European Economy. Economic Papers. Germany's growth performance in the 1990's

Figure 3.9: Grubel-Lloyd Index of Intra-Industry Trade
Note : Calculated across all SITC Rev. 3 four-digit manufacturing categories.
Source : Comext data base; own calculations.
It is interesting in this context also that the Grubel-Lloyd index for all other countries is larger
for trade with the rest of the world than for trade with other EU 15 countries. Only for Germany
and, to a lesser extent France, the reverse holds true. This appears to indicate a larger openness
of the faster growing economies to business outside of the EU, and here mostly with the US,
while Germany’s intra-industry trade is more directed towards other EU countries. The lower
openness then would explain why Germany has missed out on much of the international
40
See for example, Backus, D., Kehoe,.P and Kehoe, T. (1992).
41
Grubel, H. and Lloyd, P. (1975).
50
55
60
65
70
75
80
85
89/90
Germany
99/00
89/90
France
99/00
89/90
Netherlands
99/00
89/90
UK
99/00
89/90
Italy
99/00
World
EU15

---

economic boom that characterised the 1990s. Another aspect is that the lower level of intra-
industry trade of the slow-growing economies reflects a lower attractiveness of these countries
for foreign direct investment, as much foreign trade takes place between subsidiaries of
international companies. This aspect will be analysed next.
3.1.3 Developments of foreign direct investment
Global flows of foreign direct investment (FDI) have increased substantially throughout the last
decade reflecting ongoing globalisation of economic activity. Also the flow of German direct
investment to foreign countries has been on an increasing trend since the mid-1980s. By
contrast FDI flows into Germany have remained at much lower levels and started a steady
increase not before the second half of the 1990s. This obvious discrepancy in developments of
inbound and outbound flows has raised the question whether it can be attributed to a lack of
attractiveness of the German economy, i.e. to the question whether there is a 
Standortproblem
.
The question whether the size of foreign direct investment flows to and from Germany contains
information about the quality of the country as a location of business has attracted a lot of
attention of policymakers, economists and the public. It is difficult to find a clear-cut answer as
to whether FDI flows contain such type of information. Moreover, critical statements on FDI
inflows induced by the hostile take-over of a German company in 2000 suggest that not all FDI
flows are welcomed any longer. But from an economic standpoint it is difficult, if not
impossible to distinguish between FDI as the good, the bad and the ugly. However, one can
describe flows and review some of the arguments in the light of facts. This task will be in the
centre of this sub-section.
German direct investment abroad
German direct investment in foreign countries has been relatively flat in the first half of the
1990s and then started to increase in the second half of the decade. In the 1990 to 1999 period it
always exceeded inbound direct investment flows. Most of the direct investment flows were in
the form of equities, less in the form of credit transactions (see also Table 3.2 and Figure 3.10).