Capital Injections

Germany needs to lure foreign investors in, not scare them off

Germany Chrina
"Boah, not that company, either." Source: Reuters

Before the end of the year, the German government plans to extend its veto right to stop investors from non-EU countries buying stakes in domestic companies. The initiative, which is mainly aimed at Chinese investors, could backfire on German business. Germany isn’t among the most attractive locations for foreign investors to begin with and new rules will likely deter investment that would benefit the country.

The level of foreign direct investment, meaning investment by foreign multinationals, amounted to around $913 billion in 2017, according to UN figures. That may sound like a lot but it’s only around 3 percent of global direct investment, and that’s on a par with the much smaller economies of the Netherlands, Ireland and Canada. Britain has 5 percent, China 8 percent and the US 25 percent.

So Germany isn’t top of the list for foreign investors. There are many reasons for that: Wage and non-wage labor costs play a part, as do tax rates. Plus, there’s no need for companies from neighboring EU countries to invest because they have unimpeded trade access to Germany. Bureaucratic hurdles are a further deterrent. Germany only came in 20th in the “ease of doing business” ranking of the World Bank, putting it not just behind the US, Britain, Canada and Ireland but also New Zealand, South Korea, Estonia, Latvia and Scandinavian countries.

Reel in investors

Foreign direct investment is an important engine for an economy. It injects capital and helps boosts productivity. Economic research based on a wealth of corporate data shows that investment by foreign multinationals enhances productivity by bringing new technologies to a country. They are more productive on average than comparable domestic companies, and they tend to fuel the productivity growth of domestic firms through knowledge transfers on a number of levels. They also tend to pay higher wages than comparable local competitors. That doesn’t just apply to developing and emerging economies but also to highly industrialized countries and even the US.

That’s why, given the sustained weakness of German productivity growth, the government should be making it a priority to enhance the country’s attractiveness as an investment location. Instead, it plans to lower the investment threshold above which it can monitor and prohibit the purchase of stakes by non-EU investors. That will initially affect relatively few business sectors and investors directly, but the signal alone that national interest and protectionism are gaining weight will render Germany less attractive to investors.

Don’t pull a Trump

Advocates of the new rules argue that they will be confined to cases in which “public security and order” are in danger — but as the Trump administration recently showed when it slapped tariffs on steel and aluminum imports, that argument can be stretched and misused for protectionist measures. Such an approach tends to scare investors off.

The public debate about foreign investment centers on Chinese investors who are accused of wanting to obtain technological know-how and then take it back to China. That may be true in individual cases. But the positive impact of foreign investment also applies to capital injections from China – be it in terms of new investment opportunities, the unlocking of new markets, new financing possibilities, new management methods, new technologies or other advantages.

And don’t forget: When German companies invest in the US for example, they trigger a transfer of technologies and methods back to Germany. It’s part of an international economic interconnectedness that Germany, in particular, has profited from in recent decades. A country like Germany that is proud of its export strength should not — whether intentionally or accidentally — be deterring foreign investors by putting up obstacles to the inflow of capital.

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