At the end of 2021, Germany’s primary outward foreign direct investment (FDI) stocks were up 8% on the year at €1,506 billion. In addition to capital flows, positive exchange rate effects played a role, leading to a higher valuation of stocks. Stocks of FDI in Germany show a different picture. A decline was recorded at the end of 2021 for the first time in a long period, with stocks down 2% to €852 billion.

In general, FDI is made on the basis of strategic considerations and therefore entails long planning and settlement periods. However, it is not entirely independent of short-term developments in target regions or individual sectors of the economy. In particular, if FDI operations within a group are fulfilling financing functions, there may be significant fluctuations even within the period of one year by means of intra-group lending or repayments. The coronavirus pandemic and Russia’s attack on Ukraine are affecting FDI decisions on a lasting basis through the reassessment of international production chains and the supply of commodities. However, the full impact of such events is usually only gradually reflected in the FDI stock data.

Stock of German FDI abroad

At the end of 2021, German funds were provided predominantly in the form of equity capital, which amounted to 82% of all FDI assets. By contrast, credit operations as another way of providing funds between investors and investment enterprises played a subordinate role. The bulk of German FDI – at €1,005 billion or 67% – was invested in foreign holding companies. These companies often serve as intermediaries for tax purposes or capital pooling and pass-through activities, in some cases via several stages in various countries. In general, the real direct investment enterprises are found at the end of such chains in the form of production or service enterprises. Therefore, in order to identify the 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 2021, the volume of these holdings came to €1,426 billion.

In this consolidated view, the United States continued to occupy first place in the country ranking with a share of 29%. Germany´s predominant interest was in US-companies which supply financial and insurance services. Luxembourg followed with a significantly lower share of 8%. China came in third place – and thus ahead of the United Kingdom – for the first time. German investors in China focused mainly on the manufacturing sector, which accounted for more than two-thirds of the total amount of €103 billion. In Russia, German FDI amounted to €22 billion, which was 1.5% of the overall volume. There were more than 700 investment enterprises, employing 262,000 people. German direct investment in Ukraine amounted to €4 billion across 148 enterprises with 73,000 employees overall.

Looking at sectors of the economy, just over one-third of the total investment by German enterprises, or €491 billion, was in the manufacturing sector. Of the eight million jobs provided by German branches abroad as a whole, almost half were actually attributable to the manufacturing sector. While the financial and insurance service providers accounted for €349 billion, or around 24% of the holdings, they provided only 4% of the jobs. This is due to the large number of holding companies without a management function, which employ little to no staff. “Wholesale and retail trade; repair of motor vehicles and motorcycles” was the third major sector of the economy, with an investment volume of €236 billion, or 17% of the total figure. Overall, the number of foreign investment enterprises rose again to 42,000 at the end of 2021.

FDI in Germany

Although foreign equity capital rose again in Germany, there was a fall overall at the end of 2021 after deducting the significantly higher lending by German direct investment companies to their foreign investors.

Holding companies also played an important role in foreign investment in Germany as at the end of 2021. They accounted for two-thirds of the €852 billion overall in primary FDI. Here, too, it is worth looking through the dependent holding companies at the final investment targets. From this perspective, “financial and insurance activities” was the most important economic sector for foreign investors, accounting for one-third of investment. The manufacturing sector came in second place, accounting for just under one-quarter of holdings. Other economic sectors trailed further behind, such as the “wholesale and retail trade; repair of motor vehicles and motorcycles” (10%) and the information and communication sector. The latter showed particularly dynamic growth of 22%, driven by the telecommunications sector. In total, foreign direct investors held investments in 17,000 German enterprises, which provided more than 3 million jobs. 

FDI flows remained robust in 2022, despite Russia’s war of aggression

While the availability of FDI stock data taken from corporate balance sheets is subject to a time lag of around 16 months, balance of payments reporting already provides transaction data for 2022. These capture solely the primary FDI relationships. At €169 billion, German FDI flows abroad proved robust, despite being down slightly on the exceptionally high level of the previous year. By contrast, FDI flows from abroad to Germany almost halved to €44 billion. In net terms, €125 billion thus flowed abroad in the form of FDI – more than ever before.

German enterprises scaled back their FDI loans in Russia 

In 2022, German enterprises again invested predominantly in equity capital (€114 billion), while intra-group lending played a lesser role at €55 billion. European countries remained the most popular destination for German FDI, accounting for 70% of total funds, with the euro area alone accounting for 60%. Return flows of funds from Russia in the amount of €3 billion were observed as a result of the scaling back of direct investment loans to Russian enterprises. When interpreting the equity capital figures in Russia, it should be borne in mind that the withdrawal of German direct investors is largely reflected in lower valuations as a result of write-downs or Russian expropriations, i.e. processes that are not captured in the reported transaction data but will likely become apparent once the stock data for 2022 are available.

Europe was followed by Asia and the Americas with equal shares of 14%, corresponding to €24 billion each. Within Asia, China in particular, recorded an increase of €12 billion, although in arithmetical terms this was based entirely on reinvested earnings. By contrast, the balance between new investment and liquidations was negative, as in the previous year. Japan and Singapore each received around €3 billion from German investors. Across the Atlantic, the main beneficiary by far was the United States, which saw capital inflows of €19 billion. Bermuda took second place in the Americas with €2 billion, ahead of Canada.

Declining FDI inflows from Europe

Foreign investors’ new exposures to German enterprises declined again in 2022, amounting to €44 billion. This was due, in particular, to the lower inflows of equity capital, which fell from €41 billion to €15 billion. Although foreign investors channelled more money into new investments, this was offset by liquidations of nearly the same amount. Furthermore, the provision of funds via intra-group credit transactions was around €10 billion lower than in the previous year.

Viewed in regional terms, the Americas showed the greatest interest in Germany as a location for investment, providing German enterprises with €21 billion of FDI, particularly in the form of intra-group lending (€18 billion). Once again, the bulk of this was attributable to the United States. By contrast, relatively little investment came from Europe, with inflows decreasing from €79 billion in the previous year to €13 billion. Asia provided €8 billion in funds, with Chinese investors leading the field with €4 billion, followed by Japanese enterprises, which invested €3 billion.

Marked shifts were observed between European countries. Outflows of €25 billion from the traditional holding location of Luxembourg contrasted with inflows from Ireland (€14 billion), France (€11 billion) and the Netherlands (€7 billion). A shift in investment behaviour was evident in the United Kingdom. While there had been exceptionally high inflows to Germany in previous years on the back of intra-group loans, there were return flows of €4 billion in the reporting year.