Germany- To Invest Or Not To Invest

Germany- To Invest or Not to Invest?

Executive Summary

Authorization and Objective

Authorized for completion on XXX by Professor XXX, this study was completed to identify the potential risks and potential benefits of pursuing a financial endeavor in Germany.

Method of Data Collection

To find both secondary and primary information, the Internet was used as the prime source of data collection. The details about Germany were found on several websites and written about in several recent articles in the finance and business sectors. For the primary sources, the year end current account balances and tax statistics were evaluated, as well as the country's embassy and monetary bank home webpage. Secondary sources ranged from articles from The Economist, GPEC, and America Online, as well as other articles found online.

Report Preview

The following discussion reveals the findings and analysis from the data and information collected during the investigation. First, political risk in Germany is examined to determine possible business risks in the political sector. Second, the financial markets and sources of capital are analyzed to understand how the financial markets play a role in establishing a business in Germany. Third, the tax structure and investment incentives are discussed to determine the financial burdens and/or incentives Germany provides for foreign companies that establish business in Germany. Fourth, relevant economic statistics and trends are identified to determine the possible challenges the economy in Germany might pose to a potential investor. This is followed by a currency discussion and forecast for Germany and the Eurozone.

Report Conclusion

The conclusion of this study is that Germany would be a very safe investment at this time. This was concluded after close evaluation of Germany's economy, political realm, financial situation, and potential for strong growth in the future. Germany has proven itself to be a leader in the world economy, and although they have stagnate growth as of late, Germany's economy appears to be very promising in the future.

Political Risk

Political acts of violence against either foreign or domestic business enterprises are extremely rare in Germany. In addition, Germany is among the least corruption-plagued countries of the industrialized world, according to Transparency International, the Berlin-based international "corruption watcher" (AOL, 1). However, the construction sector, the privatization of former East German enterprises, and the awarding of public contracts represent areas of some continued concern. The European-wide organized crime problem also plays a role in the incidence of corruption. Strict anti-corruption laws apply to domestic economic activity. U.S. firms have not identified corruption as an impediment to investment.

The German government has sought to reduce domestic and foreign corruption. For example, Germany in February 1999 implemented in its own law the 1998 OECD Anti-Bribery Convention, thereby criminalizing bribery of foreign public officials by German citizens and firms abroad (U.S. Commercial Service). Tax reform legislation that became law in March 1999 ended the tax write-off of bribes in Germany and abroad. Germany has increased penalties for bribery of German officials, for corrupt practices between companies, and, under the law against unfair competition, for price-fixing by companies competing for public contracts. It has also strengthened anti-corruption provisions applying to support extended by the official export credit agency. Most state governments have contact points for whistle blowing and provisions for rotating personnel in areas prone to corruption. Government officials are forbidden from accepting gifts linked to their jobs.

Opinions, however, differ on the effect these steps will have in practice. German industry opposes creation of a central, national-level register of companies that would be barred from bidding for public contracts. While the German government has successfully prosecuted hundreds of domestic corruption cases over the years, there have been no prosecutions involving the bribery of foreign government officials since the 1999 changes in German law.

German law provides that private property be expropriated for public purposes only, in a non-discriminatory manner, and in accordance with established principles of international law. There is due process and transparency of purpose, and investors and lenders to expropriated entities receive prompt, adequate and effective compensation.

Financial Markets and Sources of Capital

Throughout the 20th century Germany's financial system has been dominated by banks. Recently, however, a number of efforts have been made to increase the role of markets within this bank-based financial system, including regulatory innovations, changes in corporate governance, and a reform of the pension system. Despite these changes, there are a surprising number of continuities in the structure of the financial system. The German financial system can therefore still be characterized as bank-based.

Although financial systems as a rule have banks and markets (Vitols, 34), bank-based systems are distinguished from market-based systems by a number of characteristics: a greater proportion of household assets are held as bank deposits, stock markets tend to be smaller and less liquid, and bank loans account for a greater proportion of company liabilities. Bank financing is more suited to low-risk investment in capital-intensive, incrementally innovating manufacturing companies.

Other indicators also show that financial markets are less important in Germany than in the US. In contrast with a relational financial asset, which is based on a specific financial relationships negotiated between two parties, a securitized asset generally can be resold by the holder to another investor on the market. The percent of total assets or liabilities which are securitized thus provides a rough indicator of the importance of financial markets for a given investor or sector. Only one third of total financial assets in Germany were securitized in 1995 (Vitols, 36), as opposed to over half of assets in the US.

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