Bavaria in focus: Foreign investments are slowly recovering!

Bavaria in focus: Foreign investments are slowly recovering!

The German economy is facing challenges that require urgent measures. In 2022, the number of foreign investments in Germany fell to its lowest level since 2011. However, the development bank KfW reports that a return of foreign investors to Germany is in sight. Nevertheless, the economic data situation in Germany remains weak; A special fund alone is insufficient for an economic turnaround. Investors continue to look critically at Germany, which depends heavily on the new government.

Medium-sized companies are increasingly withdrawing from foreign business as other countries offer more attractive conditions, including lower labor and energy costs as well as less regulation. Bavaria is often viewed as a particularly attractive business location, especially in the technology sector, which is underlined by the settlement of companies such as Google, Microsoft and OpenAI.

Economic policy changes are necessary

However, Bavarian medium-sized businesses are hopeful about the new federal government's plans. Planned economic policy changes include reducing bureaucratic hurdles, reducing taxes and energy prices, and promoting investment in a market economy. The main demands of medium-sized businesses include the realignment of the skilled worker strategy, increasing the participation of women in the workforce and faster recognition of foreign professional qualifications. There is also a call for a reduction in the work ban for those seeking protection.

Around 50% of companies have no financial scope for additional investments, which is why a faster reduction in corporate taxes and the abolition of the solidarity surcharge are considered urgently necessary. The increase in the minimum wage to 15 euros is viewed particularly critically, as this could increase labor costs in the catering industry by around 17%. The mother's pension, on the other hand, is viewed as suboptimal because it ties up tax resources without effectively combating old-age poverty among mothers.

International direct investment

A look at international direct investments shows that foreign investors increased their investment capital in Germany by a cumulative total of 163 billion euros from the end of 2019 to June 2024. The majority of these investments come from countries outside the euro area, with the USA with 56 billion euros, the Netherlands with 35 billion euros and the United Kingdom with 17 billion euros being the main countries of origin. Nevertheless, direct investment inflows to Germany have declined significantly since 2022.

Fund inflows from the euro area have decreased significantly since the end of 2021, while inflows from third countries are also only moderate compared to the previous years 2019-2021. In 2020 and 2021, foreign companies invested over 100 billion euros in Germany. In contrast, from the end of 2021 to mid-2024, only 62 billion euros in equity capital flowed to Germany.

In the manufacturing sector in particular, foreign investments were concentrated on the production of motor vehicles and parts, mechanical engineering and the production of data processing equipment. Almost 60% of total inflows of equity capital into manufacturing since 2020 have gone to these three sectors, while less than 10% has flowed into energy-intensive sectors. The reasons for the decline in direct investments could be high energy prices and increased location competition.

In order to attract foreign capital, Germany and Europe are required to demonstrate their competitiveness in promising industries. While other industrialized nations in the euro area are recording inflows of foreign equity capital, the pressure on Germany to create attractive conditions is greater than ever.

In view of this situation, everyone involved is asked to take an active role in order to secure Germany's economic future. Like the Bavarian State Newspaper reported, fundamental changes in economic policy are necessary to regain investor confidence. The current developments in Germany's international ties through direct investments demonstrate the urgency of remaining active despite a challenging economic environment, as the Bundesbank does in its monthly report holds on.