FDI is not just a driver of economic growth, prosperity and employment.
Without it, the UN Sustainable Development Goals (SDGs) could not be achieved. Not least because of this, international organisations are actively working on investment facilitation guidelines, such as the Unctad ‘Global action menu for investment facilitation’ or similar initiatives by the G20, Organisation for Economic Co-operation and Development or the World Trade Organization.
But from an investor’s perspective, FDI is a risky business, at the very least associated with practical difficulties (such as language barriers or foreign regulations). In particular, it is a problem for small and medium-sized enterprises, which make up the lion’s share of our economies. Furthermore, we live in challenging times, with an international business climate of rising levels of protectionism, trade wars and escalating labour costs in emerging markets.
At the same time, owing to automation and robotisation, the labour cost element in manufacturing costs is dwindling, changing the rules of the game for efficiency-seeking FDI. Add to the mix a pandemic, and it becomes pretty unattractive to invest in emerging markets.
A foretaste of this is the precipitous drop in FDI, as stated by recent Unctad figures (-30% to -40%) – a situation unlikely to get much better any time soon, with a global recession on the horizon.
Into this precarious economic climate, one in which firms refrain from incurring any additional risks, European and national politicians are pushing supply chain laws (Lieferkettengesetze) that aim to make companies responsible for social or environmental violations by any of their suppliers along the entire supply chain.
You read correctly: liable not only for their own wholly owned subsidiaries, which are realistically controllable, but liable for the conduct of the entire chain. Practically speaking, this means a fashion retailer needs to ensure all standards, rules and regulations are adhered to on every cotton field in India, every plant in Bangladesh, every seamstress in Vietnam and every lorry-driver transporting garments to Europe.
France has already passed a law making corporate due diligence mandatory along the entire supply chain, as has the Netherlands. And in Germany, as well as at a European level, debate is ongoing about such regulations.
There is a degree of disingenuousness in bewailing the rise of restrictive investment measures, while at the same time passing laws that result in uncontrollable legal consequences for firms. This will be most damaging, however, for emerging markets and the SDGs, because production will simply be reshored to Europe, where it can be controlled and where there is no danger of falling foul of such impossible laws.
This article first appeared in the August - September edition of fDi Magazine. View a digital edition of the magazine here.