Foreign Direct Investment Analysis

This assignment provides a comprehensive analysis of foreign direct investment (FDI) and its effects on economic growth. It includes a list of references from various academic journals and online sources, covering topics such as the determinants of FDI, its impact on CO2 emissions, and the influence of Brexit on FDI projects in the UK. The assignment also discusses the role of FDI in promoting clean energy use, carbon emissions, and economic growth.

Factors affecting FDI of Germany including
Sovereign Credit Rating(international
finance)

Table of Contents
1.0 INTRODUCTION.....................................................................................................................1
2.1 The Importance of FDI and Its Impacts on Different Economies...................................1
2.2 Factors Attracting FDI........................................................................................................3
Effect of Sovereign Credit Rating on FDI...................................................................................3
FDI in developed countries and Germany...................................................................................4
European Union and other treaties made to attract FDI and trade..............................................4
ANALYSIS......................................................................................................................................5
FDI Flow of Germany...............................................................................................................5
Sovereign credit rating and its conduction by Moody’s, Fitch and S&P....................................7
Sovereign Credit rating of Germany............................................................................................7
Market size, GDP and other economic factors affecting FDI.....................................................8
Exchange rate volatility is less between Germany and European Union....................................9
Brexit concerns and its impact on the economy of Germany......................................................9
FUTURE OUTLOOK.....................................................................................................................9
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

1.0 Introduction
Foreign Direct Investment is related to investment made by the firm or an individual in the
interested business which is located in another country. It generally takes place when an investor
plans to take part in foreign business operations or acquires any foreign business assets. It can be
inclusive of ownership establishment or related to controlling interest in some foreign company.
FDI can be pivotal in company’s growth strategy, and thereby helping the country to grow and
enhance its economic standing. (Lee, 2013).
The aim of this report in Section 1 is to provide a comprehensive understanding through various
empirical studies about the importance of FDI and its roles in progressing different economies
worldwide, and also it elaborates the factors affecting FDI, particularly it focuses on sovereign
credit rating in developed and developing countries in general. Additionally, the report focuses
on Germany’s economy and illustrates the crucial factors attracting FDI inflow in Germany
including political and economic stability, sovereign credit rating, market size and so forth. In
Section 2 the analyses the economic situation of Germany statistically in terms of FDI inflow,
GDP, market size and risk rating extracted from the risk rating agencies. In Section 3 the report
evaluates the current and future economic situation of Germany. Eventually, the report sums up
all the findings and conclusions retrieved from the analysis and literature review.
2.0 LITERATURE REVIEW
2.1 The Importance of FDI and Its Impacts on Different Economies
According to Moran, (2012) a strong relationship has been assessed on foreign direct investment
and economic growth. Large inflow of investment is generally required by countries, so as to
achieve sustainable high trajectory of economic growth. Foreign investments and borrowings
help in bridging the gap between investments and savings. FDI It is considered as a powerful
engine which enables low income countries to build physical capital, generate employment
opportunities, enhance skills of their labours, increase productive capacity and managerial
competency. Moreover, FDI also contributes in integrating domestic economies with global
ones. (Morgan, 2012). However, in contrast to this, as per the views of Alfaro and Johnson,
(2012) a considerable change in flows of trade and finance have been noticed due to extensive
surge in FDI. There are various underlying factors that are directly contributing in increasing the
1

flows of FDI in Bangladesh. Those factors are trade exchange liberalisation, appropriate
emphasis on development led by private sectors and opening and enhancing of infrastructural
services. The most important factor which led in increasing the FDI in the country is the
privilege of the advanced energy and telecommunication sectors and thus, in turn, foreign
investors will be benefited. Myanmar has also become a new destination for multinational
companies, due to its stable economic growth and its ability to deliver higher rate of interests to
the foreign investors. (Alfaro and Johnson, 2012).
According to Ramasamy, Yeung and Laforet, (2012) FDI acts as a supplement to Australia’s
national savings, develop infrastructure, supports local businesses and also helps in building its
regional economies. (Yeung, et al., 2012).
Figure 1: Foreign Direct Investment in Australian’s economy
(Source from: Impact of Foreign Direct Investment on Gross Domestic Product,
2011)
As per Blonigen and Piger, (2014) FDI can be categorized as being horizontal, vertical and
conglomerate. A horizontal direct investment is related to investment made by a company in
same type as it operates in its home country. For instance, a mobile phone provider, currently
operating in United States, planning to open up new stores in China. (Blonigen and Piger, 2014).
Jadhav, (2012) defined a vertical investment as the one which is related to investment made in
some different organuization, but related companies, from that of investor’s main business, so as
to acquire some foreign company for its smooth operations. For instance, a manufacturing
concern acquires the interest of some other foreign company which is involved in supplying raw
material required to its main businesses. A conglomerate type of FDI is one when a company
plan to invest in some other organization which is totally unrelated to the existing one in home
country. (Jadhav, 2012).
2

2.2 Factors Attracting FDI
According to Fernandes and Paunov, (2012) there are various factors that can tremendously
affect the flows of FDI positively or negatively. Investor are driven to go for FDI in order to
access to cheap raw materials, natural resources, communication and transport links, wage and
skills related to labour, availability of strong infrastructure, new customer base, and potential and
bigger market sizes. On the other hand, political instability can negatively affect FDI aspects of
any country. Exchange rate measures have to be taken into consideration by multinational firms
in order to go for FDI, due to their huge impacts on the business transactions of those firms,
whereby any company operates in any foreign country, has to use the local currency of that
foreign country, which, in turn, will result in appreciation of that local currency, and if the
volatility of the foreign currency is not high, this will help companies to reduce their costs and
achieve economies of scale. Hence, it can be stated that a preferable flow of these factors can
lead to create a positive impact over its functioning. However, factors questioning the existence
of the company can act as a negatively affecting factor of FDI. In contrast to this, as per the
views of Buchanan Le and Rishi, (2012) investment criteria may differ based on the opportunity
cost available in some other countries. For instance, if a multinational company finds that it will
be able to generate higher profits by investing in China rather than US, then, despite of having
favourable conditions in later, it will invest in the later one. (Buchanan, et al., 2012).
2.3 Effect of Sovereign Credit Rating on FDI
According to Kasemsap, (2017) Sovereign credit rating is an evaluation which is performed by
credit rating agencies based on the future abilities and willingness of sovereign governments
with respect to their fulfilment of debts. There are approximately 150 national, regional and
global credit rating agencies that are being involved in addressing the competencies of
companies based upon various factors. The stars are given to the companies on five major
factors. These are, economic scores reflecting economic structure, political risks, external
liquidity, international investment position, debt burden and monetary flexibility of the company.
3

Figure 2: Factors Affecting Rating
(Source: Impact of Foreign Direct Investment on Gross Domestic Product, 2011)
However, in contrast to this, as per the views of Alfaro and Charlton, (2013) based upon
financial stability of the company, creditworthiness of the organization is determined. It
ultimately helps in taking decisions that whether to invest in the organization as FDI or not.
2.4 FDI in Developed Countries and Germany
As per Lau, Choong and Eng, (2014) FDI in developed countries is operatively higher than
developing countries, due to many reasons, such as availability of technology, skilled workforce
and government support. Moreover, the possibility of growth in developed countries is rather
higher in comparison to developing and under developed ones. It also helps in assuring constant
economic growth indicating positive results through the investment. Germany has been able to
become the dominant in foreign direct investment flow comparing to other European countries in
2014, due to its outrageous increase in its revenues which are enhancing its ability to invest for
FDI. However, in contrast to this, as per the views of Holmes Jr and et.al., (2013) the United
States and japan have currently being experiencing outward FDI. They are being able to create
themselves as an avenue to deliver knowledge intensive services. The growing investment
income from outward flow of FDI has been able to counterbalance trade deficit.
2.5 European Union and other treaties made to attract FDI and trade
European Union has been able to become the largest source of Foreign Direct Investment as per
the global economy. International investments into EU are worth €5.4 trillion which is equivalent
4

to approximately 36% of the total wealth produced by EU. FDI has been able to provide 7.6
million jobs in EU. It also provides capital and technology in order to foster European research,
competition and innovation. EU investing abroad are worth €6.9 trillion which is 46% of the
annual wealth produced by EU supporting 7.6 million jobs in EU. It also helps in optimizing
production, adequate access to raw material and other components which can help in serving the
market in better format. However, in contrast to this, as per the views of Chandran and Tang,
(2013) the main aim of EU so as to promote FDI is to open up foreign market for EU companies.
It has also been able to make investment rules clear and concise so that it can effectively be
followed by the organizations functioning in EU territories. (Sbia, et al., 2014).
3.0 Analysis
FDI Flow of Germany
Figure 3: FDI Inflow of Germany
(Source from: Germany Foreign direct investment, 2017)
Figure 3 reveals the FDI inflows of Germany from the period of 1970 to 2016. In 1990 there was
upward trend of the FDI inflow in Germany, due to the European Union. In 2000 the FDI inflow
of Germany has surged dramatically to nearly 250 billion Euros due to the.. The FDI net Inflow
in Germany is $52,474,200,000 as in the year 2016. The value has been constantly fluctuating
since the year 2004. In the year 2008 and 2009, the value of FDI decreased to a great extent due
5

to prevalence of economic crisis that took place in US. Its impact was borne by inflow and
outflow of FDI in all the European Union countries, inclusive of Germany. Comparing the graph
with the value of FDI in the year 2017 and 2018, it can be assessed that the values have increased
tremendously indicating FDI inflow growth in the country. The main financial motive of FDI is
to ensure strategic movement of currencies from home country to host country. Germany have
been able to represent as the unique location with utmost consistency. The first essential
industrial characteristics of German market is related to presence of large number of SMEs
which have been able to become financially famous in both domestic as well as international
market. The second important aspect related to presence of FDI in Germany are the big and
successful companies who have been able to get themselves renowned at global level. Some of
the automobile companies include, Bayer, BMW, Volkswagen. There are various chemical
related companies as well, such as, Soda Fabrik, Baddische Annilin and Hoechst. They have
effective managerial structures which have been able to achieve economies of scope and scale
(Lee, 2013).
Figure 4: GDP of Germany
(Source from: Germany GDP, 2017)
GDP of Germany has increased in 2016, in comparison to the values of 2015. An enhancement
in the overall GDP helps in stating that the country is heading towards economic growth. It
generally attracts high amount of inflow of FDI in the country.
6

3.1 Sovereign credit rating and its conduction by Moody’s, Fitch and S&P
Sovereign credit rating is related to rating the organizations based upon various factors of
creditworthiness. It helps the other company to decide that whether they must invest in it or not.
Moreover, it also helps in calculating the amount of profit, one can generate by investing in that
company. Moody’s, Fitch and S&P are the three main companies having highest reliability
factor. The three tends to opt for choosing similar model of analysis and hence are being able to
generate similar results as well. It also helps in analysing the level of risk an investor can have
while investing in a particular company. The political and economical risk governing in that
country are taken into consideration for its better initialization of the same and also act as an
important factor to take decision regarding investment. The companies are given grades based on
their performance and position of the economy of the country (Moran, 2012). Moddy’s considers
investment grading bonds in the form of Ba1, Baa3, etc. It also helps in assessing the risk portion
highlighting the potential for the government and if they will be able to meet the requirements of
debt or not.
Figure 5: Sovereign Credit Rating of Germany
Country S & P Moody’s Fitch TE
Germany AAA Aaa AAA 100
(Source from: Germany Credit Rating, 2017)
The above helps in displaying the grades that have been given by Sovereign credit rating
agencies. S&P has given, AAA, which is the highest rating given to the organization having
tremendous set up based on which it is effective for the companies to make investment in
Germany. The position of the country is stable enough and have high rated creditworthiness.
Hence, investment made in the country will be less risky in comparison to the other countries. A
bigger impact of the same can also be assessed on borrowing cost of the country as well. The
transparency of grade for Moody’s, Fitch and S&P is quite higher in comparison to other small
sovereign credit rating companies. Hence, it is better for the investors to rely on the results of
these three corporations (Fernandes and Paunov, 2012).
7

Market size, GDP and other economic factors affecting FDI
Market size act as a dominant positive factor in order to attract FDI inflows in the long run.
Investment made through FDI helps in adequate enhancement in economic condition of the
country in such a manner that it helps in generation of higher economic profits. However, no
influence of market size has been seen on short run FDI investment (Blonigen and Piger, 2014).
With more than 38 million households. And 82 million inhabitants, Germany is considered
to be one of the largest country of European Union. It is also one of the largest hub of potential
buyer. Due to this reason, majority of FDI in EU is attracted by this country (Moran, 2012).
FDI is considered to be major component of capital flow in the developing countries. Its
contribution towards economic growth Germany is quite positive. In this manner, the country is
able to generate higher amount of revenue, initiate employment to a high level and bring overall
development to the practices of the Germany in terms of technology and productivity. It
ultimately leads to generation of high income and thereby making positive contribution to GDP.
Inflation, deflation and interest rates are the other common factors that have high impact
on FDI. A positive growth and stability in them helps in attracting high amount of FDI to the
country.
There are various factors that are prevailing in Germany, which ultimately affect overall
condition of FDI in the country. The responsible factors are, market size, economic stability,
prevailing labour cost, etc. There are other three factors as well which can influence the motives
of FDI related to investment in Germany are, market seeking, resource seeking and efficiency
seeking (Moran, 2012).
Volatility of exchange rates
The volatility of exchange rate in Germany and in other states of EU is quite low. Hence, any
impact of currency on decision making with respect to currency stability is not an issue while
any organization is planning to make any kind of investment in EU territories. The policy makers
of EU ensures that the trade policies are effective enough so that maximum number of
companies can be attracted towards it. Moreover, feasibility cost related to settling up of business
is kept high for investor’s attraction in the country. Exchange rate stability is an important aspect
to be taken care of by the policymakers so as to attract positive cross border investments
(Fernandes and Paunov, 2012).
8

Brexit concerns and its impact on the economy of Germany
Brexit happens to be the situation where Britain is planning to take an exit from EU territory
and is planning to follow its own set of laws, rules and regulations. An indirect impact of FDI
will also be borne by other territories of EU. It has led to financial market turmoil. It has led to
decline in the prices of FDI and making it difficult to estimate accurately. It can lead to slow
down of GDP by 0.5% and 0.1% more in the upcoming years due to retrenchment of FDI by
various ongoing companies in the territory
FUTURE OUTLOOK
After analysing all the aspects that are directly or indirectly linked to FDI, it can be stated
that, it is important to opt for preparation of new policies are procedure that can be followed by
the territories after Brexit. High impact of ineffective presence of FDI can be borne by the other
territories of EU as well which requires some set of laws and policies to be developed by
policymakers to reduce the impact of this change. Currently, Germany have been performing
effectively with highest rating from all the top Sovereign Credit Rating Agencies. Hence, it can
be stated that it is performing effectively in terms of inflow and outflow of FDI (Fernandes and
Paunov, 2012).
Another aspect is related to consideration of various market factors that are to be assessed
before making any investment in any organization of the country. In such cases, it becomes
important to address common aspects, such as GDP, market size, market stability, rate of
currency fluctuations, availability of resources, etc. In the end, it can be stated that the current
position of Germany in terms of FDI is quite effective.
Since the overall economic condition of the country has been increasing day by day, the
expected inflow of FDI is higher in the upcoming years. Moreover, an enhancement in overall
economic condition of the country can also be noticed through the prepared analysis aspect.
CONCLUSION
From the above report, it can be concluded that, Germany have been able to gather highest
rating from various Sovereign Credit Rating Agencies. The common aspects that are considered
while takings investment decisions are, , access to raw material, communication and transport
link, wage and skills related to labour, availability of infrastructure, etc. in the end, it can be
stated that investment is made in the country that can help in generating high profits.
9

REFERENCES
Books and Journals (PUT ALL REFERENCES TOGETHER WITH ONLINE )
Alfaro, L. and Charlton, A., 2013. Growth and the Quality of Foreign Direct Investment. In The
Industrial Policy Revolution I(pp. 162-204). Palgrave Macmillan, London.
Alfaro, L. and Johnson, M. S., 2012. Foreign direct investment and growth. In The evidence and
impact of financial globalization (pp. 299-309).
Blonigen, B. A. and Piger, J., 2014. Determinants of foreign direct investment. Canadian
Journal of Economics/Revue canadienne d'économique. 47(3). pp.775-812.
Buchanan, B. G., Le, Q. V. and Rishi, M., 2012. Foreign direct investment and institutional
quality: Some empirical evidence. International Review of Financial Analysis. 21. pp.81-
89.
Chandran, V. G. R. and Tang, C. F., 2013. The impacts of transport energy consumption, foreign
direct investment and income on CO2 emissions in ASEAN-5 economies. Renewable
and Sustainable Energy Reviews. 24. pp.445-453.
Fernandes, A. M. and Paunov, C., 2012. Foreign direct investment in services and manufacturing
productivity: Evidence for Chile. Journal of Development Economics. 97(2). pp.305-321.
Holmes Jr, R. M. and et.al., 2013. The interrelationships among informal institutions, formal
institutions, and inward foreign direct investment. Journal of Management. 39(2).
pp.531-566.
Jadhav, P., 2012. Determinants of foreign direct investment in BRICS economies: Analysis of
economic, institutional and political factor. Procedia-Social and Behavioral Sciences. 37.
pp.5-14.
Kasemsap, K., 2017. Foreign Direct Investment. Handbook of Research on Economic,
Financial, and Industrial Impacts on Infrastructure Development, p.239.
Lau, L.S., Choong, C. K. and Eng, Y. K., 2014. Investigation of the environmental Kuznets
curve for carbon emissions in Malaysia: do foreign direct investment and trade
matter?. Energy Policy. 68. pp.490-497.
Lee, J. W., 2013. The contribution of foreign direct investment to clean energy use, carbon
emissions and economic growth. Energy Policy. 55. pp.483-489.
Moran, T., 2012. Foreign direct investment. The Wiley-Blackwell Encyclopedia of Globalization.
10

Ramasamy, B., Yeung, M. and Laforet, S., 2012. China's outward foreign direct investment:
Location choice and firm ownership. Journal of world business. 47(1). pp.17-25.
Sbia, R., Shahbaz, M. and Hamdi, H., 2014. A contribution of foreign direct investment, clean
energy, trade openness, carbon emissions and economic growth to energy demand in
UAE. Economic Modelling. 36. pp.191-197.
Online
The Influence of Brexit on the Foreign Direct Investment Projects and Inflows in the United
Kingdom. 2017. [Pdf]. Available through
<https://www.econstor.eu/bitstream/10419/157903/1/GLO_DP_0068.pdf >.
Germany - Credit Rating. 2017. [Online]. Available through
<https://tradingeconomics.com/germany/rating >
Impact of Foreign Direct Investment on Gross Domestic Product. 2011. [Pdf]. Available through
<https://globaljournals.org/GJMBR_Volume11/5-Impact-of-Foreign-Direct-Investment-
on-Gross-Domestic-Product.pdf >
Germany Foreign Direct Investment. 2018. [Online]. Available through <
https://tradingeconomics.com/germany/foreign-direct-investment >
Germany - Foreign direct investment. 2017. [Online]. Available through <
https://www.indexmundi.com/facts/germany/foreign-direct-investment>
Germany GDP. 2017. [Online]. Available through https://tradingeconomics.com/germany/gdp>
11