The pandemic and the war in Ukraine have accelerated the restructuring of global value chains (GVCs). Once driven by the pursuit of efficiency, multinational corporations have been reassessing their global footprint to adjust to the new, fractious geopolitical climate.
Global foreign direct investment (FDI) experienced a strong recovery in 2021, but the prospects turned gloomy for 2022. There are three sets of indicators that point in that direction.
A first set relates to the multiple crises the world economy is facing — the three F’s and double H’s: the food, fuel and financial crisis combined with the humanitarian crisis in Ukraine and parts of Africa, as well as the health crisis caused by the pandemic.
The second set of indicators concerns macroeconomic indicators — the three highs and three lows. Record high levels of debt and inflation, as well as higher interest rates; record low growth of gross domestic product, trade and gross fixed capital formation.
A final set of indicators relates to the decreasing numbers of greenfield FDI projects and deals of project finance. More importantly, according to Unctad survey of the largest 5000 multinational corporations in the world, earning forecasts have in most cases been revised downward.
These are the three main sets of indicators that prove that global investment flows are on a downward trajectory with increasingly high levels of risk. In the best-case scenario, global investment flows will flatten out. In the worst case, they will be nosediving towards record 2020 levels. But, there are opportunities for companies and countries to attract international investment in the years to come in green and blue economies and in renewables infrastructure.
With regards to GVCs, globalisation accelerated between 1990s and 2010, and there have been a drastic increase in GVC growth. Between 2010 and 2020 globalisation stagnated, and since the pandemic the trend has been reversing — some refer to this chain of events as deglobalisation.
There are five main driving forces behind it:
These forces are transforming GVCs through reshoring, diversification, regionalisation and replication. All this will speed up the formation of new global trade and investment patterns. Thus, this will lead to the decline of efficiency-seeking FDI and the increase of regional market-seeking FDI.
With regards to the policy level, the perspective is different. Due to the pandemic and Russia’s war against Ukraine, many companies are facing the trade-off between chasing efficiency and falling in line with top-down policies pushing for the reshoring (bringing manufacturing processes back to the parent company location) or nearshoring (moving manufacturing to the countries nearby parent company location) of strategic value chains like semiconductors and electric vehicle (EV) batteries. It is costly because diversification means redundancy; relocation involves a lot of costs, but they have to do it because of the current geopolitical risks that have been increasing so much.
Source: www.ukraineinvest.gov.ua
