‘It’s costly, but they have to do it’

The pandemic and the war in Ukraine have accelerated the restructuring of global value chains (GVCs). Once driven by the pursuit of efficiency, multinational corporations have been reassessing their global footprint to adjust to the new, fractious geopolitical climate. “It’s costly, but they have to do it,” James Zhan, director of investment and enterprise at Unctad, tells fDi . Q: What is your current outlook on global investment? A: Global foreign direct investment (FDI) experienced a strong recovery in 2021, but the prospects turned gloomy for 2022. There are three sets of indicators that point in that direction. A first set relates to the multiple crises the world economy is facing — what I refer to as the three F’s and double H’s: the food, fuel and financial crisis combined with the humanitarian crisis in eastern Europe and parts of Africa, as well as the health crisis caused by the pandemic that is not over yet. The second set of indicators concerns macroeconomic indicators — the three highs and three lows. High levels of debt and inflation, as well as higher interest rates; low growth of gross domestic product, trade and gross fixed capital formation. A final set of indicators relates to our preliminary data for the first quarter of the year, with decreasing numbers of greenfield FDI projects and deals of project finance. More importantly, according to our survey of the largest 5000 multinational corporations in the world, earning forecasts have in most cases been revised downward. These are the three main sets of indicators that tell us global investment flows are on a downward trajectory with increasingly high levels of risk. In the best-case scenario, global investment flows will flatten out. In the worst case, they will be nosediving towards 2020 levels. Having said that, there are opportunities that lie in investment in green and blue economies, in renewables infrastructure; there are still projects in the pipeline driven by the stimulus packages of last year, and also services offering — high value-added services in particular will create opportunities for firms and for countries to attract international investment in the years to come. Q: Do you think that this is the dawn of a new era defined by a multipolar order, shaped around the big centres of power like the US, China and Europe? A: There are two levels to consider here: a firm-level international production system organised in GVCs and a policy level. With regards to GVCs, globalisation accelerated between 1990s and 2010, and we have seen a drastic increase in GVC growth; between 2010 and 2020 globalisation stagnated, and since the pandemic we have seen globalisation reversing — some refer to this last twist as deglobalisation. There are five main driving forces behind it: economic governance realignment, which is clearly driven by geopolitical rivalry and industrial nationalism; the push towards technological sovereignty and the role that the new industrial revolution plays in shaping the future of GVCs; the sustainability imperative; ESG principles that will also change the behaviour of companies and the way GVCs are managed; and the resilience-driven type of restructuring of GVCs. These forces are transforming GVCs through reshoring, diversification, regionalisation and replication. All this will lead to new patterns of global trade and investment, that is the decline of efficiency-seeking FDI and the increase of regional market-seeking FDI. With regards to the policy level, the perspective is different. Unlike the WTO for trade or the IMF for the monetary system, there is no global governance in investment. Global investment governance has always been multi-layered, multi-faceted and highly fragmented. Between 1990 and 2010, there was a proliferation of bilateral investment treaties and treaties at a sub-regional level. And later on, for the past decade, there was a kind of acceleration of treaty making and rulemaking at regional and mega-regional level. In essence, the governance of global investment was not globalised at all. Q: Many companies are facing the trade-off between chasing efficiency and falling in line with top-down policies pushing for the reshoring or nearshoring of strategic value chains like semiconductors and electric vehicle (EV) batteries. What’s your assessment of these developments? A: It’s costly, but they have to do it. It is costly because diversification means redundancy; relocation involves a lot of costs, but they have to do it because of the current geopolitical risks that have been increasing so much. Companies are prepared to do it, they are doing it in a gradual manner; they also try to wait and try to […]

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