The coronavirus has been labelled a global pandemic by the World Health Organisation, due to its effect on society. This has left countries no choice but to implement strict lockdown measures to prevent the spread, which is likely to trigger a global recession, this is primarily due to the sharp rise in unemployment, decrease in demand, and their knock-on effects. The global economy is projected to contract sharply by “–3% in 2020” (IMF Staff 2020, p.7). I will study and predict the medium- and long-term effects on Foreign Direct Investment (FDI), trade policies and global logistics.
The most significant cross border medium-term effects will be a change in trade policies and a decrease in FDI. Many practitioners concluded that foreign investment drops as a result of a recession which is inevitable due to COVID-19. Several countries including India, Germany, France and the US have begun to implement stricter rules on FDI in key and critical sectors in order to prevent economies from becoming vulnerable and exposed to foreign funds. India’s Ministry of Commerce stated Foreign Investors would require government approval before investing in an Indian company, in order to curb opportunistic takeovers. Consequently, acquisitions or mergers with existing firms in the emerging and developing countries will decrease as they require government approval, lengthening the FDI process and stop many FDI’s from occurring, therefore decreasing flow of FDI.
This trend occurred during the most recent global recession as FDI plunged 13% in 2008 (Investments Trends Monitor 2020). Nevertheless, as previous trends have shown, investors will become more selective on their international endeavours; thus, changes in investment decision, but not on the quantities invested. Furthermore, demanding bigger markets such as India or Brazil will still drive FDI alongside countries with lower regulations and low labour cost. This is an incentive for opportunistic liquid companies to undertake greenfield investments, such as in Chile.
I believe many countries will continue to pursue globalization in the following years and continue to establish better relationship with foreign countries after the global economy begins to stabilise. A huge determinant for this will be the response to trade barriers. The EU has already taken action at its level to facilitate trade flows, as well as a time-limited requirement to authorise exports for vital personal protective equipment. This shows strength between nations and will encourage further investments as profitability increases in these sectors. However, we are also likely to see a decrease in mergers and acquisitions because they tend to be long-term commitments to over sea markets. Thus, with a decrease in demand for the foreseeable future, accompanied with stricter FDI rules, and the continued severe uncertainty about the duration and intensity of the shock, this will result in the flow of FDI to decrease in the medium term.
The long-term effects will be evident on FDI, global logistics accompanied with new trade policies. We will see more FDI in the sense of mergers and acquisition as countries get back on their feet and desire more investments to boost their economy further. This will be possible as developing countries lower trade barriers to incentivise foreign investors.
Multinational companies such as Vodaphone, Nike, Shell, McDonalds need to be closer to their customers as they hold a world-wide presence seeing the world as their market, therefore will continue greenfield investments in the long-term. Furthermore, as FDI is an important source of capital investment, it is also a determinant of the future growth rate of an economy. This shows that lowering in FDI over the next few years especially in Gross Fixed Capital Formation (GFCF) will affect the growth of emerging and developing countries, including countries in Africa who has received huge FDI in GFCF. A decrease in FDI will result in less job creation in developing nations further effecting their GDP growth, therefore developing countries will have to provide more incentives for FDI in the long term.
On the other hand, if trade policies are not changed and FDI rules remain strict many business leaders will reassess the extent of their firms’ dependency on single foreign suppliers and examining how to mitigate strategic vulnerabilities. A possible solution would be a government intervention, which implements local content requirements, this would be likely as the government would want to create new jobs to decrease unemployment. There has already been calls from rich-country political leaders for radical shifts in production structures and trade policies. In addition, Western government have announced plans to encourage more domestic production, with Apple being one of the first to make the move.
Contrariwise, these countries have high average wage, and productivity levels will make labour-intensive goods, basic manufacturing, and some services expensive to produce. However, there will be no tariffs on these products as they are manufactured and sold in the home country as countries become self-sufficient and specialised. This will mean a further decrease in FDI, and further deglobalisation, as economic trade and investment between countries decline. This is very likely to occur in the long-term, we may find some countries changing their global value chains and possibly moving manufacturing to the host country to prevent inadequate supply, due to supply chain disruptions. Furthermore, China may undertake strategic trade policies aimed at establishing domestic firms in a global industry in order to boost national income at the expense of other countries (Krugman P 2007). This would be likely considering China’s global dominance in manufacturing, alongside with growing tensions as countries implement new rules to prevent Chinese FDI.
To conclude the medium- and long-term effect of the Coronavirus outbreak will be a decrease in FDI. In Particular China, who has been the second-largest FDI recipient country, therefore a significant decline of FDI flows to China in the short term will affect the level of global FDI flows. The investment impact will be even more concentrated. It will be strongest in those countries that have been forced to take the most drastic measures to contain the spread of the virus. The long-term effect of the coronavirus will be difficult for developing countries to bear, these countries are heavily reliant on FDI especially greenfield investments, which creates jobs, thus growing their GDP. Unfortunately, due to many new FDI rules in various countries, as well as the effect on supply-chains, many companies will revaluate their supply chain. Developed Western countries will be opportunistic and establish new value chains but developing countries will have to offer more incentives for FDI, this may be in the form of removing tariffs, which many countries will exploit. The opportunity to obtain globalisation will be great but at a cost for developing countries. I believe this crisis has aggravated deep seated inequalities between and within countries.