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

Table 3.7: German Direct Investment: Inflows by Country (Billion DEM)
(a)
Inflows from:
90+91
92+93
1994
1995
1996
1997
1998
1999
2000
B-L
-0.27
2.76
0.92
0.70
-3.57
4.01
2.30
22.26
61.52
DK
0.40
-0.09
0.08
0.06
0.31
-0.49
0.00
1.61
1.84
EL
0.03
-0.03
0.00
-0.01
0.01
0.01
-0.08
0.04
0.04
E
0.26
-0.07
-0.02
-0.10
0.27
0.94
0.35
-8.49
-6.07
F
3.11
2.71
1.19
0.82
1.18
-0.82
1.69
38.37
-2.09
IRL
0.42
0.19
0.45
-0.09
0.38
-0.08
0.83
0.90
0.21
I
0.99
-1.34
-1.90
0.40
0.22
0.25
4.68
3.64
0.60
NL
1.47
-1.55
2.87
3.87
3.92
2.75
6.52
6.91
64.98
A
0.25
0.55
0.27
0.73
0.12
2.06
0.47
0.98
-0.95
P
0.00
-0.01
0.02
-0.04
0.07
0.17
0.18
0.50
0.13
FIN
0.13
0.53
-0.33
0.12
0.19
0.52
2.44
-0.45
0.55
S
0.99
-0.34
-1.04
0.37
0.16
0.89
3.16
-0.94
4.78
UK
-0.15
2.47
2.53
2.93
2.41
3.90
15.19
16.51
249.09
CA
1.18
0.13
-0.23
0.17
-1.87
-0.18
-0.94
0.02
0.51
CH
-1.67
-1.09
0.69
2.46
1.24
2.22
-5.86
1.59
-3.65
JP
2.21
1.14
-0.46
0.84
-1.29
1.01
-0.19
1.10
1.34
NO
0.09
0.03
-0.01
0.01
-0.13
-0.05
0.26
0.07
1.66
US
-1.37
0.43
-1.89
3.52
4.15
2.28
6.66
14.00
-6.34
EU
7.62
5.79
5.04
9.77
5.66
14.12
37.71
81.83
374.63
OECD total
8.14
6.65
3.17
16.86
8.07
19.26
38.14
99.46
368.48
Total
10.81
7.32
2.91
19.75
8.48
21.23
42.72
102.69
373.74
(a)
Top three in bold figures
Source : OECD Statistical Databases (2002).
Table 3.8: Extra-EU FDI inflows excl. reinvested earnings with major partners
From
US
CH
JP
Others
Total
EU Total
1992-96
78.2
18.5
6.9
31.5
135.1
(Ecu. Bn.)
1997
20.0
2.5
2.7
12.5
37.8
1998
52.7
19.9
1.5
10.0
95.0
1999
67.2
4.3
3.2
15.4
90.1
Germany
1992-96
11
14
12
8
11
(% of EU)
1997
4
44
26
8
10
1998
7
-15
7
26
3
1999
13
45
16
5
13
Source : Eurostat (2001), p.37.
Table 3.9: Foreign Direct Investment in Germany by Industrial Sector (Billion DEM)
Sector:
90+91
92+93
1994
1995
1996
1997
1998
1999
2000
Primary
0.03
0.03
0.28
-0.02
-0.39
-0.66
-0.65
-0.73
0.22
Manufacturing
-4.88
0.00
-1.55
1.72
-2.80
1.65
-5.05
51.94
6.01
- petroleum, chemical,
rubber and plastic products
-3.35
-0.51
-1.74
-0.50
-1.10
0.81
-0.89
28.98
..
- vehicles and other
transport equipment
0.48
-0.75
-0.24
0.34
1.52
-1.55
-5.43
-1.27
14.01
- metal and mechanical
products
0.07
0.71
-0.01
0.08
-0.26
0.98
-0.56
15.84
-0.02
Services
15.70
10.48
14.42
19.17
19.16
20.83
49.76
60.42
376.52
- financial activities
12.45
-3.32
-0.64
-0.46
5.66
-1.61
13.69
13.59
8.32
- real estate and business
activities
..
12.19
10.90
18.82
16.77
14.56
33.48
43.91
326.83
- other services
0.71
0.21
0.62
0.14
0.39
-0.04
-0.30
0.03
2.35
Unallocated
-0.04
-3.19
-10.24
-1.12
-7.48
-0.59
-1.34
-8.94
-9.01
Total
10.81
7.32
2.91
19.75
8.48
21.23
42.72
102.69
373.74
Source : OECD Statistical Databases (2002).

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An Assessment of FDI flows and Germany as a business location
There is no doubt that motives of direct investment are manifold. Many of them have been in
the centre of theoretical and empirical analysis of direct investment, in particular in the 1990s
accompanying the surge of interest in economic growth theory. Any full analysis has at least to
take into account developments in foreign trade, in wages and costs and in world economic
activity. Several studies of direct investment in Germany have gone into this direction. Among
them is a study published by the Bundesbank (1997b) based on data from 1975 up to the first
quarter of 1977. Concerning the inbound and outbound direct investment flows the study
emphasised the important role that cost factors play in addition to sales motives by stating that:
“the worsening of international competitiveness brought about by the relatively sharp rise in
unit labour costs (calculated in a uniform currency) has caused some German enterprises to
shift part of their production abroad in the past few years; at the same time it has deterred
foreign firms from investing more heavily in Germany"
(Bundesbank, 1997b, p. 68).
According to the empirical estimates of that study a deterioration of price competitiveness of
one percent would, on average over the long term, result in an increase of 2½% in German
direct investment abroad. The German tax burden, also often been linked to direct investment
flows, though not incorporated explicitly, was identified as triggering a similar impact via its
effect on costs. With respect to foreign investment in Germany the Bundesbank stated that
"another locational disadvantage of Germany hindering the inflow of foreign corporate capital is
probably the specific structure of the enterprises and their financing" (p.73). As this
disadvantage is difficult to capture quantitatively the Bundesbank warned that when "it comes to
assessing the quality of Germany as a business location on the basis of the trend in inbound and
outbound direct investment ... a highly differentiated approach must be taken" (pp. 74-5).
Nevertheless, the Bundesbank study not only indicated that the international competitiveness of
Germany had hindered foreign investment in Germany and had stimulated direct investment
flows from Germany to foreign countries, it also suggested that direct investment flows contain
information about the attractiveness of a Germany as a location of business.
The aforementioned Bundesbank study had been based on data from the mid-seventies to early
1997 raising the question as to whether the conclusions are still applicable to the economic
situation in the late 1990s and today. Obviously, the determinants identified just a few years ago
can be presumed to be still in place and to affect today’s decisions on direct investment as well.
However, the weights that are attached to these determinants might have changed and such
changes might have enhanced the risks of misinterpretations of direct investment flows.
Indeed in the years since the launch of the study the framework has changed and so has the
behaviour: (a) direct investment flows have been increasingly affected by mergers and
acquisitions in the centre of which are other than short or medium term cost considerations; (b)
the more recent composition of flows by industrial sector suggests that mainly large
multinational companies are involved in direct investment and for firms of this size strategic
motives might have a more important role than economic conditions in Germany; (c) more and
more restrictions on the movement of goods, persons and capital have been removed since the
mid-seventies, the start year of the Bundesbank's empirical analysis, suggesting that the
relationship between exports and production on foreign soil might have changed; (d) the
introduction of the euro has removed exchange rate risks from a huge area in Europe bringing
about changes in one of the most important determinants of investment location; (e) the
transition process in the countries of Central and East Europe has progressed and their accession
with the EU has become more likely changing views on investment projects in these parts of
Europe (see e.g. Buch, Kokta and Piazolo, 2001). Obviously, the list of changes that affect
decisions about direct investment could be extended. But already the changes named above
provide good reason for first doubts whether results obtained a few years ago are still relevant or
more generally about the indicator properties of direct investment flows.

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