t's not surprising that all eyes turned to German Chancellor Angela Merkel in October as world leaders sought to end the global credit crisis.
      For months, business leaders from many nations had been watching the German economy closely. But not for the reasons many in the media would expect.
      Rather, these multinational moguls were observing a sudden and dramatic shift in state economic policy as Germany overhauled its national tax laws in January to become less confiscatory and more favorable to expanding industry.
      The result was a change of historic proportions, as Germany threw out the old tax rulebook and replaced it with one of the most competitive tax systems in all of Europe.
      The average tax burden for companies – composed of corporate income tax, trade tax and the solidarity surcharge – was lowered by nearly 9 points, from 38.7 to 29.8 percent. The total reduction was achieved primarily by reducing the corporate income tax by 10 points (from 25 to 15 percent).
      "From now on, companies in Germany pay an average tax of under 30 percent," says Michael Pfeiffer, managing director of Invest in Germany, the inward investment promotion agency of the Federal Republic of Germany. "This gives Germany lower average corporate taxes than Spain, France, Belgium and Japan. This tax reduction is a benefit to all industries."
      It didn't take long for the tax law change to make a lasting impact. Within the first half of the year, a dozen companies announced corporate facility expansion projects of more than US$50 million each in Germany, including seven plant deals that each topped $125 million.
      Leading the way was Qimonda, a memory chip manufacturer, which announced a $1.78-billion plant investment in Saxony. Intico Solar AG added to the surge in alternative energy wattage by announcing a $948-million plant for thin-film solar modules in Halle in Saxony-Anhalt.
      Seven of the 10 largest facility deals announced year to date in Germany come from the alternative energy sector, spearheaded by large investments in photovoltaic (PV) manufacturing. The country also reaped windfalls from new plants and expanded facilities in the ethanol, biodiesel and wind power sectors.
      That is no accident, notes Pfeiffer. "Germany's 'climate package' is a legislative program designed both to lower the country's carbon emissions and create jobs in the renewable energy sectors," he says. "The program aims to cut carbon dioxide emissions by 250 million metric tons by 2020. Renewable energy is to make up 30 percent of electricity production in Germany by that year."
      Nowhere is that growth coming more rapidly than in the solar cell industry. In 2007, the money spent on research and development in photovoltaics in Germany reached nearly $240 million.
      "This research success is happening for a number of reasons," Pfeiffer says. "First, Germany has a tradition of scientific excellence, which makes it a top location for R&D. Second, Germany has made environmental awareness a major societal issue for at least a generation. When you combine these factors with the success of the PV industry largely pushed forward by the 'feed-in tariffs' of the German Renewable Energy Sources Act [EEG], then you have the ingredients for the strong research landscape that exists here in Germany."
      The EEG helps generate enough revenue for PV firms to launch their own aggressive R&D programs, says Pfeiffer. "Both public and private R&D spending help lower the costs of PV, meaning that PV will become price competitive with conventional electricity at an earlier date than previously expected."
      An added boost came earlier this year when the federal government decided to pump another $55 million into research in the eastern Germany region known as Solar Valley.       Ironically, the energy issue is having another beneficial effect on Germany's economy. Thanks to rising fuel prices around the globe, more machinery manufacturers are choosing German locations even as they reconsider investments in China and India.
      According to a study conducted recently by PricewaterhouseCoopers, one-fourth of all medium-sized companies surveyed in the tool and machinery manufacturing sectors said that transportation and logistics costs had caused Germany to increase in attractiveness as a business location versus competing locations in Asia.
      Half of all firms surveyed indicated that they were being notably affected by high energy prices. Managers at those companies said that procurement costs had increased 29 percent for energy and raw materials within the past 12 months.
      "Germany is home to Europe's largest industrial base and to a tradition of excellence in manufacturing," noted Richard Offermann, senior manager for machinery and equipment at Invest in Germany. "An investment in Germany is not only environmentally sound, but also makes sense from a strategic and financial perspective."
      Deere & Company would appear to agree. On Sept. 3, the Moline, Ill.-based firm announced plans to establish a European Technology & Innovation Center in Kaiserslautern, Germany. The facility will accommodate up to 200 engineers and is set to open in the spring of 2010.
      "Our customers expect John Deere products and services to increase their productivity by integrating technology with machinery," said Mark Von Pentz, president of the company's agricultural division for Europe, Africa and South America. "This center allows John Deere the opportunity to provide even more focus to our industry-leading research and technology efforts."
      The company noted that the University of Kaiserslautern provides Deere "excellent opportunities to recruit talented employees." The new research center is located strategically between the product engineering centers at Deere factories in Mannheim and Zweibruecken.
      In other factory news, Netherlands-based aerospace group EADS announced Sept. 3 that it would expand its site at Augsburg in Germany with a new plant to make parts for its planned Airbus A350 wide-body aircraft. EADS plans to invest $435 million and create 400 jobs at the site.       Airplanes also contribute to Germany's rapidly growing logistics cluster. DHL, Schenker, Dachser and many other logistics firms call Germany home – a big reason why Germany ranked as the world's No. 1 exporter from 2002 to 2007 and is currently the No. 2 importer of goods worldwide.
      "All this would not be possible without Germany's world-class infrastructure and its excellent work force and educational system," adds Pfeiffer. "German universities offer logistics-related courses and academic programs. This emphasis, plus the industry's 2.5 million employees, contributes to technological advantages and innovation in the industry."
      A significant investment aimed to bolster this sector is the expansion of Berlin's Schoenefeld Airport. As of 2011, the airport is slated to become a major European hub.
      "As a result, Berlin will be easier to reach from cities across the world," Pfeiffer says. "This improvement is already attracting investors in a variety of industries, such as logistics, biotechnology, medicine and renewable energy. These investors are attracted by the improved connections from Germany's capital region to international markets."
      In other words, future investors won't just be casting their eyes on Germany; they'll be voting with their feet.