Foreign Direct Investment in the Post-Pandemic World

by Courtney Margetson, CEO & Executive Publisher, FDI Alliance International

As world leaders attempted to mitigate further spread of and casualties from the COVID-19 virus by mandating face masks, encouraging social distancing, and implementing lockdowns, a profound peacetime economic disruption occurred. World economies were shut down as businesses were closed, some never to reopen. The United States experienced a 32% drop in its gross domestic product (GDP) in the second quarter of 2020. This marked the beginning of the economic recovery. In 2021, worldwide growth is projected to increase by 6.4% overall, led by India with 9.8%, China with 9%, the U.S. with 5.9%, EU with 5%, U.K. with 5.3% and Japan with 2%. The economic growth is led by the developed nations, while the developing economies will grow at lower rates and will likely recover to pre-pandemic levels in 2022 and early 2023.

Foreign Direct Investment (FDI) will likely increase within the next 5 years, as opportunities abound and economic developers prepare their communities for outreach. FDI occurs when a firm invests in business assets in a foreign country. These investments can take many forms, such as the purchase of all or part of an ongoing business (at least 10%) or building a new facility from the ground up, known as a greenfield investment.

FDI can transfer a business to a new foreign location that offers potential growth selling the same product, which is considered a horizontal expansion. McDonald’s accomplished this when it expanded into Asia. The investor can also expand to obtain integration within the supply chain or distribution, adding leverage to its manufacturing capabilities, which is referred to as a vertical expansion.

Before these investments are made, the foreign direct investor will explore a variety of parameters that will secure success and mitigate risks of the

potential expansion. The evaluation of these investment parameters and current trends are essential prior to making the final decision. We will discuss the key factors and their trends as they pertain to building a greenfield facility. This is not intended to cover all factors; however, the discussion will cover the most significant parameters.

LOOKING AHEAD

Making the decision to invest, investors first consider macroeconomic issues such as fiscal policy, inflation and taxes. Then, they will consider specific local issues that would impact the cost of doing business from a specific site location. These include infrastructure, labor availability and the quality of life in the community they plan to build the new facility.

MACROECONOMIC CONSIDERATION

FISCAL POLICY

The United States has responded in an unprecedented way. The economy has been infused with trillions of federal dollars to dampen the impact of COVID-19 and jumpstart the economy. In 2020, the total U.S. debt reached 100% of the GDP. Further, there are no restrictions on the rising debt levels for 2021 and beyond, as spending is expected to add trillions more. The consequences of rising debt include the potential for rising interest rates and increases in the cost of capital.

Central banks have kept the interest rates near zero and continue to pump cash into the economy by purchasing government securities. The near-zero interest policy of the Federal Reserve was paramount to all other goals when the U.S. unemployment rate reached 14.8% in April 2020. Other developed nations followed a similar approach as the United States. As long as interest rates remain low, the cost of capital for expansion projects will also remain low. Potential investors would focus on the sustainability in a growing economy of rising debt and low interest rates.

INFLATION

The latest reading on inflation showed a substantial increase from the Fed’s target of 2% to a resounding annualized rate of 9%. The Fed is saying that the jump is only transitory.

Lumber prices are up substantially (300%). Home building is surging as the millennials forsake small, high-rent apartments in the big city for larger more comfortable living in the suburbs. This is also a continuation of the remote work trend that got a boost, as a result of COVID-19, and both the employer and employee have benefitted. This trend is expected to continue as real estate values rise long term.

Semiconductor chips are getting more expensive, as many facilities closed during the pandemic and are now finding it more difficult to bring their suppliers back.

Employees are difficult to find, and wages are going up particularly in lower paying jobs. Employees, who lost their higher paying jobs, are finding that skills levels that are in demand now do not match up well with their current skill set. The scarcity of employees is expected to continue for several years, as worldwide economies seek an equilibrium, a balance of resources.

Almost 400,000 small businesses have closed, and many small businesses had to rethink their business models to survive. To endure, these small businesses had to provide new services, new products, and implement new technologies.

All forms of transportation will cost more, including ground transportation via major shipping companies, who need more drivers and warehouse workers. Ports are full of ships waiting to be unloaded, indicating a shortage of longshoremen. In this instance, exploring alternate transport options of these goods is warranted.

The Purchasing Managers Survey, taken in May, indicated that input prices and new business services hit their highest level and are expected to continue rising at unprecedented rates.

It is important to remember that inflation does not happen overnight, but rather raw materials are the first to rise, manufacturers feel it next and then the higher price of the final product reaches consumers. The rising cost of construction materials will increase the cost of the greenfield investment and could cause the FDI to be postponed or canceled.

TAXES

The change in tax policy is one of the cruelest forms of inflation. In the long term, adding trillions of dollars to the economy may prove detrimental to middle class taxpayers, who pay 70% of U.S. income tax. A close eye on spending is necessary to avoid soaring interest rates and the rising cost of capital.

More than anything else so far, unprecedented spending plans, if implemented may cause the Fed to raise interest rates, raising the cost of capital and undermining the economic recovery, which would potentially impact the decision to pursue greenfield investment.

LOCATION SPECIFICATIONS

When the investor is satisfied that the macroeconomic parameters are more encouraging than not, they will likely move forward with the project. They will determine a location(s) that will fit best with their desired project. This section will focus on some of the more compelling areas to evaluate and acknowledge, though there are quite a few more.

TECHNOLOGY AND THE WORKFORCE

The current talent shortage is unquestionably one of the largest challenges to the economic recovery and a long-term roadblock to sustained growth. The foreign direct investor must be convinced that a trained workforce with appropriate skills will be available to meet project needs. To date, none of the countries that are part of the Organization for Economic Co-operation and Development (OECD) have reached the prepandemic levels of employment. Twenty-two million jobs were lost in this group and 114 million globally in 2020.

The latest solution to the talent shortage is a combination of upskilling, reskilling and skills matching. Investors must look at their training investments and see that the chosen region offers technical skills that fit with their needs. There is also a transition to higher growth occupations, which pay more. It is clear that the training culture is changing to the lifelong training targeted to the individual, rather than to the job.

In a recent survey, 90% of local chambers of commerce say that the workforce shortage is impacting growth in the economy. The chambers proposed that increased investment in employerled job education and training, especially since technology advances would make previous training have a limited lifespan. Targeted reskilling, and data driven information can successfully train individuals for future proof careers. This will result in higher wages, bring more workers back and provide businesses with needed talent for the long haul.

There is great potential for automation on the horizon as machines and artificial intelligence (AI) will dominate the new economy. These technologies will replace 85 million workers by 2025, while simultaneously creating 97 million new roles that will require new skill sets. Few industries will avoid being reformed, restructured or removed. The winners will demonstrate resilience, agility, scalability and automation in this new business era. Some manufacturers have reinvented themselves by producing products in great demand, including medical supplies and devices. Businesses using cloud computing will have protection against a further outbreak of COVID-19 and the delta variant. Further, automation and AI will likely enhance the resilience of the supply chains.

Communities must be able to provide a pool of workers, capable of being trained to meet the greenfield investor’s requirements. A trained workforce is critical. Things to consider: Does the community have a university and a community/technical college in the vicinity to provide the necessary training? Can the community provide any incentives such as reduced tuition or zero tuition? Can the community provide the workforce training in a timely manner, so that the new investor will have a functioning complement of workers on day one? Is the community/region growing so that workforce replacement in the long run will not be a problem?

HEALTHCARE

The post-pandemic world will likely be more prepared to handle medical emergencies, like those created by COVID-19 in early 2020. With vaccinations available and continuation of incorporating the normal measures of mask wearing, social distancing, and washed hands, another government lockdown should be avoided. Research has shown that the previous lockdown had a severe impact on the younger generation (future workers) showing such psychological symptoms; anxiety, stress, depression and changes in sleep habits. It was these confinements and mobility restrictions that led to the decline of the world economies and would impact the decision of the foreign investment.

Medical advances in immunology and the longevity of life medications have created a new factor, as people will now have greater resistance against disease and will also live much longer. The impact is that senior retirees, living longer, can make significant contributions by filling in the workforce gaps while working from home or part-time. Many of these seniors (workers) have had meaningful careers in engineering, science and computer technology that can help a company during its transition into the new economy.

Things to consider: Does the community have a forward-looking healthcare care system including one that is integrated with a local university/community college? How well did the hospital provide services to the community during the COVID-19 outbreak in 2020? Was the state government active in such a way as to minimize COVID-19 impact on its citizens and businesses without forcing severe lockdowns?

Healthcare has definitely moved up the list of the quality-of-life issues.

INFRASTRUCTURE

The U.S. Congress is considering an infrastructure bill to be spent over five years. The bill includes provisions for investments in roads, bridges, passenger and freight rail, electric grid expansion, broadband internet access, modernization and expansion of transit systems, and other projects. If passed, Congress will determine the location of these investments.

Infrastructure at the local site is critical. Sites should have all utilities available at or near the site location including electricity, water, sewer, and internet access. The site should have interstate access, and, if needed, a rail spur. The size of the site may be critical. Having multiple sites or a larger site that could be subdivided can provide an advantage in consideration.

IN CONCLUSION

We looked at Foreign Direct Investment from the perspective of building a new plant and did not delve into the other forms that include investments in existing businesses, or stock purchases. It is not an easy task to attract this type of investment to your community. Assuming you are ready, you must be willing to outreach through direct communications via internet, targeted advertising, attending international conferences, and personal visits to companies you believe would be a good fit for your community.

Waco, Texas has experienced success with FDIs in the last several years, and most recently with multiple announcements from companies representing the countries of Germany, Mexico and Canada. Waco checks all the boxes for many potential greenfield investments and is certain to announce many more FDIs in the future!