The German economy’s international capital links
The latest results from the Bundesbank's foreign direct investment survey from the end of 2003 have just been published in a new edition of the Special Statistical Publication 10 "International capital links". This contains information on the German economy’s cross-border corporate participating interests broken down by country and economic sector.
As was the case in the previous year, between the end of 2002 and the end of 2003, German direct corporate assets abroad declined by €11 billion to €589 billion whereas foreign direct investment in Germany grew by €18 billion to €531 billion during the same period. This development resulted in a relatively even balance sheet overall. If, by contrast, one considers the consolidated direct and indirect corporate assets, German direct investment abroad, which remained virtually unchanged at €666 billion (+€2 billion), is more than twice as high as foreign direct investment in Germany which grew by €22 billion to €306 billion.
In the case of German direct investment abroad, the appreciation of the euro against almost all other currencies was a major factor in the change in the direct investment stocks between the end of 2002 and the end of 2003. This can be seen from the development of the direct investment stocks in non-euro-area countries, in particular the United States, where the appreciation of the euro led in many cases to a nominal decline in corporate assets held abroad after conversion into euro. Between the end of 2001 and the end of 2002, the euro had already risen by 19% against the US dollar. It then proceeded to rise by a further 20% between the end of 2002 and the end of 2003, a development which had a marked impact on the value of the sizeable German corporate assets in the United States despite additional investment by German enterprises. By contrast, after adjustment for exchange-rate movements, German direct investment assets abroad rose. Direct investment stocks also rose in euro-area countries, where exchange-rate-related changes can be excluded because of the single currency. Compared with the previous year, in 2003, foreign enterprises in which Germans hold a participating interest managed, on the whole, to reduce their annual losses considerably while their annual profits remained roughly the same. The annual losses from 2002 were, however, only partly offset by German shareholders and thus led to a widespread increase in losses carried forward.
The rise in foreign direct investment stocks in Germany between the end of 2002 and the end of 2003 can be attributed almost entirely to investors from other European Union countries. Overall, equity capital, especially shares in nominal capital and capital reserves, grew significantly while loans from investors declined. This may be a result of the amended thin capitalisation rules which restrict the extent to which interest paid on loans may be deducted from taxable profits (section 8a of the Corporation Tax Act – Körperschaftssteuergesetz). The profitability of enterprises in Germany with foreign shareholders improved during 2003 compared with 2002: overall, the profits for the year rose and the annual losses were reduced.
Enterprises’ indirect participating interests via dependent holding companies are taken into account in the analysis of the results of the international capital links survey. This is the only way to determine investors’ actual investment interests by country and economic sector. To avoid double counting primary direct investment capital in dependent holding companies is disregarded in the case of the consolidated direct and indirect investment data.