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Economic Impact of Foreign-owned Firms in the EU and Germany

 

In times of Trump and Brexit, protectionist tendencies seem to be a global trend. The advantages that economic interconnectedness implies are increasingly receding into the background. Foreign-owned firms in the EU and Germany, however, make a considerable contribution to employment and gross domestic product (GDP).

Nowadays, production processes are globalized. There rarely is a product that is manufactured in just one country. Due to increasingly complex global value chains, goods and intermediates cross borders several times before they reach their final consumers. Multinational enterprises (MNEs) play a key role here by establishing factories, sales companies, or research and development centers in another country, by investing in or acquiring local firms.

MNEs invest abroad because they expect a higher longterm profit. Their activities can also increase economic welfare in the host economy. A net positive effect should not be taken for granted, though, since new economic activity in foreign-owned firms may crowd out economic activity in local firms and create bottlenecks in the local economy.

The calculations of Copenhagen Economics on behalf of Bertelsmann Stiftung show, however, that foreign-owned firms have a net positive effect on employment and GDP in the EU and Germany through four transmission channels: direct, indirect, induced, and spillover impacts.

Impact of foreign-owned firms on employment and GDP in the EU

In 2017, 22 million EU workers were employed by foreign-owned firms. This is 9 percent of the total employment in the EU. Through indirect impacts, 23 additional million jobs were supported in the foreign-owned firms’ EU supply chains in 2017. These jobs are supported in the supply chain in the host countries and by any supplying firms in the other EU Member States.

Furthermore, 38 million jobs were supported via consumption by those directly and indirectly employed in 2017 (induced impact). Altogether, foreign-owned firms were responsible for 82 million jobs in the EU in 2017. This is equivalent to 35 percent of the total employment in the EU. Again, these impacts are supported in the host countries and in the other EU Member States, where wages are spent.

The econometric analysis did not show any spillover effects on employment. This suggests that any positive and negative effects that foreign-owned firms have on employment among local firms, e.g., productivity enhancements, increased demand for locally produced goods and services, or via competition effects, is averaged out. The reason for this is that foreign-owned firms are assumed to have no impact on jobs in the long run (30 years)., i.e., If there were no foreign-owned firms at all, jobs would still be created by domestic investors. But it could take a longer time and produce higher unemployment in the short run.

The jobs supported by foreign-owned firms also support GDP in the EU from the wages earned, company surpluses and through spillover impacts on domestic firms. The direct, indirect, and induced impacts accounted for EUR 5.8 trillion (38 percent of EU GDP). The slightly higher share of EU GDP to employment (38 vs. 35 percent) reflects relatively higher productivity, on average, among those jobs supported by foreign-owned firms.

The spillover impacts from foreign-owned firms in the EU supported EUR 3.2 trillion in GDP in 2017. Spillover impacts are therefore important for the overall GDP impact. These impacts arise from the share of employment in foreign-owned firms that ‘spill over’ productivity, in such a way that local domestic firms become more productive (figure 1). Altogether the impact of foreign-owned firms on GDP in the EU amounted to EUR 9 trillion or 59 percent of EU GDP in 2017.1 figure

Impact of foreign-owned firms on employment and GDP in Germany

According to the projection by Copenhagen Economics, there were about 33,000 foreign-owned firms in Germany in 2017 with an employing 3.4 million people (8 percent of total employment). About 40 percent of these jobs were in manufacturing. The share rises to 33 percent or 15 million jobs when we include indirect and induced impacts. Almost half of the jobs were induced jobs from private consumption (figure 2). The econometric analysis did not show any spillover effects on employment. The explanation is the same as for the impacts at the EU level.

The GDP directly supported by foreign-owned firms in Germany was EUR 300 billion in 2017, equivalent to 9 percent of German GDP in 2017. When including indirect and induced impacts, foreign-owned firms supported almost EUR 1,100 billion or 33 percent of German GDP in 2017 (figure 3). This is the same percentage as the share of employment, suggesting that the supported jobs yielded the same productivity as the average. The supported GDP via the spillover impact from foreign firms in Germany constituted EUR 450 billion in 2017. The total impact of foreign-owned firms on German GDP in 2017 amounted to 1,540 billion Euro or 47 percent of German GDP.

2 figure3 figure

Implications for Economic Policy

From the perspective of Bertelsmann Stiftung, there are three suggestions for economic policy-making on the EU and at the national level in Germany:

  1. Strengthening communication on the benefits of the economic activities of foreign-owned firms for their host economies. In times of increasing protectionism and populism, it is more important than ever to draw attention to the significance of interconnected markets and value chains.
  1. Continuing to improve framework conditions for investment by foreign-owned firms on the EU and the member state level, while at the same time avoiding a race-to-the-bottom (e.g., unhealthy tax competition or lowering labour standards). The EU could, for example, consider a one-stop agency for foreign investors, which should be well connected with national investment agencies. On the national level, Germany could think about strengthening the role of Germany Trade and Invest (GTAI) (the economic development agency of the Federal Republic of Germany), especially in potential home countries.
  1. Working towards a multilateral approach for cross-border investment. International investment governance is fragmented into bilateral investment treaties or investment chapters in trade agreements. This makes it difficult to deal with investment-related issues on the international level. From a long-term perspective, it would make sense to take a multilateral approach – ambitious as it may currently appear. The WTO and the G20 already have investment on their agendas and thus offer themselves as a platform for the EU and Germany to continue to work on this issue.

Methodological information

On behalf of the Bertelsmann Stiftung, the economic research institute, Copenhagen Economics has analyzed the effects of foreign-owned firms on employment and GDP in the EU and Germany. The calculations are based on the Eurostat database on Foreign Affiliate Statistics (FATS). For the calculation of direct, indirect and induced impacts, additional data from the World Input-Output Database (WIOD) are used. The spillover effects are quantified using a regression analysis based on company data from 2015. For a more detailed explanation see the corresponding Policy Brief or the full paper.

The results for Germany were first published in the German-language economic policy journal Wirtschaftsdienst.

 

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