Global FDI Stuck in the Lockdown - But Transformation of International Production in the offing

Global FDI Stuck in the Lockdown - But Transformation of International Production in the offing
(File) A container ship sails out of the Kwai Tsing Container Terminals in Hong Kong, China, 28 February 2020. Photo: EPA

Describing COVID-19 pandemic as ‘supply, demand and policy shock’ UNCTAD’s world Investment Report 2020, released last week, forecasts a decrease of FDI by up to 40 % in 2020.

‘Global slow down and recession would lead multi national enterprises (MNEs) to rethink their investment strategies and this would lead to a dip in investments and the recovery can be seen in 2022’.

Given the importance of international production for post-pandemic recovery, for economic growth and job creation, and for the development prospects of lower-income countries, ‘policymakers need to maintain a trade and investment policy environment that favors a gradual - rather than shock – adjustment of international production networks’. 

Current trends in international production show a system under severe pressure with heightened risks of a dismantling and hollowing-out of GVCs and declining cross-border investment in productive assets. 

According to UNCTAD, the world’s FDI would be below US$1 trillion for the first time since 2005. In addition, FDI is projected to decrease by a further 5% to 10% in 2021 and to initiate a recovery in 2022, the report says. “The outlook is highly uncertain. Prospects depend on the duration of the health crisis and on the effectiveness of policies mitigating the pandemic’s economic effects,” said UNCTAD Secretary- General Mukhisa Kituyi in a statement on the eve of the release of the report.  

On the disruption of supply chains, UNCTAD report finds “The pandemic has already significantly affected the production networks and supply chains of MNEs across many industries. As the outbreak began, bottlenecks in GVCs immediately emerged. The 1,000 largest global MNEs and their suppliers own more than 12,000 facilities (factories, warehouses and other operations) in the areas first hit by mobility restrictions (Hubei in China, Italy and the Republic of Korea). The longer-term policy reaction to the pandemic and the drive for greater supply chain resilience will accelerate existing trends in international production. 

A significant observation in relation to international production is the degree of internationalization of selected industries like electronics, machinery and equipment, textiles and apparels, and automotive which record gross exports as a share of output to the extent of over 70% to 83%. These industries combine multiple GVCs and investment decisions of MNEs depend on how they are able to traverse through this web of value chains across different geographical locations.  This contrasts with a simultaneous trend of more nationalistic rhetoric over the past decade. Data on the transnationality index shows that it has tampered off during the five years, after a secular rise over the decades up to 2010. 

However, on the positive side, megatrends driving the transformation of international production can be grouped under three main themes: technology trends and the NIR, global economic governance trends, and sustainable development trends.  This would mean for countries a paradigm shift in development strategy and industrial policy towards investment for development where in resilience-seeking investment would be the priority. Such a paradigm shift is expected in post COVID-19 recovery.

The post COVID-19 economic recovery plans and stimulus packages announced by the governments are expected bring back the demand as well as restore supply chains of production and distribution across the countries. Investment flows are expected to slowly recover starting 2022, led by global value chains (GVCs) restructuring for resilience, replenishment of capital stock and recovery of the global economy. However decisions on FDI depend on various other factors including the ability of MNEs to reinvest from profits (which accounts for 50% of FDIs globally), and this has been the hard hit globally due to the disruption of the last three months. The top 5,000 MNEs worldwide, which account for most of global FDI, have seen expected earnings for the year revised down by 40% on average, with some industries plunging into losses. 

How does Myanmar meet this challenge? Government functionaries appear to be upbeat and the minister for investment and foreign economic relations is confident of meeting the targets of FDI for the fiscal 2019-20, despite the slowdown of the economic activities of the past three months. At one level this optimism stems from the fact that Myanmar has already approved several projects for this fiscal year. However, UNCTAD reports a decline of 5.7% of FDI in Myanmar for the coming year.  This would mean that the policy measures announced in 2019 in terms of easing of investment in various sectors like wholesale trade, mining, banking sector reforms, liberalization of trade and exports and the additional measures of the COVID19 economic recovery plan would be helpful in turning around the FDI flows.

While FDI may recover to the previous levels in a quick time frame, a closer look at the trends and changes occurring in international production systems are far more important for Myanmar to view the prospects in the long term. 

Recounting the trends in international production, UNCTAD report points out: “The crisis caused by the COVID-19 pandemic arrives on top of existing challenges to the system of international production arising from the new industrial revolution (NIR), growing economic nationalism and the sustainability imperative. These challenges were already reaching an inflection point; the pandemic looks set to tip the scales. The decade to 2030 is likely to prove a decade of transformation for international production”.

How is such a transformation visualized in international production? It can be discerned through fragmentation and the length of value chains, the geographical spread of value added and the governance choices of MNEs that determine the prevalence of arm’s-length trade versus FDI. These will have implications for Myanmar and its FDI outlook for the future.

Technology is going to drive the international production system in the coming era of new industrial revolution (NIR). Robotics-enabled automation, enhanced supply chain digitalization and additive manufacturing are key components of this change. Each will have distinct effects on the length, geographical distribution and governance of GVCs. 
It is in this critical technological transformation that the policy environment for trade and investment need to be located. Sustainability concerns including differences in approach between countries and regions on emission targets and environmental, social and governance (ESG) standards, market-driven changes in products and processes, and supply chain resilience measures are also determining factors in the NIR.

The transformation of international production will bring both challenges and opportunities for investment and development policymakers.  They include increased divestment, relocations and investment diversions and tougher competition for FDI.

UNCTAD report identifies future changes in investment-development paradigm. The investment would be sought for export orientation plus production for local markets plus infrastructure development; for regional market seeking investments; for building diversified industrial clusters, for investments based on flexibility and resilience; for small scale manufacturing facilities and services and lean infrastructure (digital and sustainable).  Shifts can be seen in movement of investments towards green economy and the blue economy, as well as in infrastructure and domestic services. Similarly investments for SDG goals would also be focus in the coming years According to UNCTAD, all these will have implications for investment policy framework for countries. There is a need to develop new eco system accommodating these prospective changes.

While some of these already figure in Myanmar’s investment promotion strategy, there is room for fine-tuning in light of the COVID-19 global recovery and provide strategic responses.  Investment promotion authorities need to assess these likely trajectories, identify options for regional supply chain flexibility and resilience bases, reviewing investor targeting approaches, moving towards diversified industrial clustering and (regional) market-seeking investment, promotion of investments for domestic services and PPP models for SDG relevant sectors renewables, agriculture and health.