A new study by the Institute of the German Economy (dt. Instituts der deutschen Wirtschaft, IW) shows alarming figures. Never before have companies withdrawn so much money from Germany as they did last year. According to OECD figures, it is mainly foreign investment in Germany that has almost completely collapsed, especially investment from European neighbours.

Shortage of skilled workers, protectionism, transport turnaround

The IW defines three main points that lead to this development. First, Germany faces a massive skilled labour problem. Second, the German export model is hampered by growing protectionism. Here, the American Inflation Reduction Act has a negative impact on Germany’s attractiveness, but money from European investment offensives such as the NextGenerationEU programme is not reaching Germany either. Thirdly, the elimination of the internal combustion engine is slowing down the automotive industry. This means that the German economy is losing an important unique selling point.

Investment influences in detail

After the net outflow of capital from Germany initially weakened between 2014 and 2018, it rose sharply again from 2019. At around -132 billion USD in 2022, it now reached the highest net outflow recorded to date.

The break in the trend between 2018 and 2019 supported the analysis of economist and former Ifo president Hans-Werner Sinn, “German industry has become heartsick”. According to this, the automotive industry has partly lost its competitiveness as a result of excessively high exhaust emission limits, the tightening of which was decided at the end of 2018, as the limits lead to a development away from the combustion engine. As the automotive industry is a key sector in Germany, its stumbling affects the entire German industry.

Energy price increases as well as uncertainties in energy security, which have not been reduced by the shutdown of nuclear power plants, are also likely to be a cause of the increased net outflows. This is evident in the higher outflows from the second quarter, which are already fully under the impact of the war from 24 February.

The low growth prospects are also a result of ageing, which is one cause of the skills shortage. Further outflows will be owed to investments to secure key commodities abroad.

However, the impact of the US Inflation Reduction Act (IRA), which subsidises investment in the US, could only be analysed in more detail with 2023 data. However, increasing protectionism seems to be a factor in Germany’s declining attractiveness: Increasing trade barriers as well as subsidies make investments more attractive among trading partners.

Investments in Germany

Most investment in Germany in 2022 comes from the USA. However, according to data from the German Bundesbank, investment from Europe has plummeted dramatically from 79 to 13 billion euros. Most jobs were announced by US companies, followed by Chinese investors with around 4,600 jobs.

According to IW economist Dr Christian Rusche, the author of the study, many problems are home-made, including high corporate taxes, rampant bureaucracy and an ailing infrastructure.

“In order for Germany to become the top address for foreign investment again in the future, the federal government urgently needs to take countermeasures.”