The World Investment Report by the United Nations Conference on Trade and Development (Unctad) has been coming out for 30 years, and Covid-19 has made its analysis more prescient than ever.
James Zhan, who leads Unctad’s investment and enterprise division, says Covid-19 has created the most difficult business conditions he’s seen since he began working in FDI in the 1980s. He outlines how the crisis might impact global value chains over the long term.
Q: Unctad forecasts FDI will fall 40% this year and drop further in 2021. Can you elaborate?
A: FDI always lags the business cycle by six to 12 months. The shock [of the crisis was sudden] but the recovery will happen at a different pace.
The World Bank and the World Trade Organisation expect a V-shaped global recovery with trade getting going again in late 2020 or early 2021. But this is not the case for FDI, where even a U-shaped recovery is optimistic.
I expect a gradual and moderate recovery in foreign investment starting at the end of 2021 or at the beginning of 2022.
Q: Beyond the usual lag between the business and investment cycle are there any other reasons?
A: The political environment is not so conducive to big investments. Protectionism is on the rise and there are concerns about national security. More countries are putting in place screening mechanisms to avoid takeovers of strategic assets.
Some countries, particularly developed countries, have implemented massive rescue packages for domestic firms. Without these packages there would be many [cross-border] acquisitions, as there was after the global financial crisis.
There is a lot of uncertainty at the moment – ambiguity, complexity and volatility – and this has had an impact on investment decisions.
But bear in mind that the current stock of global accumulated FDI around the world is $36trn, there are production facilities and services hubs all around the world. They will continue to play a key role in economic growth, development and recovery.
If we take a glass half-full perspective, global FDI may fall below $1trn this year, but that’s still $800-900bn of new investment that will be added to the global stock of FDI this year.
Q: It’s the 30th edition of the World Investment Report. Is this the most challenging FDI environment you have experienced?
A: Yes it is. I started working in this area in the late 1980s, it was a time of debt crises. FDI started to take off and many developing countries realised that equity investment in the form of FDI was an alternative source of financing to debt. It was the beginning of international production expansion.
Since then we have had two decades of rapid growth, followed by 10 years of stagnation. In the 1990s, global FDI expanded at an average annual rate of 15%; in the 2000s at 8%; in the 2010s at 0.8%.
These [figures] are all proxies for international production. It’s why we have come to the conclusion that the stagnation over the last decade was the quiet before the storm. It culminated in the inflection point triggered by the pandemic.
Q: What do you expect over the next decade?
A: The next 10 years are going to be a decade of transformation. Three mega trends will drive that transformation. First, the evolution of systems of production and global value chains driven by robotics, supply chain digitisation and additive manufacturing (3D printing).
The second trend will be the sustainability imperative.
The third trend will be the rise of economic nationalism that will lead to more interventionism, more protectionism and the shift from multilateral to bilateral and ad hoc arrangements.
All these trends will impact global value chains.
Q: In the report you call for a ‘change in the investment-development paradigm’. Can you elaborate?
A: In the last decade, many countries, particularly developing countries, tried to augment their competitiveness by identifying segments in global value chains, increasing their competitiveness through specialisation and exports.
Now, however, they can no longer narrowly specialise in value chain segments for efficiency-seeking FDI to generate exports and growth. It’s still important, but they also need to attract investment in regional market-seeking FDI, which will become more important moving forward.
Countries and companies need to have a better industrial base to attract more segments of the regional value chains.
Secondly, the shift from cost-base competition for single location investment to competition for diversified investments has been based on flexibility and resilience.
In the past, countries would compete for locations and would target flagship investment and try to link it to domestic firms. Now they need to attract diversified investment because there will be regional value chains in their own countries, particularly in services.
They need to have a diversified investment promotion strategy and more flexibility and resilience. Value chains will be shorter and value-added activities will be more concentrated in different locations.
Countries used to build big industrial infrastructure to attract large industrial investors. Now because of digitisation, the foreign investment assets footprint will become lighter and there will be less demand for large-scale industrial infrastructure and more demand for lean infrastructure, particularly for services and digital manufacturing.
James Zhan is Unctad's director of investment and enterprise.