Global trend of attracting foreign direct investment

a) The downward trend of total foreign direct investment

Over the last ten years, global FDI flows have fluctuated dramatically. It climbed from 1.330 billion USD in 2010 to a record peak of 1,920 billion USD in 2015. Then, it declined significantly in the following years, from 1,870 billion USD in 2016 to 1,497 billion USD in 2017. 2018 was the third consecutive year when FDI flows declined (by 1,297 billion USD and down by 13%

compared to 2017). In which capital flows to developed countries decreased by 27.0%, hitting 557 billion USD. By 2019, FDI to developed countries has recovered as the effect of the United States tax reform winds down. However, global FDI did not show an upward trend. In 2020, the global FDI was 859 billion USD, decreasing by 42% from the previous year. It was the lowest since the 1990s, and it was 30% lower than the global financial crisis of 2008-2009 (Figure 1).

Figure 1. FDI inflow: global and by group of economies, 2007-2020

Unit: Billions of US dollars Source: UNCTAD (2021) The drop in FDI is not evenly distributed among nations, regions, or economic groups.

FDI inflows to developing countries fell by around 12% to 616 billion USD. However, China topped the list of countries receiving the most FDI. Its FDI flows increased by 4% to 163 billion

USD, making it be the world’s largest recipient of FDI in 2020. In developed countries, total FDI was estimated at 229 billion USD, falling by 69% compared to the same period last year and being the lowest in the past 25 years. FDI flows in the euro area had been wholly exhausted because it was at -4 billion USD, falling by 101.2% compared to 2019 (UNCTAD, 2021). Some countries have witnessed record low FDI, such as the Netherlands (reaching -150 billion USD) and Switzerland (gaining-88 billion USD). In 2020, FDI in the EU27 was estimated at 110 billion USD, declining by 70.5% compared to the previous year. Accordingly, FDI flows of 17 member countries decreased, in which Germany and France fell the most. Precisely, FDI of Germany and France was estimated at respectively 23 billion USD, and 21 billion USD, dropping to 60.3%

and 39% compared to the last year. FDI flows to developing countries declined by 12% to 616 billion USD compared to 2019. The Asian developing countries had an FDI of 476 billion USD, which declined by 4% over the past year. Latin America and the Caribbean recorded a 37% drop in FDI, falling to an estimated 101 billion USD. The African region witnessed a decrease of 18%

in FDI, falling to 38 billion USD, and FDI to transition economies declined by 77% to 13 billion USD compared to the previous year. (See Figure 2). The United Nations Conference on Trade and Development (UNCTAD) says that FDI is projected to decrease by a further 5% to 10% in 2021 and to initiate a recovery in 2022 with FDI reverting to the pre-COVID underlying trend.

The outlook is highly uncertain. Prospects depend on the duration of the health crisis and the effectiveness of policies mitigating the pandemic’s economic effects.

Figure 2. FDI inflows by region, 2019 and 2020 (Unit: Billions of US dollars)

Source: UNCTAD (2021) The above drop is due to a variety of factors, of which there are two main reasons as follows:

Firstly, it is a decrease in FDI from developed countries’ policies regarding geopolitical fluctuations.

Political tensions in the world have been rising complicatedly since 2019, affecting the economic situation of some countries and critical fields. Trade tensions between the United

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States and China and geopolitical issues have significantly increased the instability of the global trading system, considerably influencing business confidence, investment decisions, and global trade. The UK’s departure from the EU (Brexit) and political instability in Hong Kong negatively affected the economic prospects of the UK and Hong Kong. In contrast, the US-Iran tensions affected the oil price in the world. In addition, several other geopolitical tensions, such as the political crisis in Hong Kong, tensions in the East Sea, and US-North Korea tensions, also impacted the global economy, trade, and FDI attraction of nations worldwide. Due to these developments, the developed countries such as the US, Japan, and Europe adopted policies encouraging their companies to bring FDI back to their home country to mitigate risks and protect domestic production (UNCTAD, 2020). At the same time, many of the world’s large economies realized that they couldn’t depend on one market. They shall diversify their supply chains to limit risks and increase investment efficiency.

Secondly, it is due to the massive impact of the COVID-19 pandemic.

The COVID-19 pandemic, which caused a sharp decline in global FDI, negatively affected the psychology of economic agents. It made foreign investors form a psychological state of delaying consumption and investment (this phenomenon was demonstrated during the 2007-2009 economic recession). Furthermore, the current economic crisis and the socio-political instability caused by COVID-19 made investors in these nations apprehensive and challenging to make investment decisions. Finding out investment prospects of potential investors via analyzing investment opportunities, seminars, business forums, investment promotion forums is likely to be delayed. Due to a lack of raw materials and components that had not been cleared, and the lack of human resources due to the pandemic, FDI enterprises operated moderately or stopped production, severely affecting production progress and orders. At the same time, implementing anti-COVID-19 measures such as isolation and social distancing have caused a sharp decrease in labor supply, especially in areas requiring direct labor during the manufacturing process. These factors have hindered the progress, preparation, and implementation of FDI projects globally.

b) Shifting trend of foreign direct investment flows

The wave of foreign direct investment movement has appeared for many years due to the trend of protectionism. The economic crisis has made many countries encourage businesses to move the capital back to their home country to solve job problems. The impact of the US-China trade war and the disruption of the global supply chain due to the COVID-19 pandemic is currently acting as a catalyst, speeding up the process of moving FDI out of China (Tong Qi, 2019). There are three trends of global FDI inflow shifting: order shifting, the transfer of parent company’s capital, and factory shifting, which means the direct shifting of a part of the whole factory from one country to another. In which, the movement of factories is the most difficult.

It is not easy to move a factory from one place to another because it takes much time to dissolve an enterprise and implement its procedures. Moreover, in the context of global investment activities having been almost paralyzed due to COVID-19, investment promotion activities of multinational corporations are challenging to implement. The shifting of orders is often easier to implement. This trend can happen soon and rapidly, so investment-receiving countries should prepare all relevant conditions to receive and gradually master the technology.

There have been many signs of FDI moving out of the Chinese market in recent years.

According to Consulting firm A.T. Kearney (2019), China relegated from third (in 2017) to seventh (2019) among the world’s best FDI destinations (this was the lowest level ever), demonstrating the decline of China’s attractiveness for investors. According to Nomura Group (2019), between the beginning of 2018 and August 2019, 56 international enterprises left China to operate in other countries. 26 enterprises moved to Vietnam. 11 enterprises moved to Taiwan. 11 enterprises moved to Thailand, and three enterprises moved to India. According to results released by Bank of America in 2020, about 67% of companies participating in the survey believed that “companies’ moving supply chains from China to their homelands or other markets will change the most dramatically in the post-COVID-19 era.”

The trend of shifting production chains out of China is due to some reasons such as:

(i) The escalating trade and technology tension between the US and China makes investors tend to look for a more stable and less risky (export-oriented) manufacturing investment place that isn’t imposed tariffs by the US; (ii) The COVID-19 pandemic has disrupted the global production and supply chain, showing its extensive dependence on China. It makes many Transnational Corporations “rethink” their global trade and investment strategies in the direction of diversifying supply to reduce risks; (iii) China is losing its advantages in attracting FDI due to rising labor costs and eliminating investment promotion policies. Wages in manufacturing in China increased to 3.9 USD/hour in 2016 from 2.0 USD/hour in 2010. The cost of industrial real estate in China has also risen dramatically as the economy and living standards have improved. As a result, foreign investors have looked for more cost-effective investment areas as a cost-cutting option. China is moving up the value chain and reforming the economy to increase domestic consumption after a long time with a high growth rate of over 8%. This country focuses on developing services and exporting higher-value items.

These things have re-directed foreign investment flows towards industries based on labor, land, and other factors (UNCTAD, 2021)

In reality, FDI to China climbed by 4% in 2020, reaching 163 billion USD, helping China overtake the United States in the list of nations receiving the most FDI. It proved to many previous comments of economic experts who said that FDI flows out of China would be challenging to realize in a short time. The shifting process does not happen immediately.

It takes about 2 to 5 years because global supply chains have been completed. Production networks and supply chains in China are highly interconnected, interdependent, and even “inseparable.” Therefore, if shifting production and supply chains, investors must pay enormous opportunity costs. FDI flows will not immediately move out of China but are restructuring in the direction of “China + 1”, which means that this shift is market diversification. It only moves a part of the supply chain due to some following reasons. Firstly, China is still a huge market and an essential destination due to its stable political system, abundant and high-quality human resources, and skilled workers. Secondly, it has low tariffs, a practical integrated logistics system with global supply chains, and good infrastructure and supporting industries. Finally, the large scale of production and the high-tech ecosystem meet the quality standards of the US and Europe. In addition, China quickly created “policy responses” to attract foreign investors. For example, they announced the Foreign Investment Law in August 2020, which included incentives for electronic industries, particularly chip

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manufacturing industries, to exempt and reduce corporate income tax for up to ten years. As a result, the FDI flows out of the Chinese market tend to slow down in the future.

c) The trend of changing the form of foreign direct investment globally

Traditional forms of investment are shifting to new forms of FDI to achieve better efficiency due to the outstanding advantage of developing global value chains. Global foreign investment is increasingly transforming investment methods through value chains. In the past, multinational corporations invested across borders through direct ownership of overseas facilities in the host country or free trade. In recent years, this trend has gradually changed.

Multinational corporations are turning to new modes of foreign direct investment (FDI) or accessing foreign markets with more modern investment forms, such as manufacturing and services lease, agricultural contracts, franchising, and contractual management to seek better business results.

Alternative forms of establishing a physical presence in the country, such as through efficiency-seeking FDI or conventional market-seeking, are collectively known as cross-border FDI without capital contribution or new forms of investment (NFI). This approach allows multinational corporations to coordinate activities in the global value chain by supporting domestic suppliers, strengthening the linkage among Vietnamese suppliers in the value chain. With the new form, investments will be made through trade contract mechanisms between foreign investors and domestic enterprises. Investments are often used for brands, intellectual property rights, business know-how, technologies, skills, or business processes.

International experts predict that the new form of investment will quickly become a trend in Vietnam, which aims to attract “new-generation” FDI. According to economic experts, the form of investment without the capital contribution and with capital contribution will not be mutually exclusive. Multinational corporations initially enter the host country’s market in the form of no capital contribution. However, after that, they can decide to invest directly through full or partial ownership by setting up overseas subsidiaries or joint ventures.

d) The competition in attracting foreign direct investment (FDI) is getting even more fierce Competition in attracting foreign investment is taking place increasingly fiercely among countries in the region and the world. It is inherently global and unequal because the advantage belongs to developed countries which account for three-quarters of total global FDI. The remaining one-quarter of FDI is for more than 100 developing countries in the world. In addition to the scarcity caused by the dramatic fall in FDI in recent years, the level of competition among developing nations is becoming increasingly fierce for the following reasons:

Firstly, developing countries have been transitioning to a market economy, opening up and integrating into the international economy, so the need for capital for development is enormous. Attracting FDI has become a vital issue of countries in the process of socio-economic development.

Secondly, many of the world’s major economies realize that they cannot depend on one market. It’s time for them to diversify the supply chain to limit risks and increase investment efficiency. Therefore, the US, Japan, and Europe have launched policies to

call for businesses to invest in their native countries or move to other countries. Thailand, Indonesia, and India also immediately announce policies toward attracting investment.

The most notable thing is that India has provided financial support to smartphone manufacturers. The competition is more intense and fiercer because China is looking for ways to retain foreign investors with preferential policies on exempting and reducing long-term corporate income tax.

Lastly, except for some oil countries, most developing countries attract FDI based on similar advantages such as abundant labor resources with cheap labor costs, products mainly derived from agriculture, and available resources… Therefore, there is a wide array of choices about investment locations and countries for foreign investors. If they want to increase the competitiveness in attracting FDI, they need to create a more attractive investment environment.

e) The trend of attracting foreign direct investment based on cheap labor is losing its advantage Industry 4.0 has brought a series of technological breakthroughs that have made significant changes, such as: (i) Creating business models that do not require much capital to purchase and own the systems of machinery, buildings, and factories as before;(ii) Cutting business costs, improving productivity by optimizing input factors and cost of maintenance systems, reducing production errors, and meeting customers’ needs better; and (iii) Providing opportunities for enterprises to develop new products and services.

The Fourth Industrial Revolution (or Industry 4.0) also affects the arrangement of production and labor. Industry 4.0 will significantly influence all laws, economies, and sectors due to its capacity to generate the replacement of human labor with new technology and robotics (Nguyen Mai, 2020). Accordingly, the low cost of labor will no longer be appreciated and gradually lose the advantage in creating FDI attraction. If a country has a favorable environment and suitable skills and technology for Industry 4.0, it will have an advantage in attracting FDI in the more value-added export-oriented group.

Besides the slowing down of global investment flows and the new investment trend in technology projects in China, FDI inflows into Vietnam after the economic crisis tended to slow down and decline in the last two years. Therefore, it is necessary to have a new strategy for attracting FDI, especially investment projects in the technology sector, to maintain and increase FDI inflows into Vietnam.