It is a truism that ‘digital’ is becoming ever more important to the way we do business. A prime example for this are streaming platforms such as Netflix and Amazon Prime. For the foreign direct investment (FDI) community, understanding the working principles of these streaming platforms provides a glimpse into a new paradigm.
This production revolution is perhaps best described by Unctad's ‘FDI lightness’ factor, or the ratio of sales generated in non-home market locations and the corresponding assets in these markets. It is exactly this ability to generate sales abroad with fewer foreign assets that will augur a revolution in FDI patterns.
The more digital products become, the more multinational footprints are going to change. The underlying assumptions are that assets will remain concentrated in the corporations’ home market — namely the developed world — while investments into peripheral countries are likely to dwindle. While geography obviously is less of an issue for a streaming platform than for a manufacturing company, technological developments, such as Industry 4.0 and automation, will nonetheless hasten the transformation of production strategies of physical goods manufacturers.
Given the shifting power balance, it is unsurprising that nation states are taking increasingly robust measures to protect their interests. For example the so-called ‘Lex Netflix’, where Swiss legislators aim to force Netflix to support the local film industry though compulsory minimum local investment sums, as a percentage of revenues realised in Switzerland. Similar discussions are underway in France, Italy and Spain.
The hotly discussed issue of international taxation is another case in point. While a digital tax is seemingly off the table, the OECD/G20 ‘two-pillar’ approach introduces the principle that taxes are not solely based on the location of a legal entity, but also where revenues are generated.
With sales revenues becoming the basis for taxation, rather than physical location of a company’s headquarters, tax havens might lose their appeal vis-à-vis markets with large purchasing power as an investment destination. Hence, and based on the precedent of the Lex Netflix, it is possible that neither labour costs nor tax rates are the key drivers for location choice in future. FDI decision making might be heading for a new era.
Martin Kaspar is head of business development at a German mittelstand company in the automotive industry.
This article was first published in the December 2021/January 2022 edition of fDi Intelligence magazine. Read the online edition here.