The German model of capitalism and the persistence of outward foreign direct investment: evidence from German manufacturing industries

Abstract

Against the backdrop of critique on the German model of capitalism in general, and German public policy in particular as to the ability to successfully adjust to rapid change and exogenous shocks in wake of economic globalisation, this paper investigates the degree of shock persistence in foreign direct investment (FDI) of ten German manufacturing industries for the period 1976 to 2003. Theory on exports and non-FDI investment suggests that FDI should exhibit a considerable degree of shock persistence because they are subject to high sunk costs because of high entry and exit costs associated with the high level of asset specificity that is normally connected to FDI. Persistence in foreign direct investment time series data is established by applying various unit root tests. The results are robust to the potential presence of structural breaks in the data. The empirical analysis shows that German outward FDI in mature manufacturing industries, with one exception, exhibits a high degree of shock persistence. The results suggest, at least for mature German industries, that the sunk costs view on shock persistency is confirmed for outward FDI. The results furnish evidence for a tentative assessment of the relationship between German public policy and FDI strategies of multinational firms.