Bouncing back? We need to talk about recovery

Joe Phillips | 16 Jun 2020 | General

United won an entertaining Manchester derby by two goals to nothing. Now, a little more than three months later, that date of March 8th seems like a lifetime ago: the days when we could go to the office, or to a bar, or just to a friend’s house. It was also the day UNCTAD released a special Coronavirus edition of its Investment Trends Monitor series, where it predicted global FDI flows would fall by up to 15% in 2020, having initially forecast a slight uptick prior to Covid-19. Less than three weeks later, another edition was released, this time suggesting a 40% drop, which remains UNCTAD’s prediction in the flagship World Investment Report published on June 16th. So what is OCO Global’s outlook for FDI from here, and by extension, what should success for an Investment Promotion Agency now look like?


Searching for optimism

Having spoken to a number of European IPAs in March and April, we were hearing feedback that generally, projects announced in 2019 would largely still be implemented. It was more those since the turn of the year that would be under threat, but even with these, IPAs were unsure if many would definitely be cancelled. So while this gave cause for some optimism, their concern was more about the rest of year. This seems well founded, as EY’s recently published Attractiveness Survey report suggested that 66% of businesses would reduce or postpone their investment plans in Europe for 2020.

In this context, and given that the virus situation across parts of Europe and North America actually worsened after March, a 40% drop in FDI still feels conservative. A key determinant is the time it takes for countries, especially those that are major sources of FDI, to return to some form of (new) normality. However, two of the world’s leading source countries – the UK and USA – are also two of the countries currently most affected by Covid-19, so ‘business as usual’ still feels some way off in both, despite the rhetoric. The protest movement around racial justice that has now spun out from the USA – while profound in terms of how society can work better in the future – will likely add further short term delay to FDI potential, both in terms of investor confidence, and its potential to perpetuate the virus.


The road to recovery

Does this mean that other countries like China might exploit the ‘absence’ of the UK and US as two of the biggest sources of investment? Maybe a little, and China are already major investors (less so in greenfield), but don’t expect a long term shift in the source of FDI opportunity.

The more fundamental shift is likely to be in the type of FDI that investors are making. Since the start of the pandemic, OCO Global has been working to model the impact of Covid-19 on FDI in different industry sectors. As you would expect, some sectors – particularly non-food manufacturing – are highly exposed, but others in technology, or in life sciences – are more resilient, with some companies positively benefiting from the crisis (most visibly, the likes of Zoom, Amazon, AstraZeneca and Netflix, but plenty of smaller firms that we haven’t yet heard about).

So the effect will be to rapidly accelerate a trend in FDI that has already been evident for 10 years or more.  Tech-driven investment already shapes today’s FDI marketplace, and we can simply expect that to be ever more apparent (read this article from my colleague, Shalini Raste, which has plenty of interesting content around how Covid-19 is impacting the future of tech and our lives). This is because these investors are more agile, their projects are less capital intensive, but more knowledge based, such that they have applications across multiple industry sectors.

So IPAs will simply have to look ever further up the value chain for targeting both new and existing investors. They cannot continue playing a project numbers game and their performance must be assessed accordingly.


Forecasting 2021

Some forecasts on economic recovery for individual countries have predicted “V” shapes (quick recovery), “U” shapes (slow recovery), or even “L” shapes (no recovery). For sure, the pessimistic scenario may come true in some locations. But at the global level, FDI has the potential to bounce back in 2021 reasonably strongly – it’s just it will become more targeted towards certain activities (tech again), more cautious (fewer jobs, M&A rather than greenfield, and in already well established locations), but perhaps also more collegiate (projects that meet some of the UN’s Sustainable Development Goals). So this recovery is not one we should measure only in terms of projects or capital flows, or even jobs, but one that takes a fuller account of economic and social impacts.

Therefore, if we assume FDI flows do fall by 40+% in 2020, a recovery in 2021 to previous levels is probably unrealistic. Perhaps a better, and more achievable ambition is to reach and exceed the level of positive impact on society that 2019 FDI flows have had. Defining and measuring this on a project-by project basis is not easy, but is already been considered by some IPAs and their advisors. The aim in 2021 needs to be not just to recover, but to improve.