IMF Working Papers

Global geopolitical tensions have risen in recent years, and European energy prices have been volatile following Russia’s invasion of Ukraine. Some analysts have suggested that these shifting conditions may significantly affect FDI both to and from Germany. To shed light on this issue and other factors affecting German FDI, we leverage two detailed and complementary FDI datasets to explore recent trends in German FDI and how it is affected by geopolitical tensions and energy prices. In doing so, we also develop a new measure of geopolitical alignment. Our main findings include the following: (i) the post-pandemic recovery in Germany’s inward and outward FDI has been weaker than in the US or the rest of the European Union (EU27) as a whole; (ii) Germany’s outward FDI linkages with geopolitically distant countries have been weakening since the Global Financial Crisis; (iii) the relationship between Germany’s outward FDI and geopolitical distance has become more pronounced over the last six years; (iv) Germany’s outward FDI to China-Russia bloc countries is more sensitive to recent geopolitical developments compared with that to US-bloc countries; and (v) Germany’s outward FDI in energy-intensive sectors decreases as destination countries’ energy costs increase, but energy costs do not appear to have a statistically significant effect on outward FDI in non-energy intensive sectors.