Analysts describe the decline as "modest" given the economic turmoil that has engulfed Europe over the past two years.
The Ernst & Young European Attractiveness Survey, presented at the World Investment Forum in La Baule, France, found mixed results, with some industries displaying more confidence than others.
Investment-intensive sectors including automotive, mining and transport projects – which have traditionally gone to Central and Eastern Europe – fell significantly, along with business services and software projects.
Other areas have proven more "recession proof", including food, pharmaceuticals and electrical goods, which showed growth in the number of new investment initiatives.
The big European economies have held up relatively well in terms of their ability to attract inward investment, according to the report. Project numbers in the UK were down just 1%, while those in France, Italy and Germany actually rose by 1%, 4% and 7% respectively.
Other "winners" in terms of investment were Russia, Ukraine and Turkey.
The 4% decline in European GDP mean there were inevitably some losers in 2009. The Spanish and Irish economies, which have historically been particularly appealing to investors outside Europe, were hit hard last year. Both countries had enjoyed runaway construction booms which have now come to a shuddering halt.
The most dramatic impact, however, was felt in Poland, Hungary, Romania and the Czech Republic, where project numbers fell collectively by 40% as investors sought the stability of larger Western economies.
Who is investing?
The US continues to account for roughly a quarter of all investment projects in Europe but invested less last year. Germany, the UK, France and Japan also began fewer new projects but still account for another 25% of investment numbers.
China invested more in Europe in 2009 than 2008, with project numbers up by nearly 30%. Chinese projects were also responsible for the third highest number of jobs created across Europe last year.
Looking to the future, 800 executives surveyed as part of the study offered a modestly optimistic view. Just over half said they were unlikely to embark on major investment projects this year but still view Western Europe as an attractive region.
However, there are concerns about Central and Eastern Europe, with executives' confidence falling sharply compared to last year. In the longer term, however, investors continue to see Central and Eastern Europe as a priority, ranking it the third most attractive location for future investment, just behind China and India.
