Economic Development

The outlook series: what to watch in FDI in 2023

January 11, 2023

Global

What to watch in FDI in 2023

January 11, 2023

Global
John Ferguson

Global lead for New Globalisation

John leads the research on New Globalisation at Economist Impact. In this role, he spearheads and develops comprehensive studies on trade, geopolitics, technology, finance, and economics. As the global economy is being transformed by the unprecedented convergence of shifting geopolitics, climate change, and an AI-driven industrial revolution, John’s research provides clients with crucial insights to navigate these structural shifts. His work is instrumental in guiding conversations towards global progress and helping clients adapt to an evolving economic landscape.

A frequent public speaker, his delivery style helps to provide context to many global issues in an insightful and accessible way, supported by his 15 years in policy and economic analysis.

At The EIU, he was Director of Country Analysis and Global Forecasting, responsible for guiding the economic and geopolitical analysis of the global economy. John holds a Master’s degree in International Economics from Sussex University, where he specialised in macroeconomics and trade, and an Honours degree in Psychology from the Australian National University.

Contact

The outlook for FDI is a challenging one as the global economy suffers from a downturn. However, aligning FDI incentives with sustainability and resilience could help to support global flows—in 2023 and beyond.

It will be a difficult year for Foreign Direct Investment (FDI). Despite the nascent recovery in global FDI flows that followed the covid-19 shock, momentum slowed in 2022 [1]. With the global economy facing recession in several key markets—due to high inflation, rising interests and the war in Ukraine—FDI will likely see another subdued year in 2023. However, the macroeconomic outlook is not the only deterrent to FDI flows. At Economist Impact, we will be closely watching two key areas that typify the transition period currently facing global FDI flows—aligning sustainability with FDI incentives and the role of FDI in increasing business resilience. The response of governments, especially investment promotion agencies, to these areas will go a long way to determining how FDI flows worldwide.
 
Creating a virtuous cycle for FDI and sustainability
 
Many companies have good intentions regarding their sustainability agenda. The problem, however, is implementation and the need to align these intentions with other business objectives—both within and between businesses. FDI is a prime example. There is currently considerable scope for a move towards more ESG-related, performance-based incentives that promote sustainable investment and to compensate firms who align with these goals. But Simon Evenett, professor of international trade and economic development at the University of St. Gallen and coordinator of the Global Trade Alert, believes too much of the onus has been placed on the business community to align with the SDGs, without sufficiently understanding the needs of companies. “Companies have autonomy, so if governments want them to do things, they need to think about their incentives,” says Mr Evenett. “The fundamental point here is that if the returns on FDI have fallen, there’s no margin now for taking on extra burdens. If governments want to work with firms, it has to be as a partnership.”
 
In early 2022, Economist Impact surveyed global companies to examine the link between sustainability and FDI. We asked respondents to rate their organisation’s performance in ESG considerations compared with their sector peers. The findings were instructive and revealing: companies who believe they are outperforming their peers on ESG are also more actively committed to sustainability-related FDI.
 
Companies that rated themselves as being stronger than their peers on ESG considerations are more likely to invest in a country with ambitious environmental targets to reduce greenhouse-gas emissions [2]. These firms are also considerably more likely than others to expect investment in existing facilities, greenfield investments and non-equity-based contractual relationships in the next five years. 
 
It therefore  makes sense that firms that think they are outperforming their peers on ESG considerations are much more likely to strongly agree with the assertion that “as FDI becomes more competitive, a country that focuses on resolving sustainability issues will have an advantage[3]. With the imposition of a global minimum tax likely to take away the possibility of countries using lower taxes to attract FDI, a comprehensive framework for sustainability and FDI could be a competitive advantage. According to a recent UNCTAD report, the impact of a global minimum tax could see global FDI flows decrease by between 1 and 4% [4]. All stakeholders will require a major effort to offset these declines and enable the benefits of FDI. Sustainability offers a key area to address that.
 
Enabling FDI with a focus on business resilience
 
Resilience is now a key concern for global businesses. With a deteriorating economic outlook and heightened uncertainty, governments seeking inward investment must align their promotional strategies with this critical business need. 
 
Fortunately, there is an increasing amount of evidence to suggest that diversified and complex supply chains can increase resilience. In the 2022 World Economic Outlook, the IMF presented evidence that diversification of supply chains significantly reduced losses from supply disruptions. The study also found that greater substitutability of inputs reduces the losses from disruptions. 
 
The results of these studies suggest steps that governments could take to attract FDI and align with companies’ resilience objectives. First, facilitating information-sharing between domestic and foreign firms will be essential. This could be information related to the domestic market’s resilience initiatives, standards or practices and information on domestic firms’ resilience efforts. Second, governments should facilitate deeper connections between domestic and foreign firms—beyond information sharing on resilience. By increasing the focus on resilience with these initiatives, the benefits of resilient supply chains will not only accrue to the companies involved, but also to the domestic economies of both countries.  

[1] https://worldinvestmentreport.unctad.org/world-investment-report-2022/
[2] Economist Impact survey, 2022, 
https://impact.economist.com/projects/future-flow/
[3] Economist Impact survey, 2022, https://impact.economist.com/projects/future-flow/
[4] World Investment Report, 2022. International tax reforms and sustainable investment. United Nations Conference on Trade and Development. 

Enjoy in-depth insights and expert analysis - subscribe to our Perspectives newsletter, delivered every week