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

Table B4.1 International discrepancies between reported direct investment flows
(net investment, in DEM billion)
Foreign direct investment in Germany
German direct investment abroad
German balance of
payments
Foreign balance of
payments
German balance of
payments
Foreign balance of
payments
1990
2.9
26.1
32.1
16.5
1991
4.7
26.0
32.2
16.3
1992
5.6
18.3
25.0
18.3
1993
0.6
13.4
19.8
30.5
1994
0.9
18.9
19.2
23.4
Source : Deutsche Bundesbank (1997a), p.78.
For the 1984-1996 period net foreign investment in Germany were 34.6 billion DEM according
to German data, but 137.2 billion DEM according to foreign data. For outbound flows the
difference was slightly smaller (226.1 billion DEM according to German data, 166.0 billion
DEM according to foreign data (source: Bundesbank (1997a), p.78). Thus, based on German
data one has to explain a net outflow of 191.5 billion DEM, while based on foreign data only a
net outflow of 28.8 billion DEM has to be explained.

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In addition to these very specific aspects of recent developments there is a more general risk of
misinterpreting the data on direct investment flows to and from Germany:
•
Inflows could indicate strength
. Net FDI is not necessarily an indicator of relative cost
competitiveness, because it also depends on non-cost factors. Empirical studies suggest that
the proximity to markets matters more than costs. Thus, net-inflows could reflect a more
positive overall macroeconomic development in the area, which attracts most FDI in net
terms. However, one has to take into account country-specific structure in the private sector.
For instance a broad equity base of company ownership could make acquisitions easier for
foreign investors than bank-based financing would do. Obviously the latter is a
characteristic of the German economy where equity financing has played a minor role up to
the 1990s.
•
Outflows could indicate strength
. FDI and foreign production are a result of firm-specific
competitiveness and transaction costs. Thus, high outward FDI could signal an
improvement of the competitive situation of domestic companies (e.g. due to scale
economies, technological knowledge or progress). Low outward FDI could also signal that
firms do not meet the preconditions for FDI (e.g. consumer goods producers have limited
resources). Moreover, FDI could come along with an increase in exports and widen the
domestic basis of R&D and future economic growth. In that respect FDI outflows would
strengthen the domestic economy and create new jobs.
•
Flows could be policy-induced
. In case of political or other trade restrictions FDI might be
the only option of foreign engagement. Moreover, domestic authorities or international
institutions (e.g. the EBRD) could encourage FDI outflows. Thus it would be misleading to
interpret these outflows as a weakness of the domestic economy. In addition one might
expect positive effects for the domestic economy.
These considerations suggest that net FDI should not be used as stand-alone indicator of
competitiveness and add to the warnings already contained in the Bundesbank report mentioned
earlier. However, in the context of the general weakness of the overall economy, the small
amount of foreign direct investment flows coming into Germany has been a focal point of the
discussion about what might go wrong in the German economy. One reading suggested that the
conditions of production and investment were not good enough to attract foreign capital. A
closer look to direct investment flows to and from Germany confirmed the discrepancy between
both flows. However, the more recent developments were substantially different as mergers and
acquisitions and ongoing globalisation have substantially changed the size of flows. Thus,
doubts occur as to whether the results obtained in earlier empirical studies still hold, in
particular whether the link between the business locations and direct investment is the same as
for instance ten years ago. On the other hand, there is no hint that Germany has in any way
become a more attractive place for foreign companies to invest in. Despite all the caveats, the
analysis therefore gives supplementary information about an economy in need of reforms that
would increase its quality as a business location.