Europe’s green transition cannot be built through domestic firms and public subsidies alone. New research from Juan Alvarez-Vilanova, Riccardo Crescenzi and Lee Mager shows that foreign direct investment is financing a substantial share of the EU’s industrial decarbonisation. They argue policymakers should respond not by limiting openness to foreign capital, but by ensuring it is strategically embedded in European economies.

European policy increasingly speaks the language of decarbonisation, clean technologies, critical raw materials and also of strategic dependencies and economic security. This agenda is now visible in the European Commission’s Competitiveness Compass, the Clean Industrial Deal and the Net Zero Industry Act, all of which link industrial decarbonisation with competitiveness, innovation and reduced strategic dependencies.

Yet one important input into this agenda remains poorly understood and poorly measured: the foreign investment that is already financing parts of the very industrial transformation these policies are trying to shape.

Green investment is not just renewable energy

The dominant way of measuring green foreign direct investment (FDI) has often been to treat it as a synonym for renewable energy, waste management or environmental services. These activities are essential, but they miss out other green activities that are increasingly possible, including within the sectors that are central to Europe’s clean industrial strategy.

The sectors that sit at the heart of the Competitiveness Compass and the Clean Industrial Deal – including steel, chemicals, the automotive sector and construction – are among the largest emitters. Decarbonising them requires new technologies, new production processes and their adoption across long and complex supply chains.

Producing the batteries, cables, heat pumps, advanced materials, financial services and insurance products that support the clean energy transition is also part of the green economy. Yet investments doing precisely this are largely invisible in conventional green FDI statistics.

In new research, we offer a more complete picture by applying the EU Taxonomy for Sustainable Activities as a classification framework, which identifies “green” economic activities that are possible across virtually every sector of the economy, beyond renewable energy. We apply it to textual descriptions of more than 109,000 FDI projects into the EU27 and the UK between 2013 and 2024, using carefully prompted Large Language Models to identify investments that involve Taxonomy-recognised green activities.

The result is a different picture of green investment in Europe. We identify 15.7% of inward FDI capital value into the EU27 and the UK as green. This is roughly twice the share captured by conventional sector-based measures focused mainly on renewable energy and waste.

In other words, around half of Europe’s green FDI is therefore largely invisible when we look only at standard sector-based classifications. This previously hidden green FDI includes electric vehicle and battery production, lower carbon materials, energy efficient industrial equipment, recycling technologies, clean transport components and specialised services that support industrial decarbonisation.

Since 2021, green FDI beyond energy has accelerated sharply, becoming the dominant component of inward green investment by 2022. The timing is revealing: the US Inflation Reduction Act was signed into law in August 2022, triggered a transatlantic contest over the industrial foundations of the green transition, to which Europe responded quickly with the Green Deal Industrial Plan, the Clean Industrial Deal and the Net Zero Industry Act.

Renewable energy FDI follows a relatively familiar geography. Southern European countries, including Greece, Portugal, Spain and Croatia, attract large renewable energy related inflows, reflecting their solar and wind endowments. These investments are often anchored in the natural geography of energy production.

Green FDI beyond energy, on the other hand, follows a different logic. Hungary and Slovakia stand out because a large share of their inward FDI is concentrated in green industrial activities, particularly electric vehicles, batteries and related manufacturing.

Spain, Sweden and France attract substantial investment across both renewable energy and beyond energy green activities. The distribution of these investments instead maps onto manufacturing capabilities, supplier networks, logistics, automotive value chains and the capacity to host large foreign investors in green activities.

In other countries, the green share of total inward investment is lower, but the absolute value of green FDI is much larger. These larger economies may matter more for Europe’s overall green industrial base, even if green investment is less dominant in their national FDI profile.

This has direct implications for EU industrial policy. High green FDI intensity can signal emerging specialisation and new opportunities for smaller or medium sized economies, whereas a large absolute volume indicates where investment may have wider European relevance.

A credible green industrial policy needs to recognise both. It should support specialised green industrial hubs, while also strengthening the countries and regions where large-scale investment can reshape European value chains.

Green FDI beyond energy tells a different story. Germany remains central, but China is at the same level. South Korea, the United States and India also account for large shares, alongside a further substantial contribution from other non-European sources.

This is not simply a story of dependence on China: the broader point is that the industrial side of Europe’s green transition is being shaped by a diversified set of external industrial powers, each bringing capital, skills and technology into European economies. The policy challenge is therefore not whether Europe should remain open to foreign capital – its green industrial transition is already being built through it.

The real issue is how these investments are governed, connected to local suppliers, linked to technology transfer and used to strengthen domestic industrial capabilities. Strategic autonomy, on this reading, is not the opposite of openness: it is what well-managed openness can help to produce.

Three implications for Europe’s green industrial strategy

Our findings have three implications for EU industrial policy. First, green investment statistics need to catch up with the green economy they are trying to measure. A policy lens focused only on wind, solar and waste will miss much of the industrial transformation already under way – and will systematically underestimate the role that foreign capital is already playing in it.

Second, the geography of opportunity is wider than the map of wind and sun. Some economies will benefit from renewable energy potential. Others will become important through manufacturing capabilities, supply chain integration and the capacity to attract and embed large foreign investors in green industrial activities. A credible green industrial policy needs to recognise both.

Third, strategic autonomy is not achieved by limiting openness – it depends on managing integration well. The policy task is to ensure that foreign green investment is embedded in local supply chains, technology transfer arrangements and domestic industrial capabilities. Investment promotion agencies, regional policy and EU industrial strategy all have a role in turning foreign capital into durable domestic advantage.

Source: LSE

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