Remaining competitive: Adapting FDI strategies in a protectionist world

In stark contrast to the free trade and open economies that have characterized the past 30 years, many countries are returning to industrial policy, introducing measures to protect and promote specific high-tech and strategic sectors such as clean energy, semiconductors, and electric vehicle/EV battery manufacturing in their domestic markets. What impact does this have on global FDI flows?  

Geopolitical instability and supply chain vulnerabilities

Geopolitical instability has made governments acutely aware of the vulnerability of supply chains in key industries. In particular, the drive to decouple Western economies from China and Russia creates an urgency to diversify energy sources and promote domestic manufacturing of key renewable energy and technological equipment. For example, any disruption to Taiwan could have a catastrophic impact on the global semiconductor industry, since over 60 per cent of the world’s semiconductors are produced there. In this context, how can countries compete and continue to attract projects in strategic sectors? The resounding answer appears to be the re-introduction of industrial policy, instances of which are ubiquitous.

The global return to industrial policy

The return to industrial policy is evident globally, with major economies in Europe, North America, and large countries such as Australia, Indonesia, India, and Turkey all enacting policies to encourage investment in strategic sectors. We are witnessing the proliferation of unprecedented financial incentives to lure companies into these markets. Under measures such as the Inflation Reduction Act in the US, the TCTF and CHIPS Act in the EU, and the PLI (Production Linked Incentive) Scheme in India, more government financial support is available to companies than ever before. Donald Trump’s re-election has spiked fears that his administration could instigate a trade war between the US and other global economies. Trump has proposed tariffs of 20 per cent on all imports and 60 per cent tariff on Chinese imports, prompting EU leaders to prepare retaliatory tariffs. Trump has also proposed a 15 per cent corporate tax rate, the implications of which could be significant for countries reliant on corporate tax revenues from US companies (e.g., Ireland, which derives 25 per cent of its tax revenue from US firms).

Elsewhere, many countries have introduced FDI screening measures. In the US, Japanese company Nippon Steel’s bid for U.S. Steel has been opposed by both presidential candidates. The US has also introduced outbound investment screening measures under its new Outbound Investment Security Program in August 2023. This trend extends beyond the US. Even the most open economies are adapting to new geopolitical realities, as evidenced by Ireland’s implementation of FDI screening measures in 2023. This legislation represents a shift in Irish policy which has an established tradition of minimal government intervention when it comes to FDI.

All these indicators signify a momentous change in the global economic landscape, favouring powerful economies relative to those with less economic and geopolitical leverage. Protectionist measures risk limiting investment opportunities to regions capable of implementing them effectively. As a result, countries with weaker supply chains and fewer resources are finding it increasingly challenging to develop robust industrial policies that ensure fair competition.

Navigating new investment landscapes

While global FDI continues to fall, FDI in certain strategic sectors is seeing growth. Megaprojects valued in billions have emerged, often secured by powerful economies that can offer cash grants or leverage geopolitical and market muscle. So, how can IPAs from smaller countries remain competitive?

1. Target group selection: It is crucial that IPAs play to their own strengths. Everyone wants to win the next multi-billion-dollar semiconductor manufacturing project. However, very few regions can realistically meet the huge workforce requirements of such projects. Just because a region can offer financial incentives to a company does not mean they will be able to fill their workforce needs (such as TSMC, who are reportedly facing skilled workforce shortages at their planned Arizona fab). IPAs should target specific groups of companies to whom they can provide real value, where workforce requirements can be met, where industry clusters exist, and where their region is genuinely competitive.

2. Supply chain analysis: IPAs should delve deeper than broad sectors like “Renewable Energy” or “Electric Vehicles” and find specific points in the supply chain where they are competitive. While not every region can take on the next billion-dollar solar panel manufacturing plant, many regions could be a perfect fit for solar panel inverter manufacturing. Conducting thorough supply chain analysis enables IPAs to identify niche market opportunities that fit their region, rather than trying to force their region to fit a specific industry.

3. Allocation of resources: IPAs should be proactive in their approach, responding to requests promptly and efficiently and providing stellar service to potential investors. However, it is not possible to give all companies the same attention, so it is imperative to decide which opportunities offer the highest potential. Efficient lead qualification ensures that often-stretched IPA resources are allocated to leads with the highest conversion potential.

4. Managing stakeholder expectations: Even when incorporating these strategies, managing stakeholder expectations is crucial. While IPAs may recognize pursuing a billion-dollar semiconductor fab is unrealistic, government officials and other stakeholders often expect big announcements. Effectively managing these expectations will enable IPAs to focus on a realistic portfolio of investments that align with their strengths and promote sustainable growth.

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