unctad.org | World Investment Report 2020: International Production Beyond the Pandemic
Statement by Mr. Mukhisa Kituyi, Secretary-General of UNCTAD
World Investment Report 2020: International Production Beyond the Pandemic
Geneva
12 Jun 2020

 

The global economy is in a dirersituation than it was during the 2008 financial crisis. COVID-19 has resulted in production stoppages and supply chain disruptions in most sectors, complete closures of entire industries, & unprecedented demand shocks in most economies. Pandemic mitigation & lockdowns will be devastating for all economies, independent of their links to global supply networks.

The economic impact of COVID-19 will hit developing countries hard, esp. structurally vulnerable economies in Africa and least developed countries in all regions with disruptions to major productive sectors and industries, declining remittances and receipts from tourism and contracting world trade. The shock will be further compounded by the impact on food security as production of major food items is concentrated in a few big countries where the pandemic is expanding. Managing the disease is only part of the persistent challenges facing developing economies.  

The development impact of the pandemic is also aggravated by decreasing demand and falling prices of natural commodities, especially oil. For many developing regions, export earnings and foreign investment are still tied to a large degree to natural resources. The dual shock of COVID-19 and falling commodity prices puts many countries in precarious economic and financial positions, undoing progress towards structural transformation and economic diversification.

The news gets worse today.  The main headline of UNCTAD’s WIR 2020, the 30th edition of the report launched today, is that flows in foreign direct investment will fall dramatically in 2020and beyond. We forecast that global FDI flows will decrease by up to 40% in 2020, down from the 2019 value of $1.54 trillion, reaching the lowest level in the last two decades.  Developing economies are expected to see the biggest fall in FDI because they rely more on investment in GVC-intensive and extractive industries, which have been severely hit, and because they are not able to put in place the same economic support measures as developed economies. The outlook is highly uncertain. Prospects depend on the duration of the health crisis and on the effectiveness of policy interventions to mitigate the economic effects of the pandemic. The pandemic represents a supply, demand, and policy shock for FDI. Lockdown measures are slowing down existing investment projects, prospects of a deep recession are leading MNEs to re-assess new projects and crisis measures taken by governments include new investment restrictions.

The impact of the pandemic, although severe everywhere, varies by region. FDI in Latin America and the Caribbean is expected to halve in 2020. FDI flows to Africa are forecast to fall by 25 to 40% in 2020. The negative trend will be exacerbated by low commodity prices.  Flows to developing economies in Asia will be severely affected due to their vulnerability to supply chain disruptions.

The outlook for FDI in structurally weak and vulnerable economies is extremely negative. A bulk of LDCs are dependent on FDI in extractive industries, many SIDS rely on investment in tourism, and LLDCs are disproportionally affected by supply chain blockages. Even before Covid, in 2019, FDI inflows to LDCs already declined by 6% to $21 billion, representing just 1.4 per cent of global FDI.

Despite the drastic decline in global FDI flows during the crisis, the international production system will continue to play an important role in economic growth and development. Global FDI flows will remain positive and continue to add to the existing FDI stock, which stood at $37 trillion at the end of 2019.  Starting in 2022, investment flows could slowly recover, led by Global Value Chains (GVCs) restructuring for resilience, replenishment of capital stock and recovery of the global economy.

COVID-19 is not the only gamechanger for FDI and international production. 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 directional trend identified in this report points towards shorter value chains, higher concentration of value added and declining international investment in physical productive assets. That will bring bring 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.

The expected transformation of international production, despite its inherent challenges, also brings opportunities for development, such as promoting resilience-seeking investment, building regional value chains and entering new markets through digital platforms. In this new context, a degree of rebalancing towards growth based on domestic and regional demand, and promoting investment in infrastructure, domestic services, the green economy and the blue economy is necessary.

Confronting the challenges and capturing the opportunities requires a change in the investment-development paradigm.

  • It will be crucial to shift from a focus on export-oriented efficiency-seeking investment in narrowly specialized GVC segments, to an "export-plus-plus" focus, which entails promoting investment in production for regional markets as well as in a broader industrial base.

  • There must be a shift from cost-based competition for single-location investors to competition for diversified investments based on flexibility and resilience.

  • And finally, transitioning will be needed from prioritizing large-scale industrial investors with "Big infrastructure" to making room for small-scale manufacturing facilities and services with "Lean infrastructure". The Report proposes a new framework for investment-development policies to reflect this change.

All of this points further promoting investment in the SDGs and in related SDG sectors - an issue that is being dealt with in the last chapter of the Report which we added at the request of the UN General Assembly. As you know, many have been calling for using the Pandemic as an opportunity for change towards a greener and a fairer future. WIR 2020 delivers the same message.

Business as usual is no longer possible in the New Normal, for all countries but especially for developing countries - it is also no longer possible for big MNEs and the private sector. This is where the momentum for change can find its spark. Only together can we find a better future. WIR2020 provides the insights into how this can be done.


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