ZURICH—Ask what makes a country competitive and you will drown in answers. Existing frameworks, including those used by the World Bank, rely on hundreds of indicators. In new research, my coauthors and I propose a simpler measure: investment. Where companies choose to build their next factory, laboratory, research center, or power plant is the clearest indicator—and the ultimate test—of competitiveness.
At the heart of our study is a line-by-line comparison of investment cases across ten industries, from chemicals and steel to advanced semiconductors and drug discovery. We find that building and operating a factory or research-and-development facility in Europe or the United States is generally at least 50% more expensive than in today’s leading investment destinations.
In research-intensive activities, this gap can approach 300%. Developing a new electric-vehicle platform, for example, costs about $445 per vehicle in China compared with roughly $1,600 in Germany. Is it any wonder, then, that China has become a location of choice for automotive R&D? Capital tends to go where costs are lower, especially in globally traded, footloose industries.
In 1995, investment in productive assets like factories, machinery, and production platforms was broadly similar across Europe, the US, and China. Since then, however, China has pulled decisively ahead. Today, its net productive investment is roughly six times that of the US. Each year, it adds three times as much productive capacity as Europe and the US combined. China now produces 85% of the world’s batteries, and one in every two new car models launched globally last year came from a Chinese manufacturer.
Europe has moved in the opposite direction. As a share of GDP, net productive investment has fallen by half since the early 2000s, from roughly 4% to about 2%. In Germany, Europe’s manufacturing powerhouse, it amounted to just 0.2% of GDP in 2024. The EU’s annual investment shortfall has been estimated at €750–800 billion, or about 4.5% of GDP. In practical terms, that means fewer factories, less R&D, and declining manufacturing capacity.
In the US, investment has shifted toward digital technologies and, more recently, AI. Seven AI-related companies increased their combined capital spending and R&D 50-fold over the past two decades, from $15 billion in 2005 to nearly $750 billion in 2025. By the end of this year, that figure could approach $1 trillion. Yet total productive investment as a share of GDP has remained flat, and despite recent industrial-policy initiatives, manufacturing investment has fallen over the past year.
None of this implies that China is unbeatable. The country generates about 40% less value from each unit of capital than Europe and the US, prompting the Chinese government to launch a campaign against what it calls neijuan (“involution”). Nevertheless, China now attracts more than one-quarter of global investment, absorbing 63 cents of every dollar invested in machinery worldwide.
What explains China’s success, and that of other investment magnets? Part of the answer is lower wages combined with productivity that matches or exceeds that of higher-wage economies—not in aggregate but for new investments. Beyond labor costs, energy and construction are cheaper, and projects move much faster. Europe’s industrial heartland, for example, pays well over $150 per megawatt-hour for electricity—roughly three times the cost in China or the US.
Then there is speed. While a nuclear power plant takes less than six years to build in China and roughly eight in South Korea and the United Arab Emirates, it can take as long as two decades in Europe or the US. Securing an operating license takes roughly five days in China, 20 in the US, and 115 in France.
Rebalancing global investment won’t be easy, but it’s not impossible either. Our research suggests that partly closing the construction-cost gap, using automation and AI to boost productivity by roughly 30%, and matching China’s speed could close 50–70% of the cost gap between the US and the world’s leading investment destinations. In Europe, those same measures could narrow the gap by roughly one-third to three-fifths.
These approaches have already been shown to work. Germany, for example, installed floating liquefied natural gas terminals barely 200 days after Russia’s 2022 invasion of Ukraine, using modular construction techniques similar to those employed in China and elsewhere. Companies are also beginning to relocate energy-intensive activities to regions in Europe with cheaper, more abundant power, such as Iberia and the Nordics.
Faster adoption of AI and robotics offers another opportunity to raise productivity and lower costs. Notably, China currently installs more industrial robots annually than the entire Western world combined.
Cost, though, is only one dimension of competitiveness, and the hardest one for high-wage economies to win. They can also focus on areas in which price is not the decisive factor. Complex drug therapies, for example, often enjoy effective market exclusivity for 10–14 years, giving companies greater pricing power. Leadership in one of today’s 18 emerging competitive arenas, from quantum computing to bioengineering, is another way to build competitive advantages that offset higher costs. American companies already lead in 14 of these arenas.
But companies cannot restore national competitiveness on their own. Government policies shape the playing field through a wide range of industrial-policy tools, from direct and indirect subsidies and tax incentives to public procurement, price supports, regulations, and trade restrictions that support domestic producers. China, for its part, provides companies with land and property at heavily discounted rates, equivalent to roughly 0.5% of GDP in additional subsidies.
Semiconductors are a case in point. Although state support for chip manufacturing has increased across all major economies, OECD research finds that China offers the most generous subsidies, averaging roughly 10% of revenue, despite its already more competitive cost structure. By comparison, support for semiconductor fabrication in North America and Europe averages just 2–3% of revenue.
The broader lesson is clear: countries that attract investment today do so by design, not by accident. They have reduced the cost of building and operating new facilities, accelerated project delivery, and embraced new technologies that boost productivity. Any country willing to do the same can compete for the capital that will shape the industries of the future.
About the authors
Jan Mischke is a partner at the McKinsey Global Institute, based in Zurich.
Anna Kortis is a McKinsey Global Institute partner, based in Vienna.