Germany’s biggest companies say they are looking to invest overseas rather than at home in the year ahead, suggesting that low investment in Europe’s biggest economy won’t improve soon

Corporate Germany Looks to Invest Overseas—Not at Home

Low Sales Growth, High Costs Deter Companies From Increasing Spending in Germany

NINA ADAM

Oct. 16, 2013 9:14 a.m. ET

FRANKFURT—Corporate Germany is looking to invest overseas rather than at home in the year ahead, a Wall Street Journal survey of top German companies reveals, suggesting that low investment in Europe’s biggest economy won’t improve soon. Feeble investment in Germany by the country’s own business sector is one of the biggest economic headaches facing Chancellor Angela Merkel as she forms a new coalition government for her third term, following last month’s elections.

Companies’ anemic appetite for investing at home has been puzzling German officials and economists this year. Many hoped that investment would pick up once the outcome of September’s election was clear. But a Wall Street Journal survey of German blue-chip companies indicates that the problem runs deeper.

Lack of sales growth in Germany and Europe, now and in companies’ expectations for coming years, is deterring many corporations from increasing their investment spending in Germany, where capital expenditure has sunk to near-historic lows as a share of gross domestic product.

High production costs—especially high energy prices in Germany compared with the U.S. and some European or emerging economies—and lingering uncertainty about the longer-term cohesion of the euro zone are also commonly cited reasons for holding back on domestic investment.

The fact that weak sales prospects in Germany and elsewhere in the euro zone appear to be holding back corporate investment suggests that Germany’s leaders are paying a price for stringent policies to tackle the euro-zone crisis that have depressed overall demand.

Ms. Merkel’s government has been widely criticized by international economists, and some fellow European leaders, for insisting on Europe-wide austerity, as well as policies aimed at boosting competitiveness by depressing labor costs.

Without stimulus measures in Germany and other relatively strong European economies to offset the retrenchment in Southern European nations, the result has been a shortage of demand in Europe’s economy, which many economists say has set back the region’s recovery from the financial crisis.

Although slow growth is returning to most of the euro zone, Europe’s delayed recovery and sluggish outlook is now coming back to bite Germany’s industries.

Most of the 19 blue-chip corporations that responded to the survey, including BMW AGBMW.XE -0.90% , Siemens AG SIE.XE -0.12% , and Adidas AG ADS.XE -0.92% , said they plan to invest more in emerging economies and the U.S. than in Germany or Europe. Stronger prospects for sales growth and lower production costs are the most frequently cited reasons.

Car maker BMW plans to raise production of its Mini brand via a contractor in the Netherlands. But most of its investment plans currently involve expanding production capacity at its plants in Spartanburg, S.C. and Shenyang, China, as well as building a new plant in Brazil.

Detergents-to-adhesives conglomerateHenkel AG HEN.XE +0.33% said it would invest where it sees longer-term sales growth. “It is fair to assume that, in a lot of cases, this favors emerging markets,” Henkel spokesman Wulf Klüppelholz said.

There are tentative signs that German corporate investment has at least stopped shrinking. Total spending on machinery and equipment rose 0.9% in the second quarter from the first, after six consecutive quarters of declines, according to the federal statistics office.

But even if German companies end up investing more in 2013 than last year, which isn’t yet clear, the level of spending will still be less than in 2011, let alone in the period before the 2008 financial crisis.

“The situation is stabilizing, but we won’t see an investment boom in Germany,” said Jörg Zeuner, chief economist at German development bank KfW.

The subdued appetite for investing in Germany extends beyond blue chips. Midsize companies—known as the Mittelstand—that make up the backbone of Germany’s economy, are also more interested in expanding their production capacity in overseas markets where sales are growing, according to the German Chambers of Industry and Commerce, or DIHK.

“For years, the disposition of midsize firms to invest abroad has been greater than their willingness to spent money at home,” said DIHK economist Dirk Schlotböller.

Ms. Merkel’s next government, which is expected to be a coalition of her conservative Christian Democrats and the center-left Social Democrats, needs to quickly address midsize companies’ concerns about the declining attractiveness of Germany as a place to invest.

If the low rate of investment continues much longer, “it will put the competitiveness of the whole of German industry at risk,” said Ralph Wiechers, chief economist of the VDMA engineering federation, which represents more than 3,000 Mittelstand companies.

Most of the companies that responded to The Wall Street Journal survey—all of them nonfinancial companies from among the leading German corporations that make up the DAX-30 stock-market index—say they are aiming to maintain or slightly increase their overall investment in the year ahead. But they are mostly planning to spend money on maintaining rather than significantly upgrading their domestic production facilities.

Only a minority of polled companies listed Germany among their planned investment targets.

The survey’s findings challenge hopes in Germany that investment will take off in coming months, following two years of weakness that has held down Germany’s growth rate. German GDP is projected to increase by about 0.4% this year, due in part to companies’ reluctance to invest.

Energy utility RWE AG RWE.XE +0.85% said it is holding back on investment because of Germany’s policy of switching from conventional to renewable energies. RWE spokeswoman Annett Urbaczka blamed what she called “uncoordinated and rapid expansion of photovoltaic” energy, fueled by government subsidies that are widely seen as needy of an overhaul.

RWE generates most of its electricity through gas, coal and nuclear fuel, energy sources that have fallen out of favor with Germany’s politicians and population, with the country pulling out of nuclear energy altogether.

The VCI chemical industry association is among the business groups calling on Germany’s government to stop electricity prices from rising further. It warns that electricity prices for German industry, which have risen by 30% in the past five years according toGoldman Sachs, will prompt companies to relocate more production abroad if the trend continues.

Meanwhile, foreign companies’ appetite for investing in Germany is also waning. Foreign direct investment in Germany plummeted to €5.1 billion ($6.9 billion) in 2012, from €58.6 billion in 2007, according to data from Germany’s central bank. The decline continued in the first six months of this year, when a mere €800,000 of FDI landed in Germany.

German companies’ direct investment abroad, however, has been relatively stable since 2009, averaging around €50 billion a year, the data show.

“The German economy can only be successful if incoming and outgoing investments are broadly balanced,” said Mr. Wiechers of VDMA. The government “should concentrate its efforts on sustainably improving overall investment conditions.”

Economists say Germany’s government could help encourage investment by making a clear commitment to stop the rise in energy bills, improving tax rules, and avoiding tax increases.