Germany’s Foreign Direct Investment in Times of Geopolitical Fragmentation
Germany’sForeignDirectInvestmentinTimesofGeopoliticalFragmentation KevinFletcher,VeronikaGrimm,ThiloKroeger,AikoMineshima,ChristianOchsner,AndreaF.Presbitero,PaulSchmidt-Engelbertz,andJingZhou WP/24/130 IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate. TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. 2024 JUN ©2024InternationalMonetaryFund[WP/24/XX] IMFWorkingPaper EuropeanDepartment Germany’sForeignDirectInvestmentinTimesofGeopoliticalFragmentation PreparedbyKevinFletcher,VeronikaGrimm,ThiloKroeger,AikoMineshima,ChristianOchsner,AndreaF.Presbitero,PaulSchmidt-Engelbertz,andJingZhou* AuthorizedfordistributionbyKevinFletcherJune2024 IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate.TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. ABSTRACT:Globalgeopoliticaltensionshaveriseninrecentyears,andEuropeanenergypriceshavebeenvolatilefollowingRussia’sinvasionofUkraine.SomeanalystshavesuggestedthattheseshiftingconditionsmaysignificantlyaffectFDIbothtoandfromGermany.ToshedlightonthisissueandotherfactorsaffectingGermanFDI,weleveragetwodetailedandcomplementaryFDIdatasetstoexplorerecenttrendsinGermanFDIandhowitisaffectedbygeopoliticaltensionsandenergyprices.Indoingso,wealsodevelopanewmeasureofgeopoliticalalignment.Ourmainfindingsincludethefollowing:(i)thepost-pandemicrecoveryinGermany’sinwardandoutwardFDIhasbeenweakerthanintheUSortherestoftheEuropeanUnion(EU27)asawhole;(ii)Germany’soutwardFDIlinkageswithgeopoliticallydistantcountrieshavebeenweakeningsincetheGlobalFinancialCrisis;(iii)therelationshipbetweenGermany’soutwardFDIandgeopoliticaldistancehasbecomemorepronouncedoverthelastsixyears;(iv)Germany’soutwardFDItoChina-Russia-bloccountriesismoresensitivetorecentgeopoliticaldevelopmentscomparedwiththattoUS-bloccountries;and(v)Germany’soutwardFDIinenergy-intensivesectorsdecreasesasdestinationcountries’energycostsincrease,butenergycostsdonotappeartohaveastatisticallysignificanteffectonoutwardFDIinnon-energy-intensivesectors. RECOMMENDEDCITATION:Fletcher,Kevin,VeronikaGrimm,ThiloKroeger,AikoMineshima,ChristianOchsner,AndreaF.Presbitero,PaulSchmidt-Engelbertz,andJingZhou.2024.Germany’sForeignDirectInvestmentinTimesofGeopoliticalFragmentation.IMFWorkingPaper24/xx.WashingtonD.C. JELClassificationNumbers: F23;F50;F21;F14; Keywords: Germany;foreigndirectinvestment;geopoliticalfragmentation Author’sE-MailAddress: KFletcher2@imf.org;AMineshima@imf.org;APresbitero@imf.org;JZhou@imf.org;veronika.grimm@utn.de;thilo.kroeger@svr-wirtschaft.de;christian.ochsner@svr-wirtschaft.de;paul.schmidt-engelbertz@yale.edu * WORKINGPAPERS Germany’sForeignDirectInvestmentinTimesofGeopoliticalFragmentation PreparedbyKevinFletcher,VeronikaGrimm,ThiloKroeger,AikoMineshima,ChristianOchsner,AndreaF.Presbitero,PaulSchmidt-Engelbertz,andJingZhou1 1VeronikaGrimmisProfessorofEnergySystemsandMarketDesignattheUniversityofTechnologyNurembergandmemberoftheGermanCouncilofEconomicExperts;ThiloKroegerisSeniorEconomistattheGermanCouncilofEconomicExpertsandPostdoctoralFellowattheUniversityofCopenhagen,ChristianOchsnerisEconomistattheGermanCouncilofEconomicExperts;andPaulSchmidt-EngelbertzisaPh.D.studentatYaleUniversity. Contents 1.Introduction6 2.RelatedLiterature7 3.DataandBackgroundStatistics8 FDI8 GeopoliticalDistance10 GeopoliticalRisk11 EnergyPrice12 4.GermanFDIovertheLastTwoDecades12 Overview12 Germany’sFDIandGeopoliticalDistance16 5.EconometricAnalysis20 EffectsofGeopoliticalDistanceandGeopoliticalRiskonGermany’sOutwardFDI20 EffectsofEnergyPricesonGermany’sOutwardFDI22 6.Conclusions24 AnnexI.FDIStockandInvestmentvs.DisinvestmentbyRegion(MiDidata)25 AnnexII.IPD-BasedGeopoliticalDistance28 AnnexIII.ResultsBehindtheBinnedScatterplot29 AnnexIV.ResultsfromMiDiData30 References31 FIGURES Figure1.Germany’sFDI6 Figure2.NewIndustrialPoliciesbyStatedObjective7 Figure3.GPRIndex11 Figure4.End-UserNaturalGasPrices12 Figure5.TotalFDI13 Figure6.Germany’sFDIbyCounterparts14 Figure7.Germany’sFDIbySector15 Figure8.RisksRelatedtoGermany’sFDI16 Figure9.GeopoliticalDistancefromGermany(IPD)16 Figure10.ComparingIPDandSIPRI-BasedGeopoliticalDistanceMeasures–OverTime17 Figure11.ComparingIPDandSIPRI-BasedGeopoliticalDistanceMeasures—Map18 Figure12.Germany’sFDIandGeopoliticalDistance—CrossSectional19 Figure13.SensitivitytoGeopoliticalRisksandSIPRIArmsImports20 Figure14.Germany’sOutwardFDI:SensitivitytoGeopoliticalRisksandGeopoliticalAlignment21 TABLES 1.RegionalbreakdownofFDIactivitiesofGermanMNEs10 2.GermanyOutwardFDIandGeopoliticalAlignment22 3.GermanyOutwardFDIandEnergyPriceinDestinationCountries23 1.Introduction Figure1.Germany’sFDI Germany’sinwardandoutwardforeigndirectinvestment(FDI)followedtheglobalizationoftradeonanupwardtrendduringthefirstdecadeofthiscentury.Asahighlydevelopedandexport
