and digital/IT/software sectors were the biggest contributors, with 27% and 24% of market share, respectively. Survey respondents also said they expected the financial services and software/IT services sector to drive Luxembourg’s growth in the coming years.

“On the surface this is positive, but we caution over-optimism, as the types of projects Luxembourg is attracting are seemingly moving in the direction of ‘business support activities,’” said Coekelbergs in the report. “This calls into question how well the grand duchy is perceived as a location for core functions, such as manufacturing plants or research hubs.”

Ireland, the survey noted, is a “country to watch.” The country--which is often seen as one of the grand duchy’s competitors--has seen a 21% increase in FDI, while 53% of investors said they plan to start or increase operations there. Ireland’s fund industry is growing, and further investigation into the differences between Luxembourg and Ireland’s markets will be needed for Luxembourg to keep its pro-business perception in the eyes of investors, said the report.

Attracting and retaining talent

Talent is both a positive influence on companies’ investment decisions in Luxembourg’s financial hub, but also a risk for the sector, said EY’s report. 27.4% of investors said that the country’s “unique pool of multilingual, highly skilled talent” is the most important factor that influences their company’s investment decision’s in Luxembourg’s financial hub. But 56% said that “the capacity to keep talent in the country” is a risk that impacts attractiveness.

The development of technical skills through apprenticeships, addressing socioeconomic factors such as expat visas, teleworking or the housing crisis, and better planning for future talent needs--the report refers to Luxembourg’s , which will begin in September 2023--are some examples of ways to attract and retain talent.

Support for high-tech industries and innovation top focus area

Reducing taxation has dropped from the top area for Luxembourg to focus on to remain competitive, named by 44.1% of survey respondents in 2022, to sixth place in this year’s survey (17.2%). What will be key is a modernisation of tax law, as well as certainty and clarity around the Anti-Tax Avoidance Directive (Atad) 3 and Pillar Two global minimum tax rules, said the report. Readjustment of individual taxation could also make Luxembourg more attractive.

The drop of taxation to sixth place, however, does not mean that tax policy should be “pushed to the background,” said , EY Luxembourg’s partner and tax leader, at Thursday’s press conference. “There is a clear need to stimulate attraction of businesses,” he added, which could be done, for example, through investment incentives or tax deductions when investing in startups. But what is most needed “is certainty and clarity,” he said. “This is important to attract and keep the international business that is there.”

The top focus area in this year’s survey is support for high-tech industries and innovation, cited by 40.4% of respondents, followed by support for small and medium-sized businesses (36.4%).

Future growth in sustainable finance and retailisation of private assets

Luxembourg’s position as “one of the major global hubs for sustainable finance” is the second-most important factor driving investment in the country’s finance hub, found EY’s survey. Though Luxembourg had a “good head start” in the field, more needs to be done to “keep the momentum going,” said the report. More coordination amongst market players, lawmakers, associations and academics could help drive the development of green finance, for instance, and allow Luxembourg to play a more active role.

“One of the key things we should particularly stress moving forward is the capability of Luxembourg’s ecosystem in the financial sector to be compliant and agile,” EY Luxembourg consulting partner  said during the press conference. “We know that we are heavily competing against other countries, like Ireland, for example. We need to take the lead--like in sustainable finance--not to just replicate the regulation into the local law, but just to go faster, forward, be more proactive. And we need to work together with the regulator.”

The domain of alternatives is another area where Luxembourg can grow, in particular thanks to the . Eltif 2.0 may bring opportunities in terms of retail investors, but alternative asset managers will also need to make some adjustments, such as in liquidity modelling mechanisms or IT infrastructure, said the report.

Space sector gets more popular

Luxembourg’s space sector is seeing “consistent” research and development investments, noted the survey, and “promotion of Luxembourg as a destination for space R&D should continue.” With the Luxembourg Space Agency, government space-related programmes, incubators supporting startups and other initiatives, the grand duchy’s space industry is “dynamic, progressive and thriving.”

Efforts to connect with other space industries, scouting and networking should continue in order to boost growth in this area, said the report.

“Luxembourg is still well-placed as a destination for foreign direct investment in Europe. It remains resilient, in contrast to some stagnation in Europe. However, strong acceleration is needed if we want to grasp opportunities,” Coekelbergs said at the conclusion of the press conference. “Whether finance, industry or space, we clearly need to act on tax and people elements. We are not yet in the top three. At the end of the day, we are number eight in the perception of attractiveness. We might just be slowly climbing the ladder.”

Find EY’s full Luxembourg Attractiveness Survey 2023 .