Foreign direct investment stocks up again in 2019

Germany’s outward immediate and indirect foreign direct investment (FDI) was up by €48 billion at the end of 2019 to €1,372 billion. FDI can take the form of equity or loans to foreign subsidiaries or associates, with the former accounting for over 80% of German outward FDI. Expanding by €10 billion, inward FDI into Germany increased at a somewhat more subdued rate to a total of €556 billion. Intra-group lending was slightly more important here, with a share of just under 40%. Links with European countries and the United States played a significant role in both directions.

German direct investors showing major interest in US firms

Europe remained the most popular recipient region for German direct investors at the end of 2019. At €675 billion, it accounted for around half of outward FDI. The ranking of individual recipient countries remained broadly unchanged: almost 30 , or €391 billion worth, of all German FDI went to the United States, which was once again number one. Far behind the United States in the runner-up spots were the United Kingdom (€136 billion), Luxembourg (€95 billion) and China (€89 billion). Remarkably strong year-on-year growth in FDI stocks destined for Belgium (+€6 billion), Singapore (+€4 billion) and Russia (+€3 billion) saw them continue to climb the country rankings.

Looking at immediate FDI by economic sector of the investment enterprise, financial and insurance activities stand out. The high level of investment in foreign holding companies without a management function was particularly notable, which accounted for €553 billion, or around 40%, of immediate FDI. These companies often serve as intermediaries for certain purposes, e.g. tax optimisation. Figures for immediate and indirect FDI where a “look-through” approach is applied to such holding companies therefore paint a different picture. At €450 billion, the main industry in which German direct investors ultimately invested based on these figures was the manufacturing sector.

European direct investors crucially important for Germany

At the end of 2019, immediate and indirect inward FDI into Germany totalled €556 billion, with the lion’s share coming from European countries. Accounting for a share of 80%, Europe was even more strongly represented as a source of inward FDI than as a recipient of German outward FDI. Direct investors from the Netherlands and Luxembourg continued to lead the field, investing €106 billion and €94 billion, respectively, though Dutch investors scaled back their stocks by €10 billion. Conversely, direct investors from Switzerland and Ireland raised their investment in German enterprises by €7 billion to €47 billion and €6 billion to €17 billion, respectively. Compared with the part it plays in German outward FDI, the United States is slightly less significant as a direct investor in Germany. Its investment in the amount of €57 billion made up around 10% of total inward FDI. If, however, the country of the ultimate investor – instead of the country of the immediate investor – is considered, US investment rose to €100 billion. Viewed through this lens, Germany also played an important role as a direct investor within its own borders due to round-tripping. This saw German groups ultimately invest €55 billion in Germany via intermediate enterprises abroad, which amounts to no less than 10% of the total investment sum.

FDI flows relatively robust in 2020 despite coronavirus crisis

While FDI stock data taken from corporate balance sheets are only available for 2019, balance of payments reporting is already providing transaction data for 2020. These show that Germany’s FDI is relatively robust despite the coronavirus crisis. Taking the World Investment Report published by the United Nations Conference on Trade and Development (UNCTAD) for comparison purposes, which estimated a 40% slump in global FDI flows in 2020, the decline in German outward FDI flows was somewhat milder, at 30%. Contrary to the projected global slump, inward FDI flows to Germany actually increased, going up by 60%.

German enterprises investing less in euro area

At €97 billion, outward FDI flows from Germany were down by almost €40 billion on the year. Funds were once again channelled abroad primarily in the form of equity and amounted to €79 billion, while intra-group lending, at €17 billion, played a lesser role.

The regions particularly affected by the weaker outward FDI flows from Germany were the euro area and the United States. Inward flows into the euro area decreased by almost half to €49 billion. At €25 billion and €8 billion, respectively, transactions to Luxembourg and Italy experienced the largest declines compared with 2019. There were even outflows of investment in certain countries, such as Ireland and Austria. Investment in the United States went down by around one-quarter to €29 billion. German investors even withdrew some of their funds from developing countries. The main countries affected by this were India (-€2 billion), Brazil (-€1 billion) and China (-€1 billion), which had still benefited from inward FDI flows in the previous year. According to the UNCTAD report, this development could be due to the heavy dependence of these economies on global value chains, which have been disrupted by the coronavirus pandemic. One other reason cited by the report is that some of these countries have been unable to implement measures to boost their economies on the same scale as developed countries.

Inward FDI flows to Germany stronger than projected

Contrary to the UNCTAD projection of a coronavirus-related global FDI slump, Germany was able to benefit from higher inward flows in 2020. Foreign direct investors pumped significantly more money into German enterprises than in the previous year (€97 billion compared with €60 billion). Around two-thirds of the funds were debt instruments (€66 billion), with equity making up only one-third.

In particular, direct investors from the United States as well as, in the euro area, the Netherlands, Luxembourg and Malta expanded lending to their German subsidiaries. However, there were also countries that cut back their investment. For example, inward flows from China fell by around €1 billion to €2 billion. Japanese investors took an even more cautious approach, reducing their investment flows from €5 billion to €1 billion. The main beneficiaries of inward FDI were domestic economic sectors such as financial and insurance activities; professional, scientific and technical activities; and the information and communication sectors.