Europe's Appeal for Foreign Direct Investment

When the management team of First Solar, a technology spin-off from the University of Ohio, was thinking about building a new manufacturing plant a few years ago, they made a surprising observation about their company’s business: They discovered that the bulk of customer orders for thin-film solar cells were coming not from America, but from Germany. So instead of building a new factory in the U.S., First Solar decided to put down roots in Europe and went looking for a place to call home.

Anyone who has traveled through eastern Germany in the two decades since the Berlin Wall fell would be surprised that First Solar settled on Frankfurt/Oder, a provincial city on the Oder river that has divided Germany and Poland since the end of World War II. Some cities in the east, such as Dresden and Leipzig, have become magnets for investment. But in the years since Germany unified in 1990, Frankfurt/Oder—a backwater with chronically high unemployment and all the problems that go with it—had seemingly been stuck on an economic treadmill.

Then, in 2005, a number of factors came together. In their search for a location, First Solar executives toured Europe and found that the German government would be more than willing to help if they set up shop in the east. While Frankfurt/Oder seems like an unexpected location, the region has a large supply of out-of-work skilled engineers. Trade unions have less influence in the east than in western Germany, and local officials were ready to bend over backward to help First Solar establish an outpost.

Welcomed with open arms

The real deal-clincher, though, was cash. Germany and the rest of the European Union offered to supply €45.5 million of the €115 million price tag for building the plant. In addition, First Solar received wage subsidies for every local worker the company hired who was previously unemployed. “Some countries offered tax holidays, but the cash incentive was quite substantial for a small company like ours,” says David Wortmann, 32, First Solar’s vice president in charge of policy and public affairs.

The German government had already created the framework for solar power to grow: It passed a renewable-energy law that improved solar economics by establishing a fixed rate that power companies are required to pay to third parties who feed electricity into the grid. This so-called net metering law made Germany a more attractive location for foreign investment in solar power.

By the end of 2007, First Solar’s plant in Frankfurt/Oder was running at full capacity. Today, the company employs more than 600 people at the plant and another 100 staff at its European sales and marketing offices in Mainz, Germany. The plant has transformed First Solar, enabling it to become a front-runner in the drive to cut the cost of producing solar-powered electricity.

“We wanted to become a leader in manufacturing thin-film solar cells, and the German government made it very worthwhile,” Wortmann says.

Residual effects

Beyond its impact on First Solar’s business, the new plant has also helped transform the depressed Frankfurt/Oder region. When First Solar set up shop, it became a magnet for other manufacturers in the solar-power industry. Companies that have since established bases in the region include Aleo Solar, Conergy, Odersun, PVflex, 5N PV and Yamaichi Electronics. According to the economics ministry of the state of Brandenburg, where Frankfurt/Oder is located, the solar-power industry now employs around 3,700 people in the region, and more than €500 million has been invested. Last year, Foreign Direct Investment magazine, published by the Financial Times group, included Frankfurt/Oder in its rankings of the top 25 European locations for foreign investment.

“In our discussions with foreign investors, [we find that] our excellent infrastructure and incentives are clear competitive advantages,” says Martin Wilke, head of regional economic promotion agency Investor Center Ostbrandenburg.

Frankfurt/Oder’s rise from a state of post-communist depression to one of the world’s leading solar-power manufacturing centers is just a single tale in a global story of how foreign investment—much of it from American industry—is transforming communities.

On the decline?

But as the worldwide economic crisis drags on, these positive transformations in Europe’s developed economies in the west (and its emerging economies in the east) may start to taper off.

According to the latest estimates by the United Nations Conference on Trade and Development (UNCTAD), foreign direct investment (FDI) worldwide dropped 15 percent to $1.7 trillion in 2008 from a record high of $1.9 trillion in 2007. Among developed economies, only the U.S. achieved growth in foreign direct investment, with inflows up 38 percent to $321 billion. The reason for this growth is mixed: In part, it reflects transfers from companies to their affiliates in the U.S., but it also shows that some foreign investors see the weak American economy as a buying opportunity. In contrast, foreign direct investment in Europe plunged 39 percent to $559 billion in the same time period.

The UNCTAD study attributes the worldwide decline in foreign direct investment to two main factors. Companies are finding it more difficult to invest because of falling corporate profits, reduced availability and higher costs. The other factor is the gloomy financial outlook, especially in developed economies, as the worst recession since World War II deepens. It remains difficult to predict when the economy will begin to show signs of lasting recovery.

The data, which are still preliminary, reveal an interesting trend: Foreign direct investment in developed economies fell 25.3 percent last year, to $1 trillion, while investment inflows to developing economies in Africa, Latin America and Asia rose 7.2 percent, to $549 billion. These numbers indicate that even as developed economies were succumbing to recession, multinational corporations still saw opportunities in emerging economies.

“The figures suggest that the economic crisis, in terms of inflowing investment, is hitting Europe and other developed economies harder than the [economies of] developing countries,” says Michael Gestrin, senior economist and manager of the Global Forum on International Investment at the Paris-based Organization for Economic Cooperation and Development.