German FDI hits record high as UK firms look for a foothold in the EU

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Germany received record levels of foreign direct investment last year, official statistics show, with the boom driven by a surge in British companies setting up operations in Europe’s biggest economy to maintain a post-Brexit foothold in the EU .

But officials expect the total volume of FDI to decline this year as President Joe Biden’s Inflation Reduction Act lures investment in green technologies from Europe to the United States.

“When it comes to new decisions, the numbers are dwindling,” said Robert Hermann, chief executive of Germany Trade & Invest (GTAI), the German government’s economic development agency. “The trend we’re seeing is that there will be fewer.”

He identified the IRA as a potential factor. “We assume it will have an effect on investment in Europe and Germany,” she said.

IDE to Germany it totaled €25.3bn last year, up from €7bn in 2021, a 261% increase, with US, Swiss and UK investors driving domestic investment as new projects from China declined. Germany has become a magnet for semiconductor and battery companies and a beneficiary of EU plans to increase the bloc’s self-sufficiency in key technologies and its resilience to potential disruptions to Asian supply chains.

Much of the increase in IDEs was explained by US chip maker Intel’s plan to build a 17 billion euro factory in the East German city of Magdeburg, and also from an investment of 4.5 billion euros by Swedish start-up Northvolt in a new battery factory in the northern state of Schleswig-Holstein.

But even without Intel’s contribution, FDI would have stood at €8.3 billion, higher than the 2021 figure.

Hermann said investors were attracted to Germany by “the size of its market, its secure legal framework, highly skilled workforce, infrastructure and research and development environment.”

GTAI’s figures are something of a lagging indicator. The huge increase in energy prices last year caused by Russia’s war in Ukraine has made Germany a far less attractive place to do business than it was before the invasion. While gas prices are now close to pre-war levels, many companies are still looking elsewhere, particularly in the United States. The IRA provides $369 billion in subsidies and tax credits for clean energy technologies.

Hermann said energy prices play a role for large international investors, but other factors are more important. “Not all projects are energy intensive,” he said. “Many are driven by personnel costs and by [proximity] to key R&D partners, suppliers and customers.”

The largest source of investment in Germany last year was the United States, which accounted for 279 projects, with Switzerland in second place and the United Kingdom in third. The total of 170 UK-originated FDI projects increased by 21% compared to 2021.

“For British companies, it is particularly important to have a foothold in the EU after Brexit,” said Hermann. Around a third of projects announced by UK companies were in financial services and 21% in IT, the GTAI said.

The agency noted that inbound investment from China was declining, with only about 141 projects announced last year, the lowest figure in eight years. Despite the decline, China was the fourth largest foreign investor.

Some experts attributed the decline to tighter restrictions on merger and acquisition activity by Chinese companies in Germany. But Hermann attributed the decline to the aftermath of the Covid-19 pandemic, which had made it more difficult for Chinese executives to travel to Germany.