ABSTRACT
Foreign direct investment (FDI) of German enterprises has registered a very strong growth since the beginning of this decade. But this growth has been rather uneven among different host regions. The share of developed countries in German outward FDI has declined, whereas the shares of Central and Eastern Europe (CEE) as well as of developing countries have increased. Between the latter two groups of countries, CEE has recorded a considerably higher growth of German FDI. This has been a source of concern to developing countries. They are apprehensive that some of German equity capital may be diverted from their economies to Central and Eastern European countries (CEECs), especially because some of the locational advantages such as low labour costs of these two groups of countries are similar. In addition, many CEECs have secured trade preferences for their exports to German market through ‘Europe Agreements’, and are geographically and culturally nearer to German investors than most of developing countries. This chapter attempts to dispel the concern about investment diversion from developing countries. For this purpose, at first the recent growth and regional structure of German FDI are analysed. This is followed by a discussion of the main causes of the relatively high involvement of German firms in CEE. Finally, we argue that German FDI in CEE is not likely to occur at the cost of developing countries.
