Economists express concern over Germany’s alarming inability to attract business investment

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Germany’s ability to attract business investment experienced a significant decline last year. According to the German Economic Institute (GEI) based in Cologne, over €135bn of foreign direct investment flowed out of the country, while only €10.5bn came in. This represents the largest gap between outbound and inbound investments in Germany, based on OECD data.

An economist at the GEI, Christian Rusche, attributed the decline in investment conditions to high energy costs and a growing shortage of skilled workers.

The report reveals that 70% of outbound investment from German companies went to other European countries. The collapse of investments by European neighbors is particularly concerning.

The report also highlights that many of Germany’s problems are self-created. These include high corporate taxes, excessive bureaucracy, and inadequate infrastructure.

Rusche urges the German government to take swift action to enhance the country’s business attractiveness. He emphasizes the necessity for Germany to become the primary destination for foreign investments in the future.

The outflows of investment from Germany have been accelerated by the Inflation Reduction Act, which offers substantial subsidies to companies in sectors like electric vehicles and renewable energy in the United States.

Furthermore, Germany is receiving a minimal share of the EU’s €750bn recovery fund, which primarily supports harder-hit economies such as Italy.

While Germany has experienced a decline in investment, there have been a few exceptions. US chipmaker Intel announced plans to construct a semiconductor fabrication plant in Magdeburg, citing Germany’s exceptional talent pool and infrastructure.

However, negotiations between Intel and the German government were challenging, resulting in Intel requesting nearly €6bn in additional subsidies due to rising energy costs and inflation. Eventually, the German government agreed to provide a total of €10bn, representing the largest foreign direct investment into Germany.

Germany’s sprawling manufacturing sector has been facing challenges in recent months. Factors such as the increase in energy prices after Russia’s invasion of Ukraine, declining orders, weak export growth, and a loss of market share in the electric car industry have contributed to this downturn.

The report emphasizes that Germany’s export model is no longer as effective due to increasing protectionism.

These findings align with a report by the Bundesbank in April, which also highlighted a record high net outflow of direct investment from Germany.

A study by consultancy EY published in May revealed a decline in the number of new greenfield investments in Germany, indicating a decrease in investor interest.