Brexodus or Stay at Home? 2020 UK-to-Germany Foreign Direct Investment
The corona pandemic and uncertainty surrounding the future relationship between the UK and EU slowed down the overall level of British firms coming to Germany last year. We caught up with Robert Scheid, Director of GTAI’s London Office, and asked him about larger UK-to-Germany business trends. He predicts a massive investment backlog in the years to come.
What’s the overall trend coming from the UK with so many changes due to Brexit and COVID-19 over the past year?
Scheid: Overall, it’s very positive. Between 2016 and 2020 there were a total of 733 expansion projects by UK companies in Germany. That said, after the record year of 2019, there was a steep drop in 2020. Last year we had 104 projects, which was down from 185 projects in 2019.
There is a lot to unpack in this data. Let’s start with last year’s decline. What do you think was the main cause?
Scheid: Well, clearly the COVID-19 pandemic had a negative effect on the willingness and ability to complete foreign projects. With very few exceptions, CEOs and business development managers were unable to travel to Germany for most of the year to visit potential sites, open corporate bank accounts and take care of other practical matters like that.
So I imagine this was a global trend, not just from the UK.
Scheid: Exactly. We can see a decline in projects from almost all other important source countries as well. But Germany’s nine-percent drop in total projects from all countries was actually better than most of the predictions. The United Nations Conference on Trade and Development estimated the drop in global FDI investments would be around 15 percent.
Based on my quick calculations, the drop in British FDI to Germany was more severe. Why is that?
Scheid: You are correct that the drop-off is more significant for the UK. To be precise, it was around 44 percent. Based on conversations with companies here, it seems that the combination of Covid-19 and Brexit significantly depressed the numbers.
I understand Covid-19 causing a reduction, but given the disadvantages of Brexit to UK businesses, wouldn’t the number of companies setting up in Germany be expected to increase?
Scheid: This is where we need to break down the numbers carefully. The overall, medium-term trend is very positive. The number of companies setting up a subsidiary in Germany each year more than doubled from 2014 to 2018 and then increased even more than that in 2019. This is at least in part due to the needs of some companies to secure access to the EU post-Brexit.
Last year was very different because of the way that Brexit played out. Following the referendum in 2016, the UK was set to leave the EU on January 31, 2020, which it effectively did. However, a transition period was implemented for the remainder of the year, so it was “business as usual” while negotiations on the future relationship continued. An agreement wasn’t reached until December 24, just days before a potential cliff-edge situation.
How did this affect companies’ decisions?
Scheid: It seems that the larger companies had already prepared as much as possible for potential changes by this point. The ones who needed European operations had already set them up in the period between 2016 and 2019, where we also see the spike in our statistics. But the situation is the opposite for small- and medium-sized businesses. It can be a major decision for a small business owner to embark on setting up abroad, especially those that are not swimming in capital. And when you add the pandemic to the mix, it was logical for many to wait and see what kind of framework agreement would be reached post-Brexit and at the same time weather the pandemic.
So what do you predict for 2021?
Scheid: 2020 taught us to be cautious with predictions, but the evidence I see today points to a massive backlog of investment projects. Since the new trading framework has been in place, the number of enquiries we are receiving is skyrocketing. It looks like there is a lot of interest right now, even though travel is still limited due to the pandemic. We will have to wait and see how this plays out, but I think we will see another sharp increase in projects either this year or next.
Can you describe the types of companies coming to Germany from the UK?
Scheid: You can segment it in a few different ways. First of all, the UK is a great place for start-ups and service providers. There are so many fast-growth tech companies in areas like fintech and artificial intelligence that receive funding for international expansion and then look to set up abroad. Many of these settle on Germany as a base to reach the largest consumer market and industrial base in Europe and serve the whole of the EU.
What is new this year is the influx of companies adversely affected by the new post-Brexit framework. Let me give you one concrete example. The new rules allow customs-free access to the EU for British manufacturers, but there are complex rules of origin for products that are imported, elaborated, and exported into the EU. For example, I have spoken with small automotive suppliers who have wires and cables made in China, import them to the UK and then supply them to automakers across Europe. Now they are facing customs duties since their products are not actually made in the UK. These types of companies are in urgent need of a hub within the EU.
So are companies actually closing up shop in the UK and moving to Germany?
Scheid: This is very, very rare. Nearly half of the companies we have assisted name Brexit as at least one factor in their decision-making process, but none of them have abandoned the UK. And it’s in all of our interest to keep economic ties strong, so we are happy that UK companies see Germany as a place to grow their business while keeping one foot firmly planted in their home country. This creates a genuine win-win out of a challenging situation.
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