KfW Research: Germany as a business location – a mixed picture

• Systematic analysis of location factors paints a mixed picture
• Strengths include strong innovative capacity, logistical infrastructure and highly trained workers
• Among the challenges are rapid demographic ageing, low public investment and high business tax rates
• Urgent need for action to safeguard competitiveness

“The systematic analysis of Germany as a business location paints a mixed picture of strengths and weaknesses. Overall, there is great urgency to act in order to secure the competitiveness of our location”,

said Dr Fritzi Köhler-Geib, Chief Economist of KfW on the occasion of the presentation of a new locational study by KfW Research. The analysis compares five international location rankings including those of the World Bank, the International Institute for Management Development or the World Economic Forum; it also compares the G7 states including Germany, China and Sweden in 22 location indicators across five specific clusters: labour supply, capital supply, innovative capacity, energy supply as well as regulatory framework and dependencies.

“Even if the level of indicators for strengths is still high, their trends suggest that other economic regions are continuously becoming more competitive”,

commented Köhler-Geib. In making a categorisation, it is relevant that during the period of 2005 to 2020 Germany was the only G7 country that succeeded in catching up with the US in per capita income adjusted for purchasing power parity. Furthermore, on a price-adjusted basis, German exports of goods and services grew by 27% from 2012 to 2023 – faster than those of Canada (+ 23%) and the US (+ 17%), for example.

It was not until the shocks occurred, starting with the pandemic since 2020, that Germany fell back on a high level.

“Its good economic development has long reduced the urgency to address the looming structural challenges. Now, the current economic weakness provides an opportunity to tackle the structural challenges from what is still a good starting position in many areas”,

said Köhler-Geib.

According to the analysis, innovative capacity is one of Germany’s strengths, as documented by the Global Innovation Index, which ranks Germany eighth out of 132 countries. However, there are problems in transferring technology to smaller businesses and putting inventions into practice in newly founded businesses. In regard to this, the role of venture capital finance is still too small.

Further strengths include the supply of capital through good access to finance, even for small and medium-sized enterprises, and a transport infrastructure that is rated outstanding by international standards. On the Infrastructure Score, part of the World Bank Logistic Performance Index, Germany ranked third among 139 countries in 2023.

While small and medium-sized enterprises often see the availability of skilled workers as a competitive advantage, the demographic trend, which heralds a particularly sharp decline in the workforce in Germany in the years ahead, is jeopardising this strength. The clearly negative trend in basic skills being acquired at school in international comparison shows an urgent need for action with a view to the skills of future workers. The figures show further weaknesses in the relatively low level of public investment and high business tax rates.

Even if the trend in electricity and gas prices has clearly been pointing downwards again since 2023, Germany has a competitive disadvantage in the cost of energy supply, especially in relation to the US and Canada.

“We need substantial public and private investment in generation capacity and associated technologies such as electricity grids and storage systems”,

said Köhler-Geib. According to the study, German industry scores very well in energy efficiency, but the country ranks only midfield for the share of renewables in energy consumption.

“In an environment of growing geopolitical conflicts and trade restrictions, Germany is very vulnerable because of its strong export orientation”,

explained the chief economist. In general, Germany’s export and import markets are highly diversified, but China remains a cluster risk in trade and for returns from direct investments. The study also highlights significant dependencies in Germany’s supply of raw materials, for which China and other authoritarian or unstable states play a major role.

“All in all, the systematic analysis of locational factors shows high urgency to build on strengths and get weaknesses under control. Only in this way will it be possible to safeguard the competitiveness of Germany as a business location in the future as well”,

said Köhler-Geib.

“In the past, the German economy and society have proven time and again that the location can deal with change and adapt to new circumstances. All actors from the political arena, business and society must now make their contribution.”

The current study can be downloaded from www.Kfw.de/Fokus