FDI has long been seen as a panacea to create much-needed jobs and boost politicians’ poll ratings, but a rethink may be necessary post-Covid. (Photo by ESB Professional/Shutterstock)

A little while ago, Douglas van den Berghe asked, in an excellent and thought-provoking article, ‘Is the FDI model still fit for purpose?’ The argument could be made that despite global foreign direct investment (FDI) flows having collapsed from $1.5trn in 2019 to $859bn in 2020, and despite a further decline of between 5% and 10% being projected for 2021, the story is more nuanced than this.

Van den Berghe is right in observing that FDI has long been seen as the ‘holy grail’, as a panacea to create much-needed jobs and boost politicians’ poll ratings, rather than viewing it in a more realistic manner. It is equally true that some aspects of FDI will undergo radical change, while others will arguably continue to thrive. Whether we should therefore query the notion of FDI in principle, and whether we should “continue to put so many resources in attracting FDI”, as van den Berghe wrote, I would be less certain about. Where I would see a need for some reconsideration is in in the FDI industry’s hitherto firmly held beliefs and its approach to promoting FDI.

FDI is a needs must consideration

With evermore elaborate definitions of target sectors and longer ‘wish lists’ (also known as ‘demands’) for what FDI projects should do for a location’s long-term development, we forgot about the simple fact that corporate managers decide on the basis of their business needs where to locate their next project. While it is certainly legitimate for a location to contemplate what it wants to get out of an FDI project, making this the only guiding principle might be a mistake.

Efficiency-seeking FDI (i.e. corporates chasing low labour cost benefits) increasingly appears to be a thing of the past. China, the biggest beneficiary of two decades of efficiency-seeking FDI, has recognised this already and started to steer a different course. The Chinese government’s 14th five-year plan makes that startlingly clear. Automation and robotisation will plough through this type of FDI, and international organisations and politicians coming up with additional demands – be they requirements under the guise of the UN’s Sustainable Development Goals (SDGs) or obligations such as the Lieferkettengesetz (a German responsible supply chain act) – only hasten a development that is already clearly visible.

While globally the number of greenfield projects declined by 35% in 2020, according to the UN Conference on Trade and Development, projects in Africa declined by 63%. As much as the SDGs are laudable, and ought to be good corporate policy, companies do not owe nation states and if pushed too hard, simply reconsider their location plans.

Market-seeking FDI (i.e. investments to be close to customers or a promising market) on the other hand will be here to stay. Whether technological changes will alter the nature of this kind of FDI, however, remains to be seen. Physical infrastructure being put in place in order to manufacture and distribute products is often seen by investment promotion agencies (IPAs) and government officials as a bit fuddy-duddy and very 20th century.

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The new glittering prizes are R&D centres, long hailed as the new ‘high value-add’, knowledge-intensive and hence highly desirable for FDI. However, this could turn out to be less ideal than anticipated. The once 100-engineer-strong R&D centre could now – with all the lessons we have learned during the Covid-19 pandemic – turn out to be a largely empty building, as people work from home. Corporate org-charts might show an R&D centre in the Scottish Lowlands, but that isn’t to say that people aren’t still actually living in (and working from) Newcastle or Carlisle. The more we move into digital products, the more such non-geographic FDI effects will take hold, and are hence clearly an area IPAs need to spend some time thinking about.

Alternatives to FDI?

The question raised by van den Berghe as to whether there are “alternatives to FDI” is the right one. Industry 4.0 is bound to result in a paradigm shift in the way we work and interact with each other, but while the means of value generation might be different in the future, the fact that this value is realised by selling it to consumers hasn’t. Customer-facing organisations – and thus FDI – will remain, and so will be production entities in an era of supply chain ruptures and difficulties crossing national borders.

I would therefore only partially agree with van den Berghe. FDI professionals need to start challenging their traditional perspective on FDI; not so much the sense of FDI in principle, but rather how they think about it. If we play our cards right, FDI is a long way from being dead. It is merely in mental rehab, seeking to find a new personality. Which means we need to work hard to understand this new manifestation of FDI. And we need to restore more of the old equilibrium, to ensure that corporates – especially managers of SMEs investing abroad – do not have reason to ask themselves: “Is the FDI model broken?”.