Strategy to Recover from Global Economic Recession

FDI and SDG

The global economy is in the midst of a severe crisis caused by the COVID-19 pandemic. The immediate impact on FDI will be dramatic.

Longer term, a push for supply chain resilience and more autonomy in productive capacity could have lasting consequences. But COVID-19 is not the only gamechanger for FDI.

The new industrial revolution, the policy shift towards more economic nationalism, and sustainability trends will all have far-reaching consequences for the configuration of international production in the decade to 2030.

The overall directional trend in international production points towards shorter value chains, higher concentration of value added and declining international investment in physical productive assets.

That will bring huge challenges for developing countries. For decades, their development and industrialization strategies have depended on attracting FDI, increasing participation and value capture in GVCs, and gradual technological upgrading in international production networks.

Export-oriented investment geared towards exploiting factors of production, resources and low-cost labour will remain important.

But the pool of such investment is shrinking, and the first rungs on the development ladder could become much harder to climb.

A degree of rebalancing towards growth based on domestic and regional demand and promoting investment in infrastructure and domestic services is necessary.

Strategy to Recover from Global Economic Recession
Challenges and Opportunities

That means promoting investment in SDG sectors. The large amounts of institutional capital looking for investment opportunities in global markets does not look for investment projects in manufacturing, but for value-creating projects in infrastructure, renewable energy, water and sanitation, food and agriculture, and health care.

GLOBAL INVESTMENT TRENDS AND PROSPECTS

The COVID-19 crisis will cause a dramatic drop in foreign direct investment (FDI) in 2020 and 2021. It will have an immediate negative impact in 2020, with a further deterioration in 2021.

The downturn caused by the pandemic follows several years of negative or stagnant growth; as such it compounds a longer-term declining trend.

The expected level of global FDI flows in 2021 would represent a 60 per cent decline since 2015, from $2 trillion to less than $900 billion -World Investment Report 2020.

Global FDI inflows, 2015–2019 and 2020–2022 forecast
Global FDI inflows, 2015–2019 and 2020–2022 forecast

Developing economies as a group are expected to see a larger decrease in the range of 30 percent to 45 percent.

Developing economies appear more vulnerable to this crisis (contrary to the situation after the global financial crisis, which had a much stronger effect on FDI to developed countries).

Their productive and investment footprints are less diversified and thus more exposed to systemic risks.

Dependence on commodities for Latin America and the Caribbean and Africa and on GVC-intensive industries for Asia push these regions to the frontline of the crisis from an FDI perspective.

Political responses and support measures critical at this juncture to limit the depth of the crisis and initiate a recovery are likely to be significantly weaker in these regions than in developed economies because of their tighter fiscal space.

Longer term, developing economies may be further penalized by the trend towards re-shoring or regionalization of international production, which could accelerate in response to the COVID-19 crisis.

INVESTMENT POLICY RESPONSES TO THE PANDEMIC

Fiscal and financial support for companies and employees are at the core of economic policies implemented in response to the crisis. National and international investment policies can play an important complementary role in various ways, although not all of them can be of immediate effect.

Facilitating investment

Several countries (e.g. China, Myanmar, Serbia, Thailand) have taken steps to alleviate the administrative burden for firms and to reduce bureaucratic obstacles with the aim of speeding up production processes and delivery of goods during the pandemic.

Measures include, for instance, the acceleration of approvals for investments in labor-intensive and infrastructure projects, faster approvals for health care and medical equipment businesses, and the reduction of investment application fees.

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Source -UNCTAD
Incentivizing investment to enhance production in the health sector

In order to address the adverse impact of the pandemic, several economies have recently adopted policy measures to boost investment in those industries that are crucial to containing the spread of the virus.

They provide various incentives to increase research and development (R&D) efforts and expenditures in such fields as medical and pharmaceutical research for developing vaccines and treatments (e.g. Czechia, the Republic of Korea, the European Union (EU).

Other incentive schemes concern measures to encourage manufacturers to expand or shift production lines to medical equipment and personal protective equipment (PPE) in order to increase the quantity available (e.g. India, State of Tamil Nadu; Italy; the United States).

A third group of incentives aims to enhance contracted economic activities. They include, for example, subsidy programmes for training and capacity-building and reductions in the price of natural gas or electricity for industrial use (e.g. Canada, Province of Quebec; China; Egypt).

Finally, major supply chain disruptions have caused some countries (e.g. Japan) to encourage their companies to divest from host countries that are heavily affected by the pandemic

Supporting local SMEs in supply chains

In many economies, SMEs are struggling for economic survival and risk losing their backward linkages with foreign investors as the latter hold off on buying parts, components, materials and services from local suppliers or as international value chains are disrupted for other reasons.

Other negative effects on SMEs include the potential loss of technology and skill transfers. These effects may create particular challenges in developing countries and affect various industries, such as textiles or mining.Financial and fiscal aid for SMEs is a core part of most State aid packages related to the pandemic.

Packages include, in general, guaranteed recovery of delayed payments, indirect financing to suppliers through their buyers, tax credits and other fiscal benefits to firms, co-financing of development programmes and direct provision of financing to local firms.Another measure is the possibility to adopt reduced or flexible working arrangements.

Examples are the aid packages of Australia, Brazil, Malaysia, the Netherlands, Saudi Arabia and South Africa.

MEGA TRENDS AFFECTING INTERNATIONAL PRODUCTION

Megatrends driving the transformation of international production can be grouped under three main themes: technology & New Industrial Revolution,global economic governance, and sustainable development .

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UNCTAD

The set of technologies driving the includes robotics, the internet of things (IoT),3D printing,cloud computing and several others. These technologies can be grouped in various ways for analytical purposes, but the key feature of the New Industrial Revolution is the integration and interaction between technologies.

To address the impact on the future of international production, nations need to leverages the two major forces driving the New Industrial Revolution: the use of digital technologies in production processes(digitalization) on the one hand, and the employment of machines to replace physical labour (automation) on the other.

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While in the New Industrial Revolution- digitalization and automation work synergistically to disrupt traditional patterns of production, their impact on international production may differ, and even push in opposite directions.

3D printing is an example of synergy between digitalization and automation that has specific implications for international production.

New Industrial Revolution technologies are heterogeneous in terms of technological scope, adoption across industries and technical and market maturity.

Investment-development ecosystem in a new era of international production

New investment development path

Old path
Export-led growth and transformation, Global Value Chains segment/niche targeting approach to integrating into the global economy based on cost efficiency, which creates silos in the host economy.

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New path
Technology and sustainability driven productive capacity building through industrial clustering, at national and regional or sub-regional level.

National enabling framework
• Macroeconomic policy appropriate for a new international production system
• Strengthen national technology and innovation systems in line with New Industrial Revolution and digitalization
• Policy package for SDGs including sustainability and inclusiveness

Linking investment to sustainable development
• Partnering between FDI and public investment in SDGs such as agriculture, health, education and digital infrastructure.
• Promoting impact-based investment
• Incubating social entrepreneurship

Modernize infrastructure
• Investing in regional infrastructure, particularly transport, logistics and
high-speed Internet connectivity
• Digitalizing manufacturing facilities
• Upgrading producer services, e.g. regional marketing network, trade corridors

Reorient investment institutions
• Establishing agencies with both investment and technology facilitation functions
• Promoting synergies between SEZs and IPAs
• Prioritizing investment in SDG sectors, including by developing bankable
project

Over the coming years, as developments in these areas materialize, it will be important to regularly monitor and reassess the trajectories.

Some trajectories or combinations of trajectories will prevail over others.
They may result in different international production configurations across industries.

For the past three decades international production and the promotion of export-oriented manufacturing investment have been the pillars of the development and industrialization strategies of most developing countries.

Efficiency-seeking and resource-seeking investment will remain important, but the pool of such investment is shrinking. This calls for a degree of rebalancing towards growth based on domestic and regional demand
and on services.

Investment in the green economy and the blue economy, as well as in infrastructure and domestic services, presents great potential for contributing to achieving the Sustainable Development Goals (SDGs).

INVESTING IN THE SDGs

Global SDG investment shows some progress but remains far from the target to meet the $2.5 trillion annual financing gap for developing countries.

Signs of progress in SDG investment are evident in six sectors: transport infrastructure, telecommunication, food and agriculture, climate change mitigation, ecosystems and biodiversity, and health.

Investment appears stagnant in education and in water and sanitation. Across the board, growth falls short of the level required to make a significant dent in the investment gap.

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UNCTAD

The COVID-19 pandemic not only may entail a temporary shock but could have a substantial impact on SDG investment given the reduction in cross-border capital flows to developing countries.

Fragile health care systems in developing countries could come under additional stress due to the pandemic, considering the indications of declining investment in the years leading up to this crisis. There is a risk that progress made in SDG investment in the last few years could be undone.

Despite the observed trends, investment in sectors such as public health and digital infrastructure could be boosted in the immediate and mid-term future.

The higher expected levels of spending and investment are likely to come from both national and international, as well as public and private sources.

The emergence of COVID-19 response bonds

The pandemic has expedited the issuance of bonds focused on relief issues and SDG 3 (Good health and wellbeing) as well as other SDGs, reaching a total value of $55 billion by mid-April 2020 already surpassing the value of all social bonds issued in 2019.

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These COVID-19 response bonds fund a range of activities, from supporting the transition of production lines to health care materials, to providing bridging finance for SMEs struggling with the effects of national lockdowns, to raising money for the development and distribution of a COVID-19 vaccine, along the lines of the “vaccine bond” first issued in
2006 by the International Financing Facility for Immunization.

COVID-19 response bonds include two of the largest dollar-denominated social bond transactions in international capital markets to date: the issuances of a $3 billion African Development Bank bond and an $8 billion World Bank bond.

The Inter-American Development Bank’s sustainable development bond, issued in April 2020 its largest-ever public bond issuance aims to raise awareness about SDG 3, with the proceeds being used to tackle the unemployment effects of the pandemic through mechanisms such as SME financing and microfinance.


Investment promotion schemes in most countries are not specifically targeted at attracting investment in SDG-relevant sectors to the extent that incentives or other promotional measures that focus on specific SDG sectors are in place, they often leave out core SDG sectors, such as health, education, ecosystems and biodiversity, water and sanitation, and climate change adaptation.

Recent years have also witnessed some investment liberalization measures in SDG sectors. The persistent and significant investment gap calls for more systematic efforts to mainstream the SDGs into the overall investment policy framework of countries and to embed SDG strategies into investment promotion schemes.

More to Read – What is AI and why we need it to reach Human Development Goals?

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