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Weak private investment in Germany indicates urgent need for action

Press Release of April 22, 2016

Current corporate investment levels hardly surpass pre-crisis levels – Experts Commission’s recommendations for strengthening investment still relevant – additional tax incentives should be considered

Businesses in Germany are still investing too little in their manufacturing facilities. As a new study conducted by the German Institute for Economic Research (DIW Berlin) reveals, 2015’s domestic private investment may have only amounted to pre-crisis levels—even though economic output has been considerably higher. This is not the case in other countries: in the US, for example, gross fixed capital investment is now roughly 14 percent higher than it was in 2007. Even in the German manufacturing industry, investment was subdued: gross investment was not even as high as the depreciation of the existing capital stock. “In the long run, this weak private investment can compromise Germany’s productivity and economic performance,” explains DIW President Marcel Fratzscher.

German Institute for Economic Research (DIW Berlin)

The German Institute for Economic Research (DIW Berlin) is one of the leading economic research institutions in Germany. Its core mandates are applied economic research and economic policy advice as well as provision of research infrastructure. As an independent non-profit institution, DIW Berlin is committed to serving the common good. The institute was founded in 1925 as Institut für Konjunkturforschung (Institute for economic cycle research). Since 1982, the Research Infrastructure SOEP (German Socio-Economic Panel Study), a long-term study, is affiliated to DIW Berlin. The institute has been headquartered in Berlin since its founding. As a member of the Leibniz Society, DIW Berlin is predominantly publicly funded.

Along with DIW colleagues Martin Gornig and Alexander Schiersch, both from the Department of Firms and Markets, Fratzscher sees an urgent need for action: “First and foremost, it is the lack of necessary framework conditions that is leading to such low corporate investment. This includes factors like poorly maintained public infrastructure, a lack of skilled labor, and regulatory uncertainties.”

Last April, the Experts Commission created “Strengthening Investment in Germany,” a proposal for how investment in Germany can be strengthened. In addition to offering suggestions for improving public investment, the proposal focuses on the expansion of digital networks and energy infrastructure as well as how to provide support for innovation and startups. Although current policy now reflects some of these recommendations, Fratzscher, Gornig, and Schiersch maintain that “it’s still nowhere near enough.”

Implementing the measures is taking too long

Current policy measures are focused on increasing public investment in infrastructure—and comparatively little effort has been made to improve conditions for private investment. For example, although the expansion of digital networks is being supported by 2.7 billion euros in the form of grants through a broadband funding guideline, until a high-quality (by international standards) network is available nationwide, there is still a way to go.

“One risk in expanding the digital networks is that regulation could be designed such that the competition in an economically strong region is compromised in order to enhance the development of economically weaker regions,” explains Mr. Schiersch.

With regard to promoting innovation, a whole range of additional initiatives and funding possibilities are under consideration. Although most of these measures are still in the planning or testing phases, they should be swiftly implemented, and the same applies to the promotion of innovative startups.

Policy has indeed taken on some of the proposals for supporting private investment, say the study’s authors—the need for action, however, remains substantial.

Another option: improving fiscal conditions

“Additional investment incentives could be created through revenue-neutral tax incentives,” says Mr. Gornig. For example, policy could reduce the economic risk for investing companies by shortening amortization periods. As well, the Experts Commission believes that tax law should no longer privilege foreign capital over equity, since tech startups rely so much on the latter.