FDI has a new look. There is less interest in the old-school, labour-intensive factories in favour of a flood of investment into the service sector.
Between 2004 and 2007, manufacturing made up 26% of the global FDI share. In 2020–23, this dropped to just 13%.
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While manufacturing lagged, the service sector went from taking up 66% of the global FDI share to 81%.
There has been no shortage of economic and political shocks in the past decade. Trump stepped onto the global stage, Covid changed the world overnight, the UK left the EU, and war broke out in Ukraine and the Middle East, just to name the major ones.
These events have served to accelerate these changes but the sectoral shift in FDI has come from more long-standing structural factors, mainly the rise of automation, protectionism and sustainability demands.
The robots are rising
The implementation of robotics in manufacturing processes has been on an upward trajectory.
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By GlobalDataIn the past ten years, industrial robot installations grew at an annual average rate of 13.3%; in 2022, the number of projects surpassed 555,000.
Increased automation reduces the need for low-skilled human capital. While cost saving for companies, it leaves an employment vacuum for manual workers, especially in poorer countries.
Low labour costs are one of the central incentives for companies to set up manufacturing plants in less economically developed countries (LEDCs). The rise of automation makes this a less relevant factor in determining the direction of FDI.
Risky politics
Experts also point to a rise in protectionism. Richard Bolwijn, UNCTAD’s director of investment research, marks Trump’s trade war with China as a “watershed” moment in the decline of multilateralism.
Protectionism and practices like nearshoring have grown more popular for multiple reasons: the rise of international conflict, political pressure and financial incentives, among them.
Russia’s invasion of Ukraine disrupted the global supply chain and companies were forced to move manufacturing closer to consumer markets. Renault, the French carmaker, is building a factory in Bursa, Turkey after it closed manufacturing operations in Russia, for example.
The Covid-19 pandemic also shone a light on the risks of overstretched supply chains and heightened investors’ perception of risk factors.
In the wake of these sorts of events, there is a feeling that bringing production facilities closer to consumer markets strengthens supply chains against disruptions.
There is also political pressure to bring manufacturing jobs back to developed countries.
Increased labour costs that this might incur may not be as much of a detractor because of the rise of automation.
Sustainability beckons
As the international economy adapts to climate change and the rise of sustainable policies, there has been a surge of investment in the sustainability sector.
Projects focusing on environmental technologies have grown from making up 1% of all greenfield projects in non-service activities to 20% in 2023.
Bruno Casella, a senior economist at UNCTAD, said that changing sustainability targets have made it harder to plan long-term cross border operations.
The prospect of a Trump presidency, for example, has also made it more difficult for businesses to know what the future role of the US will be in leading the charge towards a greener economy.
Risking further alienation
While the direction of global trade benefits some, it risks further marginalising countries that already live at the fringes of the global economy.
Boljwin describes FDI inflows as going into three categories of nations: the developed countries, the big countries with market access, and “the rest” – by which he means LEDCs.
However, even before this shift to servitisation, there was already a huge exclusion of poor countries in the global FDI intake.
According to Boljwin, LEDCs account for a quarter of the world’s population and receive only 1% of FDI inflows.
Outdated models of development
In the global economy, attracting foreign investment is generally meant to be a good thing, particularly when considering the growth of a developing country.
This was the development path taken by the ‘Asian Tigers’: Singapore, Hong Kong, South Korea and Taiwan. They all followed export driven policies and grew strong manufacturing bases.
The Asian Tigers are often held as a successful example of the development path favoured by international organisations such as the International Monetary Fund and the World Bank.
Whether this model was ever applicable to other countries or not, the shift away from manufacturing makes this sort of path much more difficult to follow.
The total share of greenfield FDI projects in LEDCs was already at just 3% in the mid-2010s. Now it is just 1%.
Is a more equitable FDI distribution possible?
How do LEDCs that don’t have the infrastructure or skilled workforce that investors prioritise compete?
One way is to focus on any leverage they might have. A lot of LEDCs are primary commodity exporters but they lose out on the revenue created from processing these materials, which is often done offshore.
International organisations and local governments could work together to create processing capacity within the borders of resource-rich countries.
Another way to attract investment is to have transparent regulations and less bureaucratic processes to enter the market.
For example, Gambia, one of the poorest countries in the world, has managed to raise its FDI inflow from $18m (1.24bn dalasis) in 2017 to an all-time high of $249m in 2021.
It created e-government tools, fostered collaboration between public and private sectors, and clarified and informed investment regulations.
The global economy is not going to wait until poorer economies have the infrastructure to attract FDI. International organisations, governments and the private sector need to work together to create the conditions that ensure LEDCs do not get left behind in the servitisation push.
