Legal factors of Germany and Foreign Direct Investment

Question: Describe about the Legal factors of Germany and Foreign Direct Investment. Answer: Introduction Globalization is very common in the present business world. However, before entering in any country; it is very important that business environment of that country is effectively analyzed. This report is based on the analysis of political, legal, and economic environment of the Germany. In this report, it explains the countrys attractiveness for FDI. It focuses on the major factors of the country that attracts foreign direct investment in the country. The purpose of the report is to critically analyzing the important factors that influence the attractiveness of Germany for the Foreign Direct Investment. Analysis of factors that attracts FDI in Germany Political and economical factors Germany is a well established democracy that has administrative rights and responsiblities shared between the executive, judiciary, and legislature. Development of the political party in the year 2013 aims to stablise the country in the future elections. It also ties with France in the areas of defense and energy. The Federal government of country grants attractive tax subsidies to all foreign investors to acquire the new buildings for a period of minimum 1 year in the service sector industries and get the benefit of tax subsidy of 25% to 27.5% for small and medium enterprise (SME) that employs more than 250 employees in the company (Uchenna, 2016). A competitive tax policy framed by the government helps companies to create more investment opportunities for FDI in the country. These flexible innovative policies framed by the Federal Republic of Germany attract FDI in the country. Due to the strong Federal Republic of Germany and shared administrative powers, the country has a well maintained culture and education. All the important policies such fiscal, monetary and defense policies are formulated by the Federal Republic and implemented. The government of the country made the flexible policies and projects to attract the FDI in the country. Recently the country launched the Investment Guarantee Scheme by the Federal Republic of Germany that aims to attract the foreign investments from the different emerging countries to get the guaranteed return in the areas of Automobile, technology, and infrastructure sector. Various countries participate in the international summit and invested 7.9 billion Euros in the country and get the huge revenues. Below given table indicates the participated countries and their investments in the country (Barringtyon, 2016). Table 1: (Source: Paul, 2012) Indicated the various investments in the different sectors by the foreign countries in Germany As per the above table indicated that the political stability of the country is strong, due to centralizing control of the government that makes the flexible policies to attract the foreign investments. Germany government has also framed the policy for all foreign investors for free access to investment in all sectors and gets 100% ownership of the business in public sectors and national bodies such as mail, telecommunication, and others (Wren and Jones, 2012). Germany is the fifth largest economy in the world and largest in the Europe, accounting for one fifth of the European Unions GDP. It is a very liberal social market economy (Leino and Ali-Yrkk, 2014). Automobile and technology sector majorly contributes to the countrys economy. Due to this technological advancement, many countries are invests in the diverse sectors of the economy. It is top 10 in the world economic forums for global competitiveness index. The main reason for its highly competitive economy lies in the manufacturing sector. It gives ample of benefits to the investors regarding high quality manufacturing at competitive prices in international markets. Another benefit for FDI to invest in this country is that GDP growth rate of the country is increased 2.2% in last quarter which is far better than the developed economies like China and Russia. Moreover, machinery and engineering process are customized and innovative that gives long term benefits to the investors in the l ong run. The country has cheap labor costs and highly skilled workforce with the best quality of work in the areas of technology, manufacturing, and automobiles. On the other side, the main barrier to the economic growth in the country is infrastructure such as bridges, trains tracks, waterways that affect the economic growth.1.5% of the GDP is spent on the maintenance of infrastructure (CIA, 2015). These infrastructure constraints force industries to move somewhere else. Another factor is that the lower interest rates of banks enable to a massive supply of liquidity in the market. Low-interest rates lead to the risks for the banks and financial institutions and it is unattractive for foreign investments due to a decrease in currencys relative value .Below given figure and table indicates the attractiveness of FDI and economic condition of the country in various sectors. Table 2: (Source: Wagner and Disparte, 2016) Table shown the different indicators and GDP rate of the countrys economy As per the above-given table, it indicates the number of factors that contributes to the economy to make it competitive and attractiveness of FDI in the host country. Legal Factors Germany is legally very effectively established at the federal, state, and regional levels, and with the legal system is such that it provides strong investment and freedom for business. Its legal system is a civil law system with indigenous concepts. The German business law is governed by the principle of economies freedom. Various laws such as EU and international law have influenced the legal system of Germany. However, the countries taxation system was exploited by wealthy and multinationals which are harmful to the government of german. It has various challenges for the country such as the licensing system which is a threat to the future investment in the service sector for the country (Moran, 2012). As a result, the legal stability of the country attracts the foreign companies to invest and promote entrepreneurial activity in Germany. Foreign investment of german was mainly focused on developed countries that are the target regions for German exports. The German FDI for the Eur opean neighbor countries is strong. The legal framework for FDI in Germany favors the principle of the freedom of trade and payment transaction. There are certain factors that affect the countrys foreign direct investment such as wage rates as the country has the high wage rate and it attracts the higher tech investment. Moreover, labor skills also affect the FDI as this makes the attractive place for outsourcing and it also helps in doing investment in the country. The tax rate also affects the country as more companies invest in the country which has low corporation tax rate. For example, companies like Apple, Google, and Microsoft invests is sought to invest in the country as Germany has the lower corporation tax rate. A key factor is the transport costs and the levels of infrastructure as the country have low labor cost as it is beneficial that other countries invest for supplying of goods (Azman-Saini, Baharumshah, and Law, 2010). Furthermore, FDI is targeted to selling the goods directly to the country which is i nvolved in attracting the investment. The political stability of the country is also the major factor which attracts the FDI to invest in the country but the countries with an uncertain political situation will be a major problem as no other will be ready for investing in the country. It is related to the trust especially judiciary and the extent of law and order. For the country, Germany EU is seen as the signal for political and economic stability which helps in encouraging the foreign investment. The main reason for the foreign investment is the existence of the commodities and it is the major factor for foreign direct investment. Additionally, the exchange rate will also be helpful for the host country to attract the FDI because it will be cheaper for the multinational companies to purchase the assets (Derado, 2013). Lastly, clustering effects is also the major FDI factor for the country which attracts the other countries to invest. There are again different factors that determi ne foreign direct investment such as free trade areas which is used to invest in the EU single market which is a free trade market. Conclusion: From the above-given study, it is concluded that the Germany is the vibrant location for the FDI and from the analysis of the important factors such as political, legal and economical; it is considered that the tendency of stability exists in these factors that attract FDI in the host country. References: Uchenna, E. (2016). Economics and Political Implications of International Financial Reporting Standards. IGI Global: USA Barringtyon, L. (2016). Comparative Politics: Structures and Choices. Cengage Learning: USA EWI (2016) Foreign Direct Investment. Retrieved from https://www.economicswebinstitute.org/glossary/fdi.htm Paul, J. J. W. (2012). Market-oriented Systemic Transformations in Eastern Europe: Problems, Theoretical Issues, and Policy Options. Springer Science Business Media: Germany Wren, C. and Jones, J. (2012). Foreign Direct Investment and the Regional Economy. Ashgate Publishing, Ltd. USA Leino, T., and Ali-Yrkk, J. (2014). 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