At the end of 2020, Germany’s primary outward foreign direct investment (FDI) stocks were down by €10 billion on the year to €1,376 billion. Although new investment funds were indeed channelled abroad, they were offset by higher negative exchange rate effects, leading to a lower valuation of the stocks. German funds were provided predominantly in the form of equity capital, which amounted to 84% of all FDI assets. Credit operations as another way of providing funds between investors and investment enterprises played a subordinate role, by contrast.

Stocks of FDI in Germany show a different picture. These registered an increase of €39 billion to reach €845 billion at the end of 2020. Lending played a significantly larger role for FDI claims in Germany than for the claims of German enterprises abroad, with equity capital accounting for just 58% of the capital provided. Links with European countries and the United States remained a major factor in both investment directions.

FDI is usually based on strategic considerations and thus involves long planning phases. However, it is not entirely independent of economic developments in target regions or individual sectors of the economy. The coronavirus pandemic and Russia’s attack on Ukraine are also affecting direct investment decisions – not least through the reassessment of international production chains and the supply of commodities. The move away from fossil fuels and an increased focus on climate change projects are other key factors. The full impact of such events and developments is therefore usually only gradually reflected in the direct investment figures.

German direct investment abroad

At the end of 2020, the bulk of German direct investment, at €937 billion or 68%, was invested in foreign holding companies with or without a management function. These companies often serve as intermediaries for tax purposes or capital pooling – in some cases via several stages in various countries. The actual direct investment enterprises are only found at the end of such chains in the form of production or service enterprises. The Netherlands and Luxembourg are traditional holding locations which, at €191 billion and €186 billion, together accounted for 27% of primary FDI.

In order to identify the actual – final – region or sector where the investment object is located, it is necessary to look “through” the holding companies. This can be done using the consolidated data on primary and secondary FDI. At the end of 2020, the volume of the consolidated FDI came to €1,315 billion. In this consolidated view, the combined share of investment in the Netherlands and Luxembourg is reduced to €43 billion, or 3%.

Looking at sectors of the economy, the manufacturing sector accounted for €444 billion, or one-third of the investment stocks. Of the eight million jobs provided by German branches abroad as a whole, almost half were actually attributable to the manufacturing sector. Although financial and insurance service providers together accounted for just under one-quarter of the holdings, at €302 billion, they provided only 4% of the jobs. This is due to the large number of holding companies without a management function, which, by definition, employ little to no staff. Wholesale, sale and repair of motor vehicles was the third major sector of the economy, with an investment volume of €223 billion, or 17% of the total figure. At the end of 2020, around 7,900 German investors had invested in 41,000 foreign enterprises – a trend that is still rising.

Foreign direct investment in Germany

Holding companies also played an important role in foreign investment in Germany. Here, too, their share came to two-thirds of primary FDI at the end of 2020. Even looking through the dependent holding companies to the final investment targets, the financial and insurance activities sector remained the most important economic sector, with a volume of €207 billion. The manufacturing sector was in second place, with an investment volume of €139 billion. It was followed at quite some distance (with figures only reaching the double-digit billions) by other economic sectors such as trade at €60 billion and the energy sector at €38 billion; at 47%, the latter recorded the largest growth in a single economic sector. In total, foreign direct investors held investments in 17,000 German enterprises providing more than 3 million jobs.

Direct investment flows in 2021 remain robust despite pandemic

While the availability of FDI stock data taken from corporate balance sheets is subject to a time lag, balance of payments reporting is already providing transaction data for 2021. These capture solely the primary direct investment relationships. The data show that German outward FDI flows rose by 37% to €164 billion, following the sharp decline in the first year of the coronavirus pandemic. This brings them back to the level of their record high in 2018. By contrast, direct investment flows from abroad to Germany showed a marked reduction – though it should be noted that inflows had been exceptionally high the previous year.

Major fluctuations from year to year are not unusual. Therefore, a longer-term comparison of the aggregate direct investment flows to and from Germany in relation to gross domestic product (GDP) provides a clearer picture of how robustly direct investment flows have developed so far under the conditions of the coronavirus pandemic. In 2020 and 2021, the years of the coronavirus pandemic, direct investment flows came to 6.8% of German GDP, which was around one percentage point higher than the reference figure for the previous ten-year period.

German enterprises’ investment in the United States down in 2021

In 2021, German enterprises again invested predominantly in equity capital (€113 billion), while intra-group lending played a lesser role at €51 billion. Europe remained the most popular destination for German outward FDI, accounting for 76% of the total funds. In an unprecedented change to the ranking order, it was followed by Asia at 13% and only then the Americas with a share of just 9%. While China and Singapore received significantly more investment than in previous years, at €6 billion and €9 billion respectively, German financial flows to the United States practically halved from €21 billion to just €13 billion. This development is consistent with UNCTAD’s World Investment Report 2021, which observes that the declines in direct investment caused by the coronavirus pandemic are very asymmetric in regional terms and affect the United States, in particular, more than Asia.

FDI inflows to Germany in 2021: Asia catching up

Foreign investors’ new exposures to German enterprises halved to €62 billion compared to the exceptionally high level of the previous year, thus bringing the figure back down to its long-term average. This was mainly due to intra-group credit transactions, which fell sharply from €79 billion to €25 billion. By contrast, at €37 billion, inflows to equity were only slightly below the previous year’s level and even significantly above the level before the outbreak of the coronavirus pandemic.

The shift in the geographical distribution of the transactions by country as captured in the balance of payments is noteworthy. At €14 billion, significantly more investment funds came from Asia than was previously the case. As much as half of this flowed from Japan to Germany. By contrast, investors in the Americas actually withdrew €10 billion worth of funds, having invested €42 billion the previous year. US and Canadian enterprises alone scaled back their direct investment in Germany to the tune of €5 billion and €3 billion. Although the European countries reduced the volume of new funds they provided compared with the previous year, they remained by far the most important group of investors in German enterprises. Developments were very mixed within this group of countries. At one end of the spectrum, investors from the United Kingdom almost doubled their investment compared with the previous year to €23 billion. At the other end, investors from the traditional holding location of Luxembourg reduced their exposure by around €23 billion on the year to €5 billion.