Over the past two decades, global value chains witnessed one of rapid growth followed by one of stagnation. The decade to 2030 is likely to be one of transformation for global value chains (GVCs), reshaping the global trade and investment landscape.
The pandemic has caused a treble shock of supply, demand and policy. It has a severe impact on FDI and GVCs. I would expect that widespread disruption of many GVCs and the deep recession of global FDI to extend into 2021. A rebound of global FDI will probably start only in 2022, hence showing a U-shape recovery.
In the longer-term, the pandemic is accelerating several trends already emerging prior to the pandemic, magnifying some challenges, but also opening up opportunities for investment and development. While the pandemic may not be over soon, reorientating investment promotion strategy will be unavoidable when charting a sustainable course to recovery.
Five drivers for GVC transformation
Five driving forces will reshape the global trade and investment landscape:
• Economic governance realignment: international trade and investment policy-making is shifting from multilateral co-operation towards regional and bilateral solutions, with intensified protectionism at home. The aggravated competition between economic powers in trade, investment, technology and so on may lead to a widespread global systemic divide in economic governance.
• New industrial revolution: the robotics-enabled automation, enhanced supply chain digitalisation, the Internet of Things and additive manufacturing will stimulate cross-border investment in new business sectors and through new modes of operation.
• Sustainability imperative: markets and governments are prioritising the mainstreaming of sustainability in products and processes. The UN’s Sustainable Development Goals (SDGs) will also change the patterns of global FDI, in terms of the sources of financing, sectoral distribution and geographical location.
• Corporate accountability: global efforts to fight corruption, illicit payments, tax evasion and anti-competitive practices, as well as environmental, social and governance standards will fundamentally change the modes of operation and governance of multinationals.
• Resilience-oriented restructuring: the massive pandemic disruption and the aggravated geopolitical rivalry will drive multinationals to diversify and reshoring or near-shoring their GVCs to be more shock-resistant and less reliant on foreign sources.
Combined, these five mega-forces will drive GVC transformation in the decade ahead. They will fundamentally alter the way firms across industries design and operate their global value chains, affecting where they locate which type of activities, how they distribute value-add over their networks, and how they transmit practices to actors along their value chains. Global patterns of investment will change as a result, as will their potential impact on economic growth, employment creation and sustainable development.
Six broad trends in the future investment landscape
In light of the five driving forces, six broad trends in the future GVCs and FDI landscape can be foreseen, up to 2030:
• Shorter and less fragmented manufacturing value chains, which will lead to a decline in the global trade of intermediate goods of GVCs, an increase in trade of final products (the shift from combustion engines to electrical vehicle manufacturing is a case in point).
• More platform-driven value chain governance by tech multinationals, with foreign-asset-light business models, i.e. more non-equity modes of cross-border operations.
• A shift of value chains from the global to the regional and sub-regional level, which will generate downward pressure on global efficiency-seeking FDI, in favour of regional market-seeking FDI. GVC diversification driven by resilience building and national security concerns will result in more redundancy in multiple geographical locations.
• A shift from mass-production and economies of scale to mass-customisation enabled by smaller-scale distributed manufacturing, resulting in more concentration of value-add in individual locations, such as 3D printing.
• Rapid growth and more fragmentation in service value chains, leading to more service FDI via offshoring (‘white collar’ services) and servicification. This will be effectively driven by the new industrial revolution, but somewhat hampered by rising protectionism.
• A boost for FDI in the green and blue economies by the global drive for achieving SDGs, with more sustainable infrastructure-driven and public services-oriented FDI.
• A substantial shift in investment promotion strategy.
The five major driving forces highlighted earlier will also reshape the global investment policy space, and business ecosystems in general, in terms of norms, strategies, rules and regulations, as well as administrative practices.
The big question as to where global trade and investment policy is heading in the 2020s is still unanswered, but a new dichotomy in policy direction is emerging. We are entering a decade of deglobalisation and the mainstreaming of sustainability. The two policy trends are somewhat incompatible. The former leads to further fragmentation of the global market and erosion of multilateralism, while the latter depends on the establishment of global standards, global governance and global partnerships.
Confronting the challenges and harnessing the opportunities arising from the new dichotomy and the future directions of global FDI require a new investment development path. The reorientation of investment policy and promotion strategy includes:
• Broadening export-led strategy which extends to investment in production for regional markets and subregional industrial clustering.
• Attracting diversified investments based on the flexibility and resilience of GVCs.
• Intensifying efforts to promote investment in green and blue economies, as well as sustainable infrastructure and public services.
In conclusion, over the past two decades, the promotion of export-oriented manufacturing investment has been at the heart of development and industrialisation strategies of most developing countries. Investment geared towards exploiting aspects of production, resources, and low-cost labour will remain important, but the pool of such investment is shrinking. A degree of rebalancing towards growth based on domestic and regional demand and on public services and infrastructure, as well as on the green and blue economy, will be a new path forward.
James Zhan is senior director of the Investment and Enterprise division at the United Nations Conference on Trade and Development (Unctad). He is the editor-in-chief of the World Investment Report and the Transnational Corporations journal.
This article first appeared in the December/January print edition of fDi Intelligence. View a digital edition of the magazine here.