Investors from abroad are losing interest in funding projects in Germany
In a surprising turn of events, foreign direct investment (FDI) in Germany has witnessed a significant drop, despite the country maintaining its position as the most sought-after location for FDI in the European Union.
The US pharmaceutical company Eli Lilly's 2.3 billion euro investment in a new plant in Alzey, Rhineland-Palatinate, is one of the few bright spots in an otherwise gloomy landscape. However, the investment weakness is expected to persist until 2024, according to the IW.
The decline in FDI is primarily attributed to growing investor concerns over bureaucratic complexity, regulatory fragmentation within the EU, and weakening export performance linked to global trade uncertainties. These factors increase the cost and risk associated with investing in Germany.
Foreign investors find doing business in Germany and the broader EU increasingly difficult due to complex regulations, lengthy approval processes, and inconsistent national laws. This regulatory fragmentation is further exacerbated by the EU’s lack of an integrated capital market, fragmentation in tax codes, legal frameworks, and weaker venture capital and private equity markets compared to the US.
Germany’s economic fundamentals are also under pressure. Its trade surplus, a key pillar of economic strength, has shown significant volatility and decline, with exports falling notably—especially to important markets like the US, China, and the UK—while imports have risen. This erosion of the export-driven economic model undermines investor confidence.
Despite the downturn, some notable investments are still taking place. The energy company BP plans to spend 6.8 billion euros on two North Sea wind farms in Germany. Additionally, Apple has announced a significant expansion of its European chip design center in Munich, with around 1 billion euros earmarked for the project.
Three data centers in Berlin, Wustermark in Brandenburg, and Hanau in Hesse are also expected to exceed the billion-euro mark. Six of these investments are in the billion-euro range, offering a glimmer of hope amidst the overall decline.
However, German companies are cautious about investing in Germany for 2024, with 36% planning lower budgets compared to this year. According to an IW survey, only 27% of German companies plan higher investment spending for 2024.
In 2022, around $132 billion (125 billion euros) in foreign direct investments left Germany, exceeding the amount invested in the same period. This represents the highest net outflows of foreign direct investments ever recorded in Germany.
Despite the challenges, Achim Hartig, Managing Director of Germany Trade & Invest (GTAI), stated that Germany remains the most sought-after location in the European Union for foreign direct investments.
The number of projects in Germany dropped to its lowest since 2013, with only 832 projects in 2022. Steeper declines in foreign direct investments have been observed in countries like France.
As of 2023, 16 investments worth over 100 million euros have been committed in Germany. The IW predicts that the investment weakness will not be overcome in 2024. However, the German government and industry leaders are working diligently to address the underlying issues and restore confidence in Germany as a favourable destination for foreign direct investment.
The US pharmaceutical company Eli Lilly's investment in a new plant in Germany is a rare instance of financing in an otherwise deteriorating FDI landscape, yet the investment weakness is anticipated to persist until 2024, according to the IW. Concerns over bureaucratic complexity, regulatory fragmentation within the EU, and global trade uncertainties are primary factors contributing to the decline in FDI in Germany, increasing the cost and risk associated with investing.
