FDI in the Digital Age

This month’s release of the annual UNCTAD Investment Report suggests that reductions in global FDI level, seen after the 2008 economic downturn, are structural. The peak in investment at that time shows little sign of returning, given a 2% decrease in total investment in 2016 by capital expenditure, compared to the previous year. While UNCTAD expect a modest increase again in the coming year, it is interesting to note the theme for this year’s report is digital development.

Going Digital

For the past few years, in terms of global FDI project numbers, the ICT sector is the most important of any. This is likely to continue, therefore UNCTAD’s emphasis on this theme is timely. Nevertheless is should also be recognized that ICT is not necessarily the jobs or capex creator that Economic Development Organizations (EDOs) or Investment Promotion Agencies (IPAs) would like it to be. Notwithstanding the likes of Google or Facebook, the industry is significantly driven by small, nimble technology SMEs. This means relatively few jobs might be created by any single investment, but the quality of those jobs - in terms of wages - will tend to be relatively high.

In this context, EDOs / IPAs in any country (but particularly in developing economies) should consider the overall objective of their FDI program: is it primarily to reduce unemployment; or is to support the ‘upgrade’ of their economy? A key part of considering this question is to avoid characterizing ICT as only a single sector, distinct from all others. Instead the role of technology feeds into almost every other sector, whether it a buzzword like Fintech; or its heavy usage in Automotive, eventually to the point where driverless vehicles will become the norm on our streets.

International Evidence

While the UK’s Department of International Trade has long focused much of its resource on winning ‘high quality’ investment, all EDOs / IPAs – including developing economies – increasingly need to shift their focus from quantity to quality. But this must also mean accepting the changing role for FDI in their location.

The same holds true for the largest source and largest recipient of FDI in the world – the USA. Given the rhetoric of the Administration’s focus on keeping jobs in America, it is likely that future outward U.S. investment will have business reasons that extend well beyond cost saving, whatever the investment destination. For a company to expand (or relocate) an operation to Mexico or anywhere else, the project will likely have a major technology component, and that destination will need to be able support such a project.

A similar approach can be expected for inward US investment, led by the work of the federal Select USA program (hosting its annual Investment Summit this week), and also individually across the states. Given the relatively low unemployment rate in the country, and despite manufacturing jobs having been lost to other countries, the Summit will be aiming to attracting high quality investment, first and foremost.

Winning in the Future

This is not to say an EDO / IPA can ignore other key location factors for an investor – the quality of labor and perhaps increasingly, regulation - are crucial, but the nature of emerging investment increasingly has technology as its cornerstone. While cost can still have an important part to play in winning FDI in developing economies, and large scale projects may still exist, successful EDOs / IPAs in the long term will be those with the agility to adapt - just like an innovative ICT company.