Prioritising target groups for FDI attraction from Germany
Russia’s full-scale war has been causing extraordinary damage to Ukraine’s economy. Direct damages have already been recorded at USD 155 bn, and sustainable reconstruction needs at USD 486 bn by January 2024. Ukraine’s pre-war economy was driven by the private sector, and so too must the economic recovery. While domestic private investors account for the majority, foreign direct investment (FDI) can accelerate produc-tivity gains and improve economic growth prospects.
Germany is one of Ukraine’s most important trade and investment partners. Moreover, Germany also hosted this year’s Ukraine Recovery Conference (URC) with a key pillar on business investment. Thus, at-tracting private investment from Germany is a key focus for Ukraine’s economic policy.
In this context, the German Economic Team reviewed and revised the definition of target groups and segments in the German market and provided recommendations on how to design outreach activities to meet sectoral needs in Ukraine. The analysis identified nine sectors, five of which were prioritised for outreach activities. Thereby, the outreach should focus on investors who are familiar with the conditions in Ukraine and on SMEs, which tend to be less risk-sensitive than large publicly listed companies. Complimentary to investor outreach activities, business climate reforms would further contribute to improving Ukraine as an investment destination.
Background
Empirical research and practical experience show that a targeted approach increases the effectiveness of investment attraction efforts. At the same time, defining target groups is a dynamic process that requires regular reviews, especially in the event of extraordinary changes in the investment environment.
In 2021, the German Economic Team assessed target groups for investment from Germany to Ukraine in a Policy Briefing with recommendations to focus on segments of the automotive, life sciences, electronics/electrical equipment and IT industries. However, the full-scale war is seriously affecting all components of FDI. Therefore, the German Economic Team reviewed the selection of target groups and recommendations for outreach activities, taking into account the impact of Russia’s full-scale war on Ukraine’s economy.
The role of German FDI in Ukraine
Germany is not only one of Ukraine’s most important trading partners, with the bilateral trade volume exceeding USD 10 bn for the first time in 2023. Investment activities also contribute to the strong economic ties. In 2023, Germany accounted for 5% of the total FDI stock in Ukraine and ranked fourth among source countries.
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Compared to other source countries, German FDI is heavily concentrated in the manufacturing sector. Also, during the war, German investors continue to invest. Companies such as Bayer (seed production), Fixit (construction materials), Notus and Goldberg Solar (renewable energy) and Rheinmetall, Quantum and FFG (defence) have announced investment since then. In addition, the Federal Government is keeping open its public investment guarantee scheme for German investments insuring against the risks of war damage, expropriation, etc. Since the beginning of 2023, 29 new investment projects have been guaranteed. Discussing investment opportunities was therefore one of the key pillars of this year’s Ukraine Recovery Conference in Berlin.
Methodology
Shortly before the conference, the German Economic Team conducted a review of the target group analysis to identify key sectoral segments and rank them according to outreach priorities. The methodology consisted of two parts. Firstly, existing government strategies (such as the Ukraine Plan) and various investment climate reports were assessed. This led to the pre-identification of a shortlist of target groups. Secondly, interviews (30 to 60 minutes) were conducted with existing investors, chambers, associations and sector experts. The second step allowed to verify the target group selection, to analyse the specific investment potential of Germany, to discuss the investment opportunities, challenges as well as the economic, environmental and social impact, and finally to derive recommendations for outreach activities and priorities.
Target group priorities
The Policy Study identified nine target groups. Five of them are identified having a first priority where highly targeted outreach is recommended.
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The target groups listed are severely affected by war-related factors. The energy and construction sectors, for example, have suffered large damages that will require not only quick rebuilding efforts, but also medium-term reconstruction according to sustainable principles of energy efficiency and green technologies. Therefore, short-term and medium-term activities may differ.
Outreach activities can include individual contacts and meetings at relevant sector-specific trade fairs and collaborations with associations. In addition, three target groups have been identified as a second priority, where systematic market intelligence is recommended as a first step and outreach activities recommended depending on the intelligence results. For the target group IT and digitalisation, no separate outreach activities are recommended. Relevant segments at the interface to the IT sector (e.g. AgriTech, DefenceTech, HealthTech) should be integrated into measures addressing the respective other target groups (e.g. Agri-food, Defence, Healthcare).
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Recommendations and outlook
During the war, when there is a large scale of uncertainty, outreach activities should focus on companies that already have experience in investing in or at least trading with Ukraine. In addition, focusing on small or medium-sized enterprises is recommended, which tend to be less risk-averse than, for example, large publicly listed companies.
Priority should be given to highly targeted investor outreach that allows communication with potential investors. Overall, outreach is about identifying high-potential investors and approaching them individually. In this context, interviewed partners suggest working with intermediaries (chambers, associations, existing investors). At the same time, complementary business climate reforms should also be a priority. For example, key investment challenges related to the rule of law and the risk of corruption should be addressed. In addition, insurance and incentive schemes should be further tailored to the needs of investors. All in all, targeted outreach and complementary investment climate reforms would be key steps to accelerate economic recovery through private investment.
This newsletter is based on the Policy Study “Reviewing the target group selection for attracting German investment to Ukraine”
