Why Do Some Countries Attract More Private Investment Than Others?

By Finn Hilgart

In recent years, discussions surrounding Germany’s economic competitiveness and prospects have become increasingly prominent. Once regarded as Europe’s economic engine, Germany has experienced stagnant output, deindustrialization pressures, and a political climate that struggles to agree on a path forward. What caught my attention in particular was how closely this malaise was associated with weak private investment. As a crucial indicator, private investment reflects long-term expenditure on machinery, equipment, and factories that drive a country’s future economic productivity and output potential.

At the same time, France, a country similar in many ways and with its own economic and political struggles, did not experience the same decline in private investment. This contrast between two comparable economies became the starting point for my bachelor’s thesis, as I wanted to understand why Germany and France, despite sharing many structural characteristics, were attracting different levels of private investment. That puzzle eventually led me to the broader research question of why some countries are able to unlock more private investment than others.

To answer the research question, I developed three hypotheses. The first focused on the role of public investment, specifically whether more productive and efficient government investment in infrastructure and human capital crowds in private investment by enhancing private capital returns. The second hypothesis examined how economic policy uncertainty, such as political instability, unclear regulations, or unpredictable trade policy, discourages companies from committing capital to long-term projects. The third explored whether the way companies are financed, through banks, internal funds, or equity, determines a country’s ability to attract private capital during periods of structural economic transition, when firms need the flexibility to shift toward new, high-risk industries.

To test these, I combined two strands of evidence. On the one hand, a quantitative econometric analysis based on a Bayesian Vector Autoregressive (BVAR) model, using 25 years of quarterly economic data from Germany and France. On the other hand, a comparative analysis of over 1,600 newspaper articles from leading outlets in both countries, using an LLM (OpenAI's GPT 5) to systematically assess how the media frames each of these three factors. After examining the evidence, economic policy uncertainty emerged as the most convincing and robust explanation. The econometric analysis provides evidence that shocks to uncertainty significantly depress private investment in both countries. The newspaper analysis reinforces this, as uncertainty is by far the most discussed factor and almost always framed negatively. Germany has been particularly hard-hit post-2021, and the data suggest that a return to the calmer policy environment of the 2010s could boost German private investment growth considerably.

For policymakers, this means that providing a stable and predictable environment is essential for encouraging private investment and supporting long-term growth. Public investment plays a role, too, but a more nuanced one. In France, well-targeted expenditures appear to crowd in private investment, whereas decades of chronic underinvestment in infrastructure have failed to generate the same effect in Germany – though this leaves an untapped opportunity. Lastly, higher dependence on equity financing means that capital flows more easily into high-risk innovative sectors in France. In Germany, where family-owned businesses rely heavily on bank loans and internal funds, companies tend to be more cautious about pivoting to new industries, a dynamic commonly referred to as the middle-technology trap. At the European level, building a genuine capital markets union would make equity financing more accessible and support economic transition across the EU.

Reaching these insights was not always straightforward. The most demanding part was refining the econometric model given the limited time-series data available. Progress sometimes felt slow, but studying how other researchers approached similar problems and discussing methodological choices openly with my supervisor made a real difference. If I could offer one piece of advice to future students, it would be to ask for help early and stay realistic about the scope of a bachelor’s thesis.

Looking back, what I found most rewarding was overcoming the methodological challenges and gaining a deeper understanding of econometric tools. I also valued discovering how LLMs can meaningfully support empirical research. Ultimately, the thesis allowed me to explore a topic at the intersection of economics, finance, and politics that I find genuinely fascinating, and to develop analytical skills that will stay with me well beyond this project. Lastly, I would like to take the opportunity to thank my supervisor, Jonas Bunte, Head of the Institute for International Political Economy, for the invaluable guidance, patience, and continued support during the process of writing my thesis.

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