View from Europe: Think small to boost FDI inflows

The recently published World Investment Report 2018 from Unctad confirms what most of us already suspected: FDI inflows have fallen yet again, this time sharply. And it is less the headline figure of -23% we should be worried about, but the drop in greenfield projects. The situation does not look particularly good, but rather than sink into despair, countries should actively address this situation.

Governments, and in particular IPAs, are not exploiting all their opportunities. Take, for example, Germany’s famed but much misunderstood Mittelstand. Looked at in detail, it quickly becomes apparent that there is no such thing as 'the Mittelstand'. Apart from its focus on a narrow market segment and a strong international orientation, it is a highly varied group of companies, of different ownership structures and sizes; from tiny companies with €5m turnover, to big family-run groups making well over €250m annually. And it is precisely this spread where the opportunity lies.

A 2012 survey by bank KfW and Creditreform found that of the smallest firms (below €5m turnover), only 43% engage in exports, while in the above €250m group, 77% are active abroad. Exports, of course, are far less risky and less capital and knowledge intensive than FDI. It is therefore hardly surprising that the picture repeats itself in a more pronounced form. In the smallest category of firms, only 5% have FDI activities, in the €25m to €50m group the figure is 31%, and the companies with more than €250m in turnover are 61% active in FDI.

So what do these figures tell us? Smaller firms find it difficult to invest abroad, even if they already have foreign exposure via export activities. Most surveys come up with more or less the same answers: uncertainly about foreign legal and regulatory environments, lack of knowledge about how to internationalise and operate in that market in particular, lack of business contacts. All, essentially the very raison d’être of IPAs.

But most IPAs seem to have long since given up on dealing with smaller companies, who admittedly need more support and hand-holding; they prefer to hunt for headline-grabbing mega-projects (Amazon comes to mind). This is, more often than not, driven by their political masters who are seeking front-page news. But big multinationals are out there already. If you look for the next wave of FDI, it might be worth rediscovering the smaller firms and start thinking in earnest about what it is they need in terms of support and advice, to tempt them into your jurisdiction

Martin G Kaspar is head of business development at a German Mittelstand company within the automotive industry. E-mail: martin.georg.kaspar@gmail.com