For years, foreign direct investment in Europe has been sold as a cure-all. Growth, jobs, modernization. The promise sounded simple. But recent evidence tells a more restrained story. Foreign capital does change the business environment. It raises the bar for efficiency. It pushes local firms to work faster, leaner, and more precisely. But when it comes to jobs, the impact is far more modest.
The main trend identified in the OECD report is clear and hard to ignore: FDI raises productivity, but hardly expands employment, especially for small and medium-sized enterprises. This is not an intuitive conclusion. In public debate, FDI is still linked to factories, new plants, and thousands of jobs. In reality, foreign capital in Europe now works differently. It plugs into existing value chains. It optimizes processes. It brings technology and management standards. But it rarely expands headcount. For SMEs, this means higher efficiency without a proportional increase in staff.
The OECD report is based on detailed firm-level data from more than 24,000 companies in Germany, Italy, and Romania. These are very different economies. Different income levels. Different institutions. Yet the results largely converge. Where foreign capital presence grows, SMEs become more productive. Output per worker rises. Processes become more standardized. But employment grows slowly, if at all.
The strongest effects are seen among small and medium firms. Large companies gain much less from FDI. The reason is simple. Big firms already operate close to international standards. Their technology gap with multinationals is small. SMEs, by contrast, have more room to improve. When a foreign investor enters the picture, demands on quality, timing, and management rise sharply. For some firms, this is an opportunity. For others, it is pressure. On average, the outcome is higher productivity.
The form of interaction matters most. When SMEs become suppliers to foreign companies, the gains are strongest. These relationships come with tough requirements. Standards must be met. Equipment must be upgraded. Management practices must change. This is painful, but it is also where efficiency gains prove most durable. The report shows clearly that manufacturing SMEs integrated into foreign supply chains see the most stable and visible benefits.
The picture is very different when foreign firms simply enter the same sector as local companies. In this case, the impact on SMEs is weaker and mixed. Competition intensifies. Weaker firms are pushed out. Stronger ones adapt. Productivity may rise, but not across the board. And it is almost never accompanied by job growth. In some cases, the effect is negative, as process optimization reduces the need for labor.
The effects are even weaker in services. The report finds that SME productivity in services responds far less to FDI than in manufacturing. Markets are more fragmented, and many services are not easily tradable. Foreign firms in these sectors are less likely to build strong links with local businesses. Knowledge transfer is weaker. Scaling is limited.
Manufacturing remains the core area where FDI truly reshapes SMEs. Value chains are longer. Standards are stricter. Technologies spread more easily. This is why productivity gains among manufacturing SMEs are the most pronounced, both in traditional industries and in more advanced segments.
Geography also matters. In less developed regions, where FDI is scarcer, the impact of each project can be stronger. The gap in technology and management between foreign and local firms is wider. Even limited foreign presence can deliver a real boost. Access to new markets, practices, and networks can be a turning point for SMEs.
But this is not automatic. In such regions, the risk is that FDI remains an isolated enclave. Without a ready ecosystem and capable local partners, foreign projects operate on their own. In these cases, spillovers to SMEs are minimal. The report stresses that connections matter more than the mere presence of capital.
Employment deserves special attention. Why does higher productivity not translate into more jobs? The answer is straightforward, though rarely said out loud. Modern FDI in Europe focuses on automation, digitalization, and optimization. Capital replaces labor. Firms produce more with fewer workers. This improves resilience, but it does not create mass employment.
In some cases, foreign projects even increase pressure on labor markets. SMEs must compete for skilled workers. Requirements rise. Wages may rise. But the number of jobs does not necessarily grow. For some workers, this is an opportunity. For others, it raises the risk of being left behind.
The report shows that employment effects, when they appear, are highly selective. Sometimes very small firms or large companies see modest gains. But these effects are weak and unstable. On average, the impact of FDI on SME employment remains limited. This matters in policy debates where FDI is still often presented as a tool to fight unemployment.
Country differences add nuance. Italy shows the broadest benefits for SMEs, as foreign firms are more deeply embedded in local supply chains. Germany’s model is more restrained. Gains exist, but competition is intense and markets are mature. Romania shows the weakest and least stable effects, reflecting limited integration between local businesses and foreign capital.
The overall conclusion is uncomfortable for simple policy recipes. FDI does not work the same way everywhere. Its impact depends on economic structure, SME capabilities, and the quality of the regional environment. Where these elements align, productivity gains are sustained. Where they do not, effects are limited or short-lived.
The report also highlights another key point. Large firms barely benefit from FDI in productivity terms. This suggests that policies focused only on attracting big investors often overstate spillovers. The real potential lies with SMEs. But it is unlocked only when links, skills, and readiness to adapt are in place.
In practical terms, foreign capital rarely solves social problems directly. It does not guarantee job growth. It does not equalize incomes. Its contribution lies elsewhere. It raises efficiency. It speeds up renewal. It reshapes business structures. For the economy as a whole, this is a gain. For specific firms and workers, not always.
That is why the OECD emphasizes connections, not volumes. What matters is not how much investment arrives, but how it is embedded in the economy. FDI without links delivers little. FDI with deep ties transforms SMEs, but through productivity, not employment.
This conclusion breaks with familiar rhetoric, but it fits today’s European reality. In an economy shaped by aging populations, automation, and cost pressure, job creation is no longer the main channel through which investment works. The quality of growth matters more than the quantity of jobs.
For SMEs, this means a clear choice. Adapt to higher standards and become more efficient, or be pushed out. Foreign capital does not control this process. It simply makes change happen faster.
Lina Yegil kizi, expert of the EconomyKZ.org portal
