Foreign investments in the international economy have been strongly affected by the coronavirus’s turbulence, like so many other aspects of international economic relations. Apart from a strong contraction, the foreign direct investment will undergo important changes in its configuration, accelerating in some cases trends pointed out in recent years.
Forecasts point to the biggest drop in investment flows since World War II. The UNCTAD World Investment Report foresees a fall of 40% in 2020, which would continue with a fall of 5% in 2021 to start recovery in 2022. These forecasts must be taken with logical prudence, given the high uncertainty existing, primarily about the duration and control of the pandemic.
Apart from this contraction, a series of important structural changes are emerging. There are three major determinants of these changes:
As a direct consequence of the pandemic’s disruptions, the security of product supplies has come to the fore. This applies to strategic products such as medical and all kinds of products that feed global value chains. The interruptions and delays in supplies caused by the coronavirus, due to alterations in production processes and the transport of goods, have made supply security a priority factor.
Changes in the dynamics of global value chains, which have also been underway for some time, have made efficiency and the search for lower costs as a determinant of foreign investment lose steam. The wage differential between developed and developing countries has narrowed, especially China, the major offshoring destination. On the other hand, technological developments such as digitization, robotization, automation, artificial intelligence, 3D printing, have caused the work factor to lose relevance in production processes.
What will be the main transformations that the three previous elements will cause in foreign investment configuration?
The following should be highlighted:
A strengthening of regionalization or production in proximity, another trend that will now be reinforced by security considerations and shortening of value chains. This trend towards localizing the production process in a “regional” way directly affects investments. Investments in production centers are not necessarily located in the same country as the company that carries them out, but they are in neighboring countries. In the case of investments by European companies, this can shift to closer locations, for example, in Africa.
An intensification of the reshoring or relocation processes will be enhanced by the three determining factors that we mentioned: protectionism, concern for the security of supplies, changes in the dynamics of value chains, in which the search for efficiency through lower labor costs loses importance.
The new emphasis on reindustrialization, which is enthusiastically supported by different governments, may hurt companies’ foreign investment activity.
Greater geographic diversification in the investment destinations reduces the risks of a high concentration of supplies in a reduced number of locations.