Germany’s failure to attract business investment ‘alarming’, say economists

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Germany’s ability to attract business investment suffered an “alarming” decline last year, when more than €135bn of foreign direct investment flowed out of the country and only €10.5bn came in, according to a leading economic institute.

The Cologne-based German Economic Institute (GEI) said the gap between outbound investments by German companies and business investment into the country in 2022 was the largest on record, based on data from the OECD.

“The investment conditions in Germany had recently deteriorated again due to high energy prices and the increasing shortage of skilled workers,” said Christian Rusche, an economist at the GEI. 

The report said 70 per cent of the outbound investment by German companies went to other European countries, adding that this made it “particularly alarming that investments by European neighbours have collapsed”.

Many of Germany’s problems were “home-made, including high corporate taxes, excessive bureaucracy and an ailing infrastructure,” it said. 

Rusche called on the government in Berlin to take steps to improve the country’s attractiveness for business. “The federal government urgently needs to take countermeasures to ensure that Germany becomes the first address for foreign investments again in the future,” he said.

The figures come as the US offers large subsidies to tempt investment from companies in various sectors, including electric vehicles and renewable energy, via the Inflation Reduction Act, which the researchers said had accelerated the outflows of investment from Germany.

Meanwhile, it warned that Germany was also receiving very little of the EU’s €750bn recovery fund, which was launched in response to the coronavirus pandemic to fund investments in areas such as green energy and digitisation and is focused on harder-hit economies, such as Italy.

Germany has seen a few notable exceptions to the trend. US chipmaker Intel last year announced plans to build a semiconductor fabrication plant in Magdeburg, citing Germany’s “top talent [and] superb infrastructure”.

But the plans were delayed as the US chip company found itself locked in tough negotiations with the German government. Intel demanded nearly €6bn more in subsidies because of rising energy costs and inflation. 

Berlin finally yielded, pledging a total of €10bn, or roughly a third of what Intel has committed to spend on the plant, highlighting how governments are increasingly dipping into taxpayers’ money to attract foreign direct investment. The deal will be the largest foreign direct investment into Germany. 

Germany’s sprawling manufacturing sector has been suffering from a downturn in recent months, hit by the sharp increase in energy prices after Russia’s invasion of Ukraine last year, as well as falling orders, weak export growth, and loss of market share for electric cars.

“The German export model no longer works as well as it used to with increasing protectionism,” the report said. 

The findings are similar to those published in April by the Bundesbank, which also said that the net outflow of direct investment from Germany had risen to a record high last year.

A study by consultancy EY published in May said there had been 832 new greenfield investments announced last year in Germany, down from 841 the previous year and 930 in 2020.