FDI in a Risky World
by Joseph Joyce
The pandemic has shown that global supply chains are vulnerable to shocks. Output contracted as factories were closed in China and the impact was transmitted to firms further along the chains and the distributors of the final goods. Foreign direct investment had already slowed in the aftermath of the global financial crisis of 2008-09, and there were questions about its future (see here). How will multinational firms respond to the new shock?
The McKinsey Global Institute seeks to answer this question in a new report, Risk, Resilience and Rebalancing In Global Value Chains. The authors point out that the pandemic is only one of a range of shocks that can disrupt production. They distinguish between catastrophes that are foreseeable (such as financial crises) and those unanticipated (acts of terrorism), as well as disruptions that take place on a smaller scale. The latter can also be divided between those that are foreseeable (climate change) and those that are unanticipated (cyberattacks).
The report then measures the exposure of different business sectors to the various shocks. Those that are heavily traded are more vulnerable. These include communication equipment, computers and electronics, and semiconductors and components, all industries that are seen as promoting growth. Apparel is another sector that is vulnerable to risks, such as the pandemic and climate change.
These risks will motivate firms to reconfigure their supply chains. The political fissure between China and the U.S., as well as government policies to ensure self-sufficiency in some sectors, will also induce firms to reorganize production. The report’s authors estimated that 16% to 26% of current exports could be shifted. They find that “…the value chains with the largest potential to move production to new geographies are petroleum, apparel, and pharmaceuticals.” In some cases governments may need to provide financial support to induce firms to relocate to domestic economies where the governments seek domestic self-sufficiency.
The United Nations Conference on Trade and Development (UNCTAD) in its World Investment Report 2020 also considers the future of FDI (see here for a summary). It identifies three trends that will shape the future of international production. These include technology trends that contribute to a “New Industrial Revolution;” growing nationalism that leads to more protectionism; and the need to achieve sustainability. As these forces evolve, they will push firms to increase supply chain resilience and increase national and regional productive ability.
The authors of the UNCTAD point out that economic sectors differ in terms of the length of their existing value chains, their geographical distribution, and their governance. Consequently, multinational firms will respond in different ways to the trends the authors identify. But they identify three overall trajectories–reshoring, regionalization, and replication–that all involve scaling down global value chains. A fourth trajectory–diversification–would transform existing operations but include a lower geographical distribution of value-added and less investment in capital goods.
These changes represent challenges to government policymakers, particularly those in developing economies. A retreat of international production will hamper the prospects of lower-income countries where the global supply chains have been a driver of growth. But there is also the opportunity to attract new investment. Among the measures that the report’s authors recommend are investment promotion strategies in infrastructure and services, and participation in regional initiatives.
The reconfiguration if international production systems will shape FDI in the years to come. But the formation of new production chains will only take place as the global economy recovers from the current collapse. UNCTAD reports that global FDI flows are forecast to fall by up to 40% in 2020 from their 2019 value of $1.54 trillion, and could decline by another 5% to 10% in 2021. All these predictions come with large degrees of uncertainty about the future of the global economy. Multinational firms will hold back on new expenditures until they see a consistent recovery and learn how governments will seek to influence their foreign operation.
The pandemic has shown that global supply chains are vulnerable to shocks….
[ What has impressed me is the reverse, just how adaptable and resilient global supply chains are given environmental or general economic as opposed to specific political-economic shocks. Simply look to the way in which Amazon has avoided shortages of products made abroad or to the way in which necessary trade along the Belt and Road has held. ]
August 23, 2020
How the BRI is defying expectations in 2020
By Tom Fowdy
The year 2020 has been one of the dreariest years in global economic history. The imposition of worldwide grinding lockdowns and the decimation of recreational and tourist industries have created profound challenges for global prosperity and wellbeing, with countries experiencing overwhelming surges in unemployment and falls in gross domestic product.
Yet in the midst of the chaos and uncertainty, there is one program which has ultimately defied expectations, that is China’s Belt and Road Initiative (BRI).
Despite the frosty climate for global investment which has of course slowed down new Belt and Road related lending, newly published data nevertheless found China’s non-financial direct investments in Belt and Road countries (thus investments by private companies) stood at 10.27 billion U.S. dollars in the first seven months, up by 28.9 percent year on year, with foreign contracted projects standing at 67.18 billion U.S. dollars in the same period.
In addition, projects created by the BRI have also come to fruition. China-Europe railway trains have surged by 68 percent in the past year, with cargo having increased by 73 percent, with 1,232 trains having made journeys from Chinese cities to European destinations. The increases have been bolstered by the COVID-19, proving faster, more efficient and cheaper than maritime and flight cargo.
Western commentators have persistently sought to push a confirmation bias that they believe the BRI is failing, or doomed to fail. If it is not described as a “debt trap” or in another malign ways, then its investments are typically presented as incompetent or inefficient, with a focus on how countries are apparently “pushing back” against it or how it is “unravelling.”
Thus not surprisingly, the early COVID-19 pandemic resulted in a chorus of typical op-eds which heralded the virus as “the undoing” of the project. However, far from crippling China, evidence seems to suggest the pandemic has accelerated the program as a route to economic recovery, and is now changing Eurasian supply lines accordingly….
August 24, 2020
U.S. abandoning globalization will hurt its businesses: Harvard Business Review
“Deglobalization sounds good until you need to design a product in a competitive marketplace,” a report released by Harvard Business Review said, adding that globalization happens because it creates value and broadens a corporation’s capabilities.
NEW YORK — U.S. multinational companies know that deglobalization of supply chains and de-coupling from China will affect their production capabilities in the United States and their competition with Chinese firms in the long term, according to Harvard Business Review.
Though the COVID-19 pandemic has triggered calls for deglobalization, the fundamentals of the U.S. globalized economy — and China’s role within it — will not change, said a report * published on the magazine Thursday.
The biggest tech firms in the United States rely on “a global scale of sales and operations to stay ahead of foreign rivals,” the commentary said. U.S. industries enjoying positive trade balances with China are high-value-added sectors, and China owns the world’s largest market for high-value-added industries, it added, taking the example of Apple, whose leadership would collapse if its business in China is stopped.
“Deglobalization will not bring factories back to the United States,” as the products of most U.S. corporate foreign affiliates are sold where they are produced, the report said.
“China is rapidly globalizing its industries by encouraging its higher-value-adding industries, such as power generation, construction equipment, and telecommunications systems, to supply overseas projects in the Belt and Road Initiative and to invest in foreign market operations,” it said.
“Deglobalization sounds good until you need to design a product in a competitive marketplace,” the report said, adding that globalization happens because it creates value and broadens a corporation’s capabilities.
Disunited Nations: The Scramble for Power in an Ungoverned World
by Peter Zeihan
The most amazing book I have read in the past ten years — in which geography is your fate. For example, Brazil has no rivers between its important cities, territory in between so rugged it cost 5 times as much to build roads (look at cliffs all the way down the coast between coastal cities), agricultural land so poor that it must be limed for years before put too use and takes 3-4 times as much fertilizer and many times as much insecticide because there is no winter to kill mosquitoes — leaving country as a collection of fiefdoms more than one unit.
Does the world.
Read Jared Diamond’s “Guns, Germs and Steel.” The central narrative is “geography is your fate.”
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