FDI in Germany

A couple weeks ago, Britain lost out on its chance to house the first Tesla factory in Europe. Elon Musk decided to choose a location near Berlin instead, claiming that the uncertainty of Brexit made the investment too risky. Berlin’s minister of economic affairs claims the factory could create around six to seven thousand jobs in production with hundreds or thousands in other areas. This is just one of the many affects upon Germany from receiving this FDI; however, there is more to these effects than this. Which is why I would like to take a look at some of these FDI effects so we can understand the magnitude of what Germany is receiving from this investment, if it is truly a net gain for Germany, and how they can optimize this investment.

In the short-run, FDI increases capital causing the MPL to increase causing wages to rise. However, returns to capital decrease because wages rise causing the MPK to fall as less people can be employed for one piece of capital. The opposite is true for the sending country (the US). FDI in the short-run will cause the US’s MPL in the manufacturing sector to decrease as there will be less capital per worker (as the capital that would’ve been employed went abroad) and this will cause wages to fall. However, because wages fall, returns to capital rise. So, in the short-run, FDI will cause the output of the manufacturing sector and wages to increase in Germany, while returns to capital will decrease; conversely, in the US wages and MPL will fall, and returns to capital will increase. To Germany, this will be a net gain and would be beneficial for them to undertake this investment.

The aforementioned are the short-run effects of FDI which we know from class, but are there other affects of FDI? In an empirical paper’s findings which I looked at, it claimed that FDI, output growth, and financial markets are interconnected; these findings show us that the positive affects of FDI on economic growth will only be felt after a certain threshold of financial market development. While there is much potential for Germany to receive from this FDI, this research tells us that this investment may not be as beneficial as once thought for Germany as the external factors needed for this kind of growth may not be set up. Thus, in order for Germany to receive the full benefit of this FDI, it should focus on the growth of its financial market before it becomes too late to reap the full benefits.