In investment promotion and economic development, size matters. The higher, the better: job creation and capital investment remain the currency of the industry.
It should come as good news then that the number of mega deals has been rising quickly. According to fDi Markets figures, the global average capital expenditure for greenfield FDI projects is at its highest level since the global financial crisis.
It’s a win-win for host locations and companies. The former maximises opportunities for economic spillovers; the latter can achieve better scale and efficiency — at least on paper. In reality, though, with size comes challenges, and mega-projects seldom live up to the hype. This risk is even more tangible in the current market environment, where some of the drivers behind mega-projects have little economic foundation and feed off the volatility of the fractious global economy. Take reshoring. The idea that Western inventors can efficiently bring production back to their home markets is widely overstated.
The comparative disadvantage of Western countries in terms of costs, as well as labour and land availability, is just too wide to justify mass reshoring. However, lured by generous incentives, some have taken the plunge. Foxconn’s fiasco in Wisconsin is telling. With former president Donald Trump entering the White House on his ‘America First’ platform, federal and state authorities lined up a $3bn credit and incentive package — by far the biggest ever granted to a foreign company, and frankly the only way for Foxconn to even entertain a discussion. However, the business case for the Taiwanese company to produce advanced LCDs in Wisconsin was weak throughout, and the ‘flying eagle’ soon became a $10bn bust (see page 68). Eventually, Wisconsin saw little jobs and investment; Foxconn no scale nor efficiency.
The energy transition is another major source of investment inflation. Green hydrogen projects worth dozens of billions of dollars are being announced the world over. Mauritania, a water-scarce African economy of $8bn, is now chasing a $40bn export-oriented green hydrogen project (see page 60). Other countries across Africa and Latin America have similar ambitions. However, their business case remains a fantasy as green hydrogen has yet to prove its case as a mass deployable source of energy.
Another major source of investment inflation is electric mobility. The big push in Europe and the US for the local manufacturing of electric vehicle batteries combines elements of reshoring politics and energy transition. The EU is openly handing out state aid to pull it off to close the gap with Asian producers, and the US is handing out billions of dollars in support schemes. Whether they will ever be able to compete with dominant Asian producers and set up sustainable businesses is still unclear.
There certainly are mega-projects and investment campaigns that make a lot of economic sense. However, they may still struggle to translate into equally big opportunities for host communities. In our cover story (see page 18), we map the top 100 research and development (R&D) spenders of 2021. While they are coveted investors, there is growing evidence that big R&D spending by incumbent companies doesn’t always create major spillovers for local ecosystems. Instead, they tend to cannibalise resources from the ecosystems in which they operate.
In other words, size can be a misleading proxy for the real benefits of an investment project, particularly in the current market. If jobs and capital investment remain the currency of economic development, well, that currency appears very inflated at the moment. Another currency, bringing in elements of investment quality, may soon be needed.
This article first appeared in the June/July 2022 edition of fDi Intelligence. Read the online edition of the magazine here.