The Covid pandemic has hit the fashion industry hard. When the boss video calls you at an odd hour, is it sexual harassment? India asks automakers to cut royalties to foreign parents to boost local investment. What does this mean? At the most obvious level, it means that China is resuming production and work earlier than other countries business confidence in most other countries are showing trends similar to the United States.
Monthly production data in China confirms this trend, as we see that manufacturing output rebounded sharply in March. Or, it could indicate that Chinese companies are using this crisis as an opportunity for further expanding their global influence. It should be borne in mind, however, that the measure we are using here to indicate business confidence in China, the Purchasing Managers Index PMI , has been subject to scrutiny.
Additionally, due to the nature of FDI, we should be prepared for a slow recovery. In many instances, cross-border business ties need to be re-established; investors are normally more risk averse abroad than at home, and there are a number of complicated operations and logistics challenges involved in restarting production in a foreign country.
The consequences of a global FDI contraction could be more dire for developing countries with a more diversified portfolio of FDI inflows because the potential economic benefits of those inflows are greater. If the contraction in global FDI lasts for a while, the consequences for developing countries will be severe.
It will impact them in different ways, however. Countries whose extractive sectors depend on FDI inflows, many of which are in Africa, will first and foremost experience a loss in export revenues which many already have due to the plunge in prices for primary commodities, especially oil 8. The consequences of a global contraction in FDI could be even more serious for developing countries with a more diversified portfolio of FDI inflows, because the potential benefits of such inflows are greater: FDI inflows do not only boost export revenues in these countries, they also boost employment, tend to have a more positive impact on infrastructure development, and can result in technology transfers to the host economy, particularly in the manufacturing sector.
Attracting investors is only the first step towards a successful FDI strategy. Convincing investors to stay and expand their operations is a key factor for achieving economic development goals. The competition among developing countries to attract FDI from high-income countries has become fiercer than ever, particularly in manufacturing.
The nature of competition in the global economy of the 21st century is also an issue of concern in relation to the contraction in FDI to developing countries. The developing-country share of low-tech manufacturing exports has almost tripled since , and the global pool of unskilled labour has doubled since For example, garment manufacturers in Bangladesh have been pressured to restart production despite the associated health risk.
Factory owners fear that overseas retailers will simply source production from other countries like China, Viet Nam or Cambodia if they do not resume production quickly. To recover post-COVID, the world—and developing countries in particular—will require a significant influx of resources.
FDI inflows can bring in some of those resources, but governments will need to put conditions in place to help attract and retain productive investments and, more importantly, to maximize their development benefits. This crisis may offer a window of opportunity for governments to re-examine their approaches to investment attraction and retention, with a view towards increasing the embeddedness of FDI within their local economies.
To this end, we highlight three focal areas that may require novel policy approaches and thus deserve increased attention from policymakers:. First, measures and supportive mechanisms to help local firms overcome supply-side constraints must be introduced and further strengthened. Two types of measures specifically can be fruitful in the longer term in this respect, both for developing stronger linkages between local and foreign firms, as well as to improve competitiveness of local industrial structures: the development of a system of quality certification that is often required to enter into the supply chains of foreign firms, and improvements in digital infrastructure that allow firms to operate remotely both along global value chains and in reaching out to foreign markets.
Second, export processing zones EPZs , which have been an important tool for attracting FDI in many developing countries, should be designed in a way to link up to the domestic economy. This calls for EPZ regulations that support the establishment of local supplier relationships, including the design of supplier development programmes to support match-making processes between foreign firms and local suppliers.
Third, international actions to support countries during and after the pandemic need to pay particular attention to least developed countries. Those countries are facing particularly hard budget constraints and are often limited to implementing policies that focus primarily on investment facilitation measures, simply because they do not have the resources to offer more substantive support to their private sector firms.
Press Release No. Global Investment Trends Monitor No. Paris: OECD. This is not to say that Latin America is irrelevant, where Brazil and Mexico account for a large share of FDI inflows into developing countries. They are not depicted in the figure because, in absolute terms, their FDI inflows are lower than the cut-off point. Powell, Jamie and Jones, Claire. FT Alphaville. Trade and Development Report Update. Hauge, Jostein. Third World Quarterly 40 11 , Hauge, Jostein and Chang, Ha-Joon.
Cheltenham: Edward Elgar. Savage, Susannah. Financial Times. Read next. The views expressed in this article are those of the author alone and not the World Economic Forum.
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