A new paper from McKinsey & Company shows that the UK and EU economies are still attracting investment from abroad. However, they are increasingly focused on high-risk investments in data centres, or volatile links with China, which US trade policies may still jeopardise in the years ahead.
A foreign direct investment (FDI) is an investment in the form of a controlling ownership in a business, in real estate or in productive assets such as factories in one country by an entity based in another country. The cumulative value of FDIs around the world had fallen steeply in the years before the pandemic – crashing to a decade-long low in 2018 – but has been rebounding rapidly since.
However, a new study from McKinsey & Company paints a complicated picture for FDIs in 2025. From 2017, and the first presidency of Donald Trump in the US, onwards, the geometry of global trade has been shifting toward geopolitically closer partners, fuelled by trade wars, the imposition of tariffs, allegations of security concerns, and populist pledges of domestically driven industrial policies.
Surveying about 200,000 announced FDI projects from 2015 through May 2025, McKinsey found that geopolitics is still playing an increasing role in global trade. While FDI still bridges vast geographic distances, the average geopolitical distance of greenfield FDI announcements since 2017 “shrank about two times faster than that of trade”.
Amid this geopolitical nearshoring, since 2022, advanced economies attracted more investment—mostly from one another – but China’s share of FDI has plunged. Meanwhile, in developing markets, the absolute value of announcements has gone up in recent years, but the share of the total has declined. Suggesting this trend will deepen further, the heavy tariff regimes rolled out by the Trump administration saw FDI announcements in emerging economies drop by half in the first five months of the year – compared to the 2022-to-2024 period.
While this has caused marked uncertainty, it has also opened up opportunities. The United Kingdom and European Union experienced more modest growth through the two periods studied. While the continent did not escape the same trend related to US tariffs – with Europe’s FDI attraction relative to the United States having dropped to just 70% since 2022, after being roughly equal in 2015 to 2019 – the UK and EU still saw FDIs rise by around 40%.
Data centre dependence
Much of this is being driven by data centres – currently seen as Europe’s growth engine. And while the first five months of 2025 saw the disparity between the US States and other advanced economies widen further in terms of FDI flows, Europe still performed well to that end. Inflow into the US more than doubled in annualised terms, relative to the 2022-to-2024 period, McKinsey found, with gains in all sectors except EVs and basic manufacturing. But Europe still saw a 65% increase (excluding intraregional flows)—entirely due to data centre projects.
Worryingly for Europe, almost every other sector declined. This means that should the hype around AI fail to yield the material economic benefits it claims, the entire market for FDIs may soon hinge upon a data centre ecosystem that nobody wants or needs. In some ways, this trend could be bucked by investment from China – though that would also need to buck the geopolitical distancing of those economies.
At present, European economies and the United States are the primary recipients of announced investments in automotive and batteries, attracting about 50% of total FDI announcements since 2022. In the case of the US, which accounted for roughly 30% of total announced inflows, about half of the investment has come from leading Japanese and South Korean players in automotive assembly and batteries, with the remainder mostly coming from Europe.
While leading Chinese companies made up less than 10% of the total, this is different for Europe: Chinese firms, including EV producers and battery makers, have emerged as the largest prospective investors. They account for about $10 billion in yearly announcements since 2022, with about 55% of announced FDI coming into the region from partners outside of Europe. Projects by leading Chinese battery manufacturers in Germany, Hungary, Portugal, and Spain include some of Europe’s largest planned gigafactories, most of which could produce LFP cells, while projects by EV makers include new assembly lines in Slovakia and Spain. But the uncertainty around US trade policy may yet see this flow hit by further tariffs.
Sourced from Mckinsey & Co