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Foreign Direct Investment – Motor for Jobs, Growth, and Prosperity

Through foreign direct investments, German companies access markets worldwide. At the same time, companies from other countries invest in Germany. Both strengthen the German economy, secure jobs, and promote prosperity. This makes freedom of investment and comprehensive legal protection for foreign investments all the more important.

Germany benefits considerably from international economic integration. German foreign direct investment (FDI) abroad has increased almost six-fold since 1990 to around 1.2 trillion euros. Thanks to their successful activity abroad, companies benefit from local comparative advantages and thus secure jobs and competitiveness at home in Germany. Through their foreign investments in over 38,000 companies, German firms generate annual foreign sales (2017: 3.1 trillion euros) which are more than twice as high as German exports (2017: EUR 1.3 trillion euros) (Deutsche Bundesbank, 2017). FDI thus ensures that Germany remains a competitive market. FDI also helps to establish high labour and social standards in developing countries.

FDI in Germany

Increasingly, the success of German industry is also based on investment from abroad. Foreign companies operate production facilities through their investments and strengthen business relationships with German partners. Such investments secure and create jobs in Germany. The figures of the Deutsche Bundesbank show how important FDI is for the German economy: Stocks of FDI in Germany amounted to 534 billion euros in 2017. Foreign investors hold stakes in around 17,000 companies in Germany and are responsible for around 3.1 million jobs. They generated a revenue of 1.6 trillion euros in Germany in 2017.

However, less and less direct investment is flowing to industrialised countries worldwide. By contrast, the growth markets of the major emerging markets are becoming increasingly attractive. In 1990, around 17 percent of global investment flows went to developing and emerging countries. By 2018, the figure had risen to 54 percent. The attractiveness of Europe as a business location is declining. In 1990, the EU still held 47 percent of global FDI stocks, but by 2018 Europe’s share had dropped by more than half to 21 percent. Europe must therefore work decisively towards remaining an attractive destination for foreign investments.

Tightening Investment Screening

Unfortunately, more and more countries are increasingly restricting foreign direct investment. In 2018, 55 countries adjusted their foreign investment laws. More than a quarter of these measures brought with them new restrictions – the highest number in two decades. Investment screening to protect national security played an important role in this context. Since 2011, such measures have been introduced in eleven countries, while 41 countries have tightened existing instruments.

This trend can also be observed in Germany. The increase in Chinese investment fuelled the political debate as to whether the government has enough leeway to restrict unwanted investment. Proponents of tighter investment screening warn that the innovative strength and sustainability of the German and European economies are threatened by strategic and often government-sponsored foreign investments in cutting-edge technology providers. Furthermore, some proponents view more rigorous controls as tool to incentivise market opening abroad (“reciprocity” in market access).

The German government tightened foreign investment screening in both 2017 and 2018. A further comprehensive modernization of the German Foreign Trade and Payments Act (Außenwirtschaftsgesetz) is planned for 2020 which threatens additional restrictive measures. The European Union adopted regulation in early 2019 to harmonise investment screening in the EU. German industry supports precautionary measures to protect public order and national security. It must also be prevented that state-subsidised investments from abroad lead to market distortions or undermine the social market economy. Nevertheless, it must be ensured that foreign investment is welcome in Germany and that investment screening does not become an instrument of industrial policy.

Guaranteeing Freedom of Investment and Open Markets: Investment Agreements

In order to facilitate German investment abroad, it must be protected against political risks. Therefore, a high level of protection is necessary within future Bilateral Investment Treaties (BIT). At the same time, the right of states to regulate in the interest of the public must be guarded in such contracts.

The Lisbon Treaty (in force since December 2009) had brought investment protection within the scope of the EU’s common commercial policy. As such, it has been part of the EU’s negotiations of Free Trade Agreements (FTAs). In 2017, the European Court of Justice found, in its opinion on the EU-Singapore Free Trade Agreement, that parts of investment protection fall under the competence of both the Union and its members. The trade agreement with Canada (CETA) contains a chapter on investment protection with state-of-the-art provisions. CETA is a mixed agreement. The chapters which fall into the exclusive competence of the Union are currently applied on a provisional basis with ratification still ongoing in the member states. The chapter on investment protection, on the other hand, is not yet applied pending ratification by the members. The EU and Singapore have negotiated an FTA and an Investment Protection Agreement, i.e. two separate treaties. The trade agreement entered into force late 2019 after the European Parliament and the EU member states gave their consent. The Investment Protection Agreement is yet to be ratified by all member states according to their own national procedures. In mid-2019, the EU signed a trade agreement and an Investment Protection Agreement with Vietnam. Both agreements still await ratification: the FTA by the Union, the Investment Protection Agreement by both the Union and the respective national parliaments of the member states.

The EU is also negotiating a BIT with China (Comprehensive Agreement on Investment, CAI). A finalization of the talks, which had started in 2013, is long overdue. Apart from investment protection, the negotiations also include market access. Progress has been slow; the parties exchanged market access offers for the first time in mid-2018.

The EU supports the establishment of a Multilateral Investment Court (MIC). Negotiations started in late 2017 under the United Nations Commission on International Trade Law (UNCITRAL). The aim of the MIC is to provide a procedural framework for investor-state dispute settlements. ISDS is controversial in the wider public. The EU hopes to address some of this criticism with a multilateral solution.