Impact of Foreign Investment in Germany

There are several ways for companies to pursue internationalization. Foreign direct investment (FDI) is seen as one of them, as “one of the major drivers of globalization” and as a crucial element in today’s global economy. FDI “provides additional capital to the production processes of the host countries and, accordingly, increases the economic growth rate” (Hsieh, Boarelli & Chi Vu, 2019, p. 377). Developing nations attract FDI into their economies “as they expect long-term economic growth from additional stable resources” as host countries (Lamsiraroj, 2016, p.116).

Since the process known as globalization emerged in international trade at the end of the 19th century, the dependence of countries on international commerce has grown and after the liberalization of  trade in the 1990s, there has been an explosive increase of international trade, delocalization, and a quest for new markets (Van Cauwenberge, Vancauteren, Braekers & Vandemaele, 2019, p. 361). Companies seek to take advantage of the resources of other countries to minimize the loses that can be generated by the regulation of their home countries. However, when host countries do not have a stable economy – due to problems such as Increases in  Economic Policy Uncertainty (EPU) related to potential changes in the economic policy –, international investors are more likely to opt for a wait-and-see attitude instead of investing in the host country (Canh, Binh, Thanh & Schinckus, 2019, p. 01).

Investment as an Important Factor

Throughout history, investment made for research and development (R&D) has been fundamental for nations and corporations. Investment motivates the creation of innovative products that are “a necessary condition for productivity growth and sustainability” (Honoré, Munari, & de La Potterie, 2015, p. 533). Many nations aim for a better quality of life in their country, based on the resources they have at their disposal. However, their resources are often not enough, that is why research and development are key factors “to improve the technological innovation capability, so R&D investment decision is one of the most important decisions for high-tech enterprises” (Wen & Xia, 2016, p. 519).

The excessive increase in demand for food – that goes hand in hand with per capita income – has led to a change in the way it is produced and on the places where such production is be carried out. The bulk of the additional production of food will be assumed by regions where “determining factors, such as land and water availability, and policy regulations, are the least constraining” (OECD-FAO, 2014, p. 17). Countries that have these characteristics are seen to be on the road to growth. A way to take advantage of this situation is by outsourcing the production and investment “in agricultural land areas in foreign countries via large scale Foreign Direct Investments ” (Hirsch, Krisztin & See, 2020, p. 01).

Foreign land agriculture is an agreed investment made by organizations. In general terms, a company “has to reflect the objective of a resident entity in one economy to obtain a lasting interest (OECD, 2001, p.178). This means that the companies carry out their operations in another country contributing capital and exploiting the resources that are present in the target country. Productivity poses an incentive “for increasing investments in the agricultural sectors in these countries as they represent potentially high returns ” (Collier & Venables, 2012, p.1-22).

From our point of view, foreign direct investments are important factors for the German economy because they contribute to a higher economic growth of the country. Such investment are projected in the long term in order to be more stable and to produce a higher economic development for Germany. Nonetheless, the returns of those investments usually depend on political changes in the host country, which might alienate foreign investors. To attract potential investors a country must have political stability, that is, to reduce the internal problems of the country. Although we have already said that foreign direct investment is a very good opportunity to generate development in the host country, we should not leave aside the negative factors that it generates. For example, the lack of attention provided to educational development and the high competitiveness and technological development imposed by foreign companies, which generate new monopolies that lead local companies to bankruptcy. Even though national governments in the host countries should be concerned about economic growth via FDI, they should not neglect local companies. For this reason they should set certain barriers that make it more difficult for these foreign investors to enter and, at the same time, be more flexible with foreign companies in order to attract their attention and generate incentives for local companies to optimize their production processes and be more efficient.

References

Canh, N. P., Binh, N. T., Thanh, S. D. & Schinckus, C. (2019). Determinants of foreign direct investment inflows: The role of economic policy uncertainty. International Economics.

Collier, Paul, Venables, Anthony J., (2012). Land Deals in Africa: Pioneers and Speculators. Journal of Globalization and Development 3 (1), 1–22.

Hirsch, C., Krisztin, T & See, L. (2020). Water Resources as Determinants for Foreign Direct Investments in Land – A Gravity Analysis of Foreign Land Acquisitions. Ecological Economics, 170, 1-2.

Honoré, F., Munari, F., & de La Potterie, B. V. (2015). Corporate governance practices and companies’ R&D intensity: evidence from European countries. Research Policy, 44, 533–543.

Hsieh, C., Boarelli, S & Chi Vu, T.H. (2019). The effects of economic policy uncertainty on outward foreign direct investment. International Review of Economics & Finance. 64, 377-392.

Lamsiraroj, S.(2016). The foreign direct investment–economic growth nexus. International Review of Economics & Finance. 42, 116-133.

OECD (2001), The Uruguay Round Agreement on Agriculture: An Evaluation of its Implementation in OECD Countries, OECD Publishing, Paris.

OECD/Food and Agriculture Organization of the United Nations (2014), OECD-FAO Agricultural Outlook 2014, OECD Publishing

Van Cauwenberge, A., Vancauteren, M., Braekers, R & Vandemaele, S. (2019). International trade, foreign direct investments, and firms’ systemic risk : Evidence from the Netherlands. Economic Modelling. 81, 361-386

Wen, H., & Xia, K. (2016). Venture capital, ownership concentration and enterprise R&D investment. Procedia Computer Science, 91, 519–525