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Reaping the benefits of FDI 4.0 and digital FDI for sustainable development

Foreign direct investment (FDI) can significantly contribute to the sustainable development of both home and host countries in several important ways: through expanding access to markets, bringing in foreign exchange, contributing to skills development, human capital growth, technology transfer and increasing competition in local markets. It can also support industry upgrading and facilitate regional and global value chain integration of small and medium-sized enterprises. Consequently, it is possible for governments, either directly or through their investment promotion agencies (IPAs), to promote and facilitate FDI which targets their country’s specific sustainable development priorities. For instance, many African countries see FDI as a means to create more employment opportunities and transfer capital, while countries in the Middle East see FDI more as a vehicle to generate a change in the structure of their economies through encouraging diversification and competition and potentially kickstarting the Industry 4.0 revolution.

Regardless of which sustainable development effect countries aim to generate through FDI, two things are clear in today’s socio-political and economic climate. First, FDI will be an especially important resource for all economies in building back better in the COVID-19 recovery period. Second, the acceleration of the digital transformation and Industry 4.0 is fundamentally transforming people’s lives and creating new ways for all economies to attract, promote and facilitate FDI.

The COVID-19 pandemic has disrupted FDI, with global FDI flows plummeting by 35 per cent in 2020. Developed countries recorded the most dramatic declines, while FDI to the Asia-Pacific region was more resilient, growing by 4 per cent. Looking ahead, effective response and recovery measures combined with vaccine rollouts should strengthen a further rebound in FDI flows in 2021 and 2022. This outlook, however, is dependent upon efforts to suppress the spread of the virus, especially the ongoing harsher waves many countries in the region are currently experiencing, and the effectiveness of policy interventions to simultaneously stimulate FDI and address the pandemic’s socio-economic effects. Furthermore, getting back to pre-COVID-19 FDI levels will take time. Cross-border business ties need to be re-established and appropriate projects identified to attract and retain investors. In the meantime, lower levels of investment will lead to heightened competition for investment.

The pandemic has also accelerated the digital transformation. Measures enacted by governments to contain the pandemic have propelled businesses towards digitalization and the provision of online operations and services as demand has grown. Firms that were more digitally agile have adapted to this new environment most successfully, while those that were not have focused on improving their digital skills and incorporating new digital services into their business models.

The acceleration towards digitalization has occurred against the backdrop of the Fourth Industrial Revolution, or Industry 4.0, which is fundamentally altering every aspect of the way we live and work, and how our economies can sustainably and inclusively develop and grow. The scale, scope and complexity of these shifts are unlike anything humankind has experienced before.

The convergence of heightened competition for FDI, digital transformation and Industry 4.0 can create many opportunities, challenges and changes for attracting and retaining FDI. If calibrated in the right way, investment promotion policies, strategies and tools can respond to these opportunities and create growth engines that both support the future of trade, economic growth, employment and decent jobs, and develop new innovative solutions that change the competitive and economic landscape of a country.

Yet unlocking such opportunities will require governments and IPAs to rethink traditional approaches to FDI promotion and consider leveraging a new approach, an FDI 4.0 approach. This focuses on building a digitalization-friendly investment climate, targeting country-specific digital investment goals, leveraging new models for asset-light FDI and harnessing collaboration and partnerships between companies and countries.

At the policy level, a number of countries in the Asia-Pacific region have already begun developing and even implementing national digital economy strategies and policies, yet FDI is often left out of these plans. Developing robust digital infrastructure as well as better and more accessible digital education will require extensive public and private sector investments, including FDI. Policymakers in different ministries responsible for the various components which fall under the digital economy must therefore closely coordinate with the national IPA to design a coherent digital investment strategy and regulatory framework as a part of the wider national digital economy plan.

Bold and thoughtfully coordinated efforts to develop a digital investment policy and leverage the FDI 4.0 approach will enable countries to bolster FDI in the digital economy and accelerate an inclusive digital transformation of their societies. Such action is imperative as countries look to build back better post-COVID and get back on a path towards achieving the SDGs.

To support, in the coming months, the ESCAP Asia-Pacific Research and Training Network on FDI (ARTNeT) platform will be partnering with IPAs in the ESCAP Asia-Pacific FDI Network to deliver national capacity building workshops to help countries develop a digital investment policy.

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