Economies seeking to regain foothold through investments must focus on improving supply chain resilience and setting a supporting industrial policy, a United Nations (UN) report said.
The UN Conference on Trade and Development (Unctad), in its World Investment Report 2021, explained that governments and the private sectors are keen on rebuilding economies now after a steep decline in global foreign direct investments (FDI) last year. It noted that “major shocks” hit greenfield investment for industrial and infrastructure projects, both of which are considered “the most productive.”
Global FDI plunged by 35 percent to $1 trillion last year from $1.5 trillion in 2019 amid the widespread crisis prompted by the lockdown measures because of the pandemic. This is nearly 20 percent lower than the 2009 figures after the global financial crisis, Unctad noted.
For the Philippines, the Bangko Sentral ng Pilipinas earlier reported that its total FDI net inflows last year contracted by nearly 25 percent to $6.5 billion from $8.7 billion in 2019. It was blamed on the global supply chain disruption and poor business outlook amid pandemic.
“Both policy-makers and firms are now focused on building back better. Resilience and sustainability will shape the investment priorities of governments and firms,” Unctad Acting Secretary General Isabelle Durant said.
To make the supply chain robust, Unctad said multinational enterprises (MNEs) have three options: network structuring, supply chain management solutions and sustainability measures.
The UN agency said that MNEs will implement the options first—which includes better planning and forecasting and providing buffers—before considering network restructuring as this can be very costly. It involves making decisions regarding production location, investment and divestment, Unctad explained.
“For firms, the push for supply chain resilience could lead to pressures in some industries to reconfigure international production networks through reshoring, regionalization or diversification,” it added.
But Unctad said that the “resilience push on international investment” needs a supporting measure as well.
“In the absence of policy measures that either force or incentivize the relocation of productive assets, MNEs are unlikely to embark on broad-based restructuring of their international production networks,” said James Zhan, Unctad’s director of investment and enterprise.
The international think tank said that industry policy would dictate how firms in various sectors will be able to rebalance international production networks allowing supply chain resilience.
“For developing countries, industrial development strategies are also the basis for building a viable pipeline of bankable projects,” the report noted. “The lack of shovel-ready projects in many countries remains a key barrier to attracting more international project finance.”
Investment outlook
UNCTAD sees FDI growing by 5 percent to 10 percent this year for Asia due to intra-regional value chains and robust economic growth projections.
It explained that signs of recovery for trade and industrial production in the second half of 2020 can give a boost for this year’s anticipated FDI hike. One of the most important FDI sectors for Asia, the manufacturing industry, already exhibited some signs of improvement last year, the UN agency said.
“However, in smaller economies oriented towards services and labor-intensive industries, particularly hospitality, tourism and garments, FDI could decline further in 2021,” Unctad warned.
The UN report noted that recovery investment plans in many countries are focused on physical, digital and green infrastructure.
These are the sectors “in which public investment plays a bigger role, making it easier for governments to act,” it noted. Said infrastructures also have high economic multiplier effect, the report said, which is a must amid the economic downturn.
“Unctad believes that the drive on the part of all governments worldwide to build back better, and the substantial recovery programs that are being adopted by many, can boost investment in sustainable growth,” Durant said. “The goal should be to ensure that recovery is sustainable, and that its benefits extend to all countries and all people.”