Advantages and Disadvantages of Foreign Direct Investment (FDI) for Germany

This paper intends to discuss the merits and demerits associated with the Foreign Direct Investment (FDI) in Germany. The trends related to the FDI in Germany has been described in the paper. In addition, the paper has also highlighted on the risks related to the FDI in Germany. Based on the analysis, some recommendations have also been provided to improve the FDI in Germany.
1. Introduction
Foreign direct investment (FDI) refers to form of investment that is made by an entity that is headquartered in a particular country into another entity that is headquartered in a different country. This form of investment has grown into prominence due to the advent of globalization. Companies have been witnessed to increasingly invest in foreign entities particularly the ones based in the emerging economies with the hope of expanding their customer base and augment the market share. As such the level of FDI net inflows have increased considerably over the last decade or so. This fact can be justified by the data provided within the World Bank database (refer to figure 1).
1.1. Global FDI trend
The level of FDI has a direct association with various economic factors related to a country. The extent to which a country’s economic factors are favourable determines the level of foreign investment inflows to be received by that country. However, off late FDI has become exposed to various types of risk out of which the common ones are foreign exchange risk, country risk and sovereign risk. It is undeniably true that FDI has lots of advantages but it has to be kept in mind that such investments are associated with fair share of disadvantages as well. With regards to these facts, what follows is a detailed review of literatures that emphasizes on the advantages and disadvantages of FDI with particular focus on German companies.
1.2. FDI outflow trend in Germany
As is evident from figure 2 given above, FDI outflow from Germany has been decreasing since 2006 when the country reached the maximum level in terms of FDI outflow as a percent of GDP. The investment has since then decreased abruptly and hit a record low of 2.34% and 1.26% in the year 2008 and 2011 respectively (The World Bank Group, 2014b). Such abrupt decrease in FDI outflow can be largely attributed to the global financial crisis during 2007-08 as well as the euro zone crisis in 2010. Majority of the German companies have accrued the benefits of FDI during the course of their international operations. Regardless of such benefits, FDI is still associated with a quite a number of disadvantages. Therein lies the relevance of this research as the researcher endeavours to identify the advantages and disadvantages of FDI for Germany.
1.3. Objective
• To understand the key determinants of FDI.
• To explain the advantages of FDI for Germany.
• To explain the disadvantages of FDI for Germany.

Advantages and Disadvantages of Foreign Direct Investment (FDI) for Germany

Type: Report
Domain: Foreign Direct Investment
Words: 4000
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