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Episode 43 – The Macro Factors Driving Foreign Direct Investment Trends

Site Selectors Guild
Episode 43 - The Macro Factors Driving Foreign Direct Investment Trends
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Rick Weddle (Site Selectors Guild): Welcome to Site Selection Matters, where we take a close look at the art and science of site selection decision-making. I’m your host, Rick Weddle, president of Site Selectors Guild. In each episode, we introduce you to leaders in the world of corporate site selection and economic development. We speak with members of the Site Selectors Guild, our economic development partners, and corporate decision-makers to provide you with deep insight into the best and next practices in our profession. In this episode, we have as our guest Courtney Fingar, editor-in-chief of Investment Monitor, a part of New Statesman Media Group, with a mission of explaining how the world is changing for decision-makers in need of data-driven answers. Today, Courtney will talk with us about foreign direct investment or FDI. More specifically, Courtney will share with us about FDI trends and the macro factors driving them. What an interesting and relevant topic for today’s discussion. Join me as we welcome Courtney Fingar to “Site Selection Matters.” Courtney, before we get into the weeds of foreign direct investment or FDI as a topic, take a minute, if you will, and tell us about the “Investment Monitor.”

Courtney Fingar (Investment Monitor): Well, first of all, thanks very much for having me. “Investment Monitor” is a new publication that was launched in September 2020. It’s digital-only, and it’s free to read and access. So, I hope all the listeners will check it out. Our audience that we’re targeting would be senior decision-makers at multinational companies and those who influence their decisions, so that, of course, would include site selection advisors. But, of course, it could be interesting for anyone in the broader FDI ecosystem. We consider ourselves to be data-led. So, we are trying to sort through all the vast amounts of data out there that relate to FDI and help our readers make sense of them. I come to the publication from a relatively long career at Financial Times, formerly running fDi Magazine there, and I’ve been joined at Investment Monitor by about 10 other colleagues from there. And we’re just looking to build something new, and we felt there was a gap in the market that we’re trying to serve.

Rick: Well, that’s great. It sounds like a great opportunity at a really interesting time. You know, 2020 was wow, quite a year as we faced the first global pandemic in at least our lifetimes. One area that was impacted by the pandemic was global investment or FDI hugely. By some estimates, the total of foreign investment fell by over 40% maybe in 2020. Take a minute if you will and help us unpack that fact or data, as you would say, and explain why our listeners should be concerned with it.

Courtney: Yes, it was a highly disruptive year, and the data charts are pretty ugly when we start to look around what happened last year. And it’s arguably the most difficult situation for FDI in decades. And that would even include the big collapses that we saw after the global financial crisis more than a decade ago. Now, the collapse is not uniform. There were some sectors that have continued to perform relatively well, and they are not surprising ones like healthcare and ICT. And a few countries are outliers. We saw increases in China and India, for example. But apart from those few bright spots, we saw declines in every mode of FDI. So, we saw declines in M&A portfolio investment, which I guess is adjacent to FDI rather than FDI itself. And most worryingly, we saw relatively large declines in greenfield FDI, which, of course, is the productive job-creating FDI. And we saw the declines in every region of the world. So, for those who rely on FDI, which would really include every community on Earth, let’s face it, every place needs FDI for jobs and income. And so, for those who are charged with attracting foreign direct investment, it’s an extremely difficult environment in which to operate right now.

Rick: In the U.S., Courtney, many people for the first time ever had to get acquainted with the word supply chain or had to get acquainted with, you know, realizing that all the products that they take for granted every day and use every day are tied into this global system. So, it really does affect everybody, doesn’t it?

Courtney: That’s right. And, you know, what we’ve seen is that some trends and I guess some worries that predated the pandemic, and supply chain risk is one of them, just became heightened and accelerated by the pandemic rather than just launched solely by the pandemic. You know, companies had been looking for a while to try to minimize risk in their supply chains. And we’d seen a growing trend towards shorter supply chains and more regionalization at the expense of globalization. And what COVID did was just kind of move that into ultra-fast gear and move that up the list of priorities that companies that make global goods were considering.

Rick: Courtney, someone told me the other day, they said, “Oh, the pandemic changed everything,” but I thought about it and I thought, “You know, the pandemic’s a little more like a time machine. I think it sped everything up.” Many things that were underway moved much more quickly. I mean, remote work, for example, we were doing it a bit. Now, we’re doing it a lot. Some would say the pandemic was a time machine, that it moved us forward in that. Do you find that to be also the case maybe with, like, your comments about supply chain?

Courtney: That is absolutely correct. And I think the pandemic is more an accelerator than a catalyst of changes. And I think what’s interesting is the extent to which these changes or even this acceleration continues in what we hope will soon be a post-COVID world. How many of these changes are permanent? And that’s a big question at the moment.

Rick: Interesting. Are there other macro drivers that you see underpinning these FDI trends?

Courtney: Yeah. So, on my list of what I considered the top drivers, we already touched on, you know, supply chains, remote working, changes in working patterns, and, of course, the general chaos of COVID, but there are a few others that I think are relevant and that also predate the pandemic. One is the great decoupling of the U.S. and Chinese economies. And that had also been underway for a while but was accelerated by political factors, trade wars, but also by the pandemic. And that has huge implications because of the clout of these economies, their big implications on supply chains, on production patterns, on FDI, and trade. And so, this is something we’re continuing to watch and track actively.

Another trend I will point to is automation in Industry 4.0, other trends that predate COVID but that have major implications for where and how companies locate productive facilities. And another is the increasing prioritizing of sustainability initiatives and ESG criteria and the reporting mechanisms for those. That also, I think, awareness of these factors, the sustainability and ESG, were heightened by the pandemic, I guess, because of some of the flaws that it exposed in our global economic system. So, I think these are things that we need to continue to watch and have been impacted by COVID, but I think are more durable and long-lasting than the time period that the pandemic will last.

Rick: And so, the pandemic, in many ways, a lot of these things were sitting there. They were around. They were moving. There were transitions underway, but a lot of people were able to say, “Well, I’ll deal with that tomorrow, not today.” But then the pandemic brought it home and tomorrow became today and we had to deal with it all at once. Courtney, I recently read that developed countries were the hardest hit by this in 2020. What are your thoughts on that?

Courtney: Yes, so that’s certainly what the numbers show that developed economies have borne the brunt of the FDI collapse by quite a large margin. I think there are two reasons. One is just that if you take developed economies as a group, that includes really some of the major investment destinations in the world. So, therefore, they kind of had more to lose. But the second reason is just that developed economies did stronger lockdowns. So, we saw in Europe, of course, especially Western Europe have been in pretty much a strict lockdown for one year. So, that shut down many aspects of the economy, but also access. I mean, the ability of business people to even enter these places. Of course, you know, the U.S. would be in that category as well. It didn’t lock down to the same extent that Europe did, but has been greatly impacted by COVID whereas other places, I’m thinking of Africa, in particular, a lot of less wealthy countries have not locked down just because they felt they could not. In many African countries, if you do a total lockdown people will starve, and so governments had to make really difficult calculations there. And I think that’s really what is kind of underpinning this discrepancy that we’re seeing.

Rick: So, that means they may have suffered less economically because they didn’t really respond so aggressively to the pandemic, but I would expect that that probably means there are some unintended consequences of that also probably I would think.

Courtney: Yeah. There were. And I think what it points to is just the extremely difficult decisions that governments really everywhere have had to make. And it’s just that those decisions are difficult everywhere, but particularly difficult in the poorer countries.

Rick: Very, very interesting as we, you know, really try to look at that and see. You know, one of the things I’ve observed is that the pandemic really taught us a lot about what we don’t know. You know, we thought we knew a lot of things. And, obviously, your company’s into data-driven decisions, and we’re learning that there’s a lot that we don’t know as we figure these things out.

Courtney: Yes. I mean, kind of, when there’s a moment of such crisis and such disruption, you almost just have to rip up the plan for what you had before, which is the case for a lot of companies and governments, and we’re rewriting new rules as we go along.

Rick: Yeah, that’s exactly right. It’s like, I think it was Mike Tyson that said, “Everybody’s got a good plan until you get hit in the nose, and then it changes.”

Courtney: Exactly. So, we’re all just trying to get up from the matt at this point.

Rick: I think that’s right. Let’s look at the U.S. now where most of our listeners on Site Selection Matters are from. With the 2020 drop in FDI inflows, maybe by a half or something order of magnitude, and a projected weak outlook for 2021, what do you see in your crystal ball for the U.S. in the next year or so?

Courtney: Well, I think it’s the case for the U.S. as anywhere, and that is the FDI recovery is linked to the economic recovery, which is linked to the COVID recovery. So, I’m a little more bullish on the U.S. now because the vaccination plan, for example, seems to be going well. And so, there is light at the end of the tunnel in terms of reopening and recovery. I mean, the U.S., in any case, it has so many durable factors that make it attractive for foreign investment, it’s very hard to dent those. So, when the U.S. is not in a crisis, it tends to be a quite durable and attractive investment destination. So, I think as we move into recovery, opportunities are going to start opening up, and interest in the U.S. is going to be high.

We also expect to see a bit of a Biden boost for some sectors that his administration will prioritize like infrastructure. We expect a lot of infrastructure activity, construction activity, and big investment in renewables, just to name a few. And then I always say maybe manufacturing. And I only say maybe because the manufacturing sector is something that almost every administration wants to support. And you really can’t go wrong with claiming that you’re going to revive made in America and U.S. manufacturing and, you know, Biden administration has its own plans to incentivize that. I know there is a lot of hype surrounding reshoring, for example, and I think the U.S. can benefit from that trend. We just want to be, I suppose, cautiously optimistic about how that will ultimately bear out. So, I mean, predictions are very difficult, but my eye is on a relatively strong recovery in U.S. FDI, if not by the end of this year, certainly by next year.

Rick: You mentioned reshoring. I’m reminded, I think it was Yogi Berra, the baseball great said, “You know, predictions are really hard, especially about the future.” And I think that’s kind of what we’re saying is that it’s really difficult to talk about…reshoring was huge, but the actual effect of it has been much smaller than we anticipated when the pandemic first broke through. A lot of companies, instead of moving factories, they maybe just contracted with someone else for their supplies, and although there’s a lot of regionalization underway, the impact of it has not been as great as we thought.

Courtney: Yes. And the one caveat I always say when speaking with U.S. economic developers is that bear in mind the reshoring trend works in reverse as well. So, U.S. companies are not the only ones looking at their supply chains and their production patterns and their operations around the world and thinking of bringing them closer to home or, in fact, home. So, just as U.S. manufacturers might be thinking to reshore, so too can German manufacturers, instead of, for example, investing in the U.S. So, it’s very much a double-edged sword or a two-way street if I can throw two analogies out there. And that’s why we need to be cautious. I think there is something in the reshoring trend, but a lot of it is hype, and we have to be very cautious about our expectations surrounding it.

Rick: Good point. So, Courtney, you mentioned economic developers, which is, you know, an important topic to me and all of our listeners. What should economic developers in the U.S. or Europe or the developed countries right now be doing to maintain their competitive position, create new jobs, and foster investment going forward, anything different?

Courtney: Some different. I mean, I guess I should say that I don’t envy the task at the moment because investment promotion and economic development is just not an easy job even at the best of times, and it’s highly, highly competitive with a lot of pressure to deliver results. And at a time when I guess the piece of pie of potential FDI projects has shrunk so much, you risk kind of fighting over the scraps that are left. But I think even though things are difficult going into a full… You know, you have to have some crisis-fitting, I guess, and adapt the strategy to get through the short term. And that means relying heavily on digital tools. So, if we can’t have physical site visits, for example, and do the normal means of interacting with investors, there needs to be some flexibility and use of innovative and digital tools. However, crisis is also a time to rethink your entire strategy and to regear your approach. So, I would really encourage them to, you know, try to get through these next months and be flexible and adapt as much as possible. But also, don’t just try to get through these next months and then snap right back to the old ways of promoting the location and interacting with investors. Try to use it as an opportunity to be more innovative and forward-thinking.

Rick: Courtney, let me throw you a hardball punch right now. There’s a lot of thought and talk today about equity. In other words, about fairness in that. And one of the questions, I was in a conversation the other day and someone suggested that what we may see now is an even greater concentration of investment in key or select areas because the pie is smaller. And companies are able to invest or concentrate their investment in, I don’t want to say better locations, but maybe more competitive locations at the expense of others. Do you see that trend kind of continuing, and if so, what does that mean for economic developers?

Courtney: I do see that trend continuing, and there are a lot of implications for that and many negative ones. So, if we think in a global perspective, there are huge concerns about what this means for developing countries, you know, that, of course, are desperately reliant on inward investment. And related to the topic of supply chains and reshoring and consolidating operations, there are many developing countries that built their entire competitiveness and their FDI, you know, strategy on being cost-competitive manufacturing locations. But cost is less and less important now in a world of automation, so they’re already exposed. So, there are major developmental consequences for this and lots of fears over what it means for poverty reduction, you know, the UN sustainable development goals, which were already way off track. It appears that one of the negative impacts of the pandemic is going to step those even further back.

So, these are things in a global context that are extremely alarming and worrying, but I would say even within developed countries. So, even when you think of economic developers competing against their counterparts in other U.S. cities and states, it’s a concern. And I think it probably will mean, by the very nature, if there are fewer projects, if a company is expanding less actively, it’s going to choose its locations extremely carefully, cautiously, and wisely, and that really does mean only the best locations. Now, however you measure that best location, there’s some variants in that, are going to win the projects. So, the question is, what does that mean for those who are going to lose out? Now, of course, they can work to put things in place to up their game, but that’s not something that you can do overnight. So, I’ve not got an easy answer for any of that except to say that this probably is going to be what happens. There is going to be a bit of a shakeout and a shakeup in investment locations, and there will be winners and there will, unfortunately, be losers.

Rick: And the distance between the winner and the loser may be farther apart than it has been in the past.

Courtney: Yes.

Rick: Courtney, you’ve given us a lot to think about today. What a great conversation this has been, but that’s really all the time we have. So, let me say, thanks, Courtney, for taking time with us today and talking with us about FDI and major trends impacting that on this episode of “Site Selection Matters.”

Courtney: Thank you so much.

Rick: Thanks for listening to this episode of Site Selection Matters, and a special thanks today to Courtney Fingar for helping us get inside and better understand the current trends impacting foreign direct investment or FDI. What an informative discussion that leaves us with a lot to think about. Again, I’m Rick Weddle, president of Site Selectors Guild. This podcast episode presents my views and the views of my guests, and they do not necessarily represent the views or opinions of the Site Selectors Guild or its membership. We hope you’ll subscribe to the “Site Selection Matters” podcast on Apple Podcast, on Stitcher, on Spotify, or wherever you listen to your podcast. We look forward to bringing you some great discussions in the year ahead. Until next time, good day.