German FDI hits record as UK businesses look for EU toehold

Germany received record levels of foreign direct investment last year, official statistics show, with the boom driven by a rise in UK companies setting up operations in Europe’s largest economy to keep a post-Brexit toehold in the EU.

But officials expect the total volume of FDI to decline this year, as President Joe Biden’s Inflation Reduction Act lures investment in green technologies away from Europe to the US.

“When it comes to new decisions, the numbers are dropping,” said Robert Hermann, chief executive of Germany Trade & Invest (GTAI), the German government’s economic development agency. “The trend we’re seeing is that there will be fewer of them.”

He identified the IRA as a potential factor. “We assume it will have an effect on investment in Europe and Germany,” he said.

FDI into Germany totalled €25.3bn last year, up from €7bn in 2021 — an increase of 261 per cent, with US, Swiss and UK investors leading inward investments as new projects from China declined. Germany has become a magnet for semiconductor and battery companies, and a beneficiary of EU plans to increase the bloc’s self-sufficiency in key technologies and its resilience to potential disruptions to Asian supply chains.

Much of the increase in FDI was accounted for by US chipmaker Intel’s plan to build a €17bn factory in the eastern German city of Magdeburg, and also by a €4.5bn investment by Swedish start-up Northvolt in a new battery factory in the northern state of Schleswig-Holstein.

But even without Intel’s contribution, FDI would have stood at €8.3bn — higher than the figure for 2021.

Hermann said investors were drawn to Germany by the “size of its market, its secure legal framework, highly qualified workforce, infrastructure and R&D environment”.

GTAI’s figures are something of a lagging indicator. The huge increase in energy prices last year caused by Russia’s war in Ukraine made Germany a much less attractive place to do business than it was before the invasion. While gas prices are now close to prewar levels many companies are still looking elsewhere, particularly the US. The IRA provides $369bn of subsidies and tax credits for clean energy technologies.

Hermann said that energy prices did play a role for big international investors, but other factors were more important. “Not every project is energy intensive,” he said. “Many are driven by personnel costs, and by [proximity] to important R&D partners, suppliers and customers.”

The biggest source of investment into Germany last year was the US, which accounted for 279 projects, with Switzerland second and the UK third. The total of 170 FDI projects originating in the UK was 21 per cent up on 2021. 

“For British companies, it’s particularly important to have a foothold in the EU after Brexit,” Hermann said. Around a third of the projects announced by UK companies were in financial services and 21 per cent in IT, the GTAI said.

The agency noted that inbound investment from China was in retreat, with only around 141 projects announced last year — the lowest figure in eight years. Despite the decline, China’s was the fourth biggest foreign investor.

Some experts have attributed the decrease to tightened restrictions on M&A activity by Chinese companies in Germany. But Hermann blamed the decline on the aftermath of the Covid-19 pandemic, which had made it harder for Chinese executives to travel to Germany.