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, Direct Investment: International Labor Division in a Globalized World

Cars, machines, computers - hardly any product is manufactured in just one country. Foreign direct investment (FDI) plays a crucial role in this. Companies use FDI to set up production sites, sales companies or invest in local companies in other countries. This creates increasingly complex value chains that link companies and countries. We analyze the effects of these developments on Germany and Europe.

 

Foreign direct investment (FDI) is an essential part of economic globalization. They promote the international division of labor and help companies to build global value chains (GVCs). In this way, FDI contributes to the increasing economic interconnectedness between countries and people.

FDI mainly take the form of greenfield investments and mergers and acquisitions (M&A). While greenfield investments create new values, existing values are taken over through M&A transactions. This difference is of great importance for the analysis of FDI.

In general, we regard FDI as positive: They can create jobs, increase tax revenues and reduce costs for both consumer goods and production factors. This generally increases economic growth, productivity and living standards in the participating countries. At the same time, however, there are fears that FDI will have a negative impact in both the host countries and the home countries of companies investing abroad.

Developing and emerging economies in particular fear that multinationals will exploit domestic labor, resources and the environment and move on with their investments as soon as higher labor, social and environmental standards are enforced. In developed countries, which have so far been the main outward investors, there is still the fear that companies will use FDI to relocate jobs to low-cost countries. In recent years, industrialized countries have increasingly become a target for FDI from emerging countries, especially China. This has added concerns about a ”sell-out“ of German know-how and technology. In Germany, many people therefore want better protection from foreign investments by the government.

The ”Global Economic Dynamics“ project aims to contribute to a better understanding of the effects of FDI and the related value chains. To this end, we publish – partly in cooperation with external partners – scientific analyses, policy papers and blog posts.

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