ey.com/attractiveness • Financial services companies are understandably less EY point of view: technology optimistic about their growth prospects in Europe than the sample average. Only 12% expect strong growth, compared Digital agility with 21% of companies overall, and 6% expect to reduce their existing presence slightly. They are nearly twice as likely as The digital economy accounts for over 10% of Britain’s GDP. And it is manufacturing firms to identify EU instability (51%) and Brexit growing fast, both in the UK and across the EU. Investment in tech (41%) among the top three risks to their growth. For them, start-ups now tops US$13.6b in the UK and Europe — up fivefold in volatility is seen as a much less severe risk. five years. But since the referendum, financial technology (FinTech) investments have slumped 26% to US$532m in the third quarter of Their reasons are clear: London is the center of financial 2016 — running at almost half the pace seen during 2015. services in Europe, and many companies there fear business The UK has Europe’s strongest start-up ecosystem, centered in the disruption arising from Brexit. Financial services firms in London London district of Shoreditch, but spilling out into high-tech centers face a number of risks, including the potential loss of so-called around the university cities of Oxford and Cambridge. European “passporting rights.” These rights allow a financial services firm cities — notably Dublin, Paris and Berlin — see the referendum result as regulated by one EU state to sell services in the other 27 states a chance to promote themselves as alternative technology hubs. without acquiring additional authorizations. If passporting rights Key issues for tech entrepreneurs and investors revolve around talent are withdrawn, firms may be obliged to relocate some operations and mobility, data flow and data privacy regulation, tax and trade to EU27 countries in order to continue trading within the EU. rules, and access to finance. • Technology firms are by far the most bullish. Overall, 72% The EU is a leading source of funds for UK research, innovation and plan to invest in Europe in the next three years, and of these, SME projects through programs such as Horizon 2020, which aims 33% expect to grow their presence significantly. That is very to achieve nearly €80 billion of investments by 2020. Fears that good news in a continent that has so far been unable to give rise funding may be harder to obtain may be making venture capital firms to a digital technology firm equal to the giants of Silicon Valley. more cautious. However, US global technology giants have continued to demonstrate their confidence in London as a digital technology Well-established tech firms seem untroubled by instability in powerhouse. Europe, yet the tech firms we surveyed are nearly as worried about Brexit (38%) as those in financial services. They are Jean-Benoit Berty much less bothered about instability in the EU (24%), but 60% EY UK Technology, Media and Telecommunications Sector are alarmed at volatility in commodities, currencies and capital Leader markets. One explanation may be that young tech firms rely heavily upon external funding, and fear that their financing Source: “UK’s digital economy is world leading in terms of proportion of GDP,” ecosystem could be upset by Brexit. TechUK.org website, https://www.techuk.org/insights/news/item/4075-uk-s- digital-economy-is-world-leading-in-terms-of-proportion-of-gdp, accessed 12 Despite its poor performance in building consumer-oriented December 2016; “Action is needed now to stem the flow of vital technology talent,” The Times website, http://www.thetimes.co.uk/article/action-is- digital champions, Europe is widely seen as a powerhouse needed-now-to-stem-the-flow-of-vital-technology-talent-8dnqbqt5k, accessed in emerging technologies such as artificial intelligence, the 9 December 2016. “Brexit depression casts dark cloud over UK fintech investment,” Finextra website, https://www.finextra.com/newsarticle/29772/ internet of things and robotics. The continent, on both sides brexit-depression-casts-dark-cloud-over-uk-fintech-investment, accessed 9 of the English Channel, has produced many promising young December 2016; “European Social Fund 2014–2020,” European Commission website, http://ec.europa.eu/esf/main.jsp?catId=62, accessed 9 December 2016. companies in these fields, and hosts powerful ecosystems underpinned by close links between industry and academia. • Mid-sized companies will continue to seek growth in Europe. More than two-thirds expect to grow their presence in Europe, and 26% plan significant expansion. For them, it is volatility in currency and commodity markets that poses the biggest business risk, with the slowdown in trade flows, and Brexit in second and third places. EY’s European attractiveness survey January 2017 11