In April and May 2021, EY surveyed senior executives from over 300 multinational enterprises (MNEs) in developing countries for the World Bank’s quarterly pulse survey on foreign investment trends.
The findings show that, while economic conditions continue to improve, the pandemic is still keeping the lid on foreign investment. Most companies are still operating below pre-pandemic capacity and recovery is likely to be gradual.
The report outlines six insights that could help investors, businesses and governments in developing countries understand and take advantage of that recovery.
1. The negative effects of the pandemic continued to ease, but remained widespread
Over 93% of MNEs in developing countries experienced at least one adverse impact of COVID-19 in Q1 2021. But fewer reported negative demand, output, revenue and profit effects (compared with Q1 2020) than in previous surveys. The extent of the impact was also lower on average.
Demand has returned to Q1 2020 levels, creating price pressures: 52% of companies reported higher input costs compared with Q1 2020. If we exclude input costs, the share of companies reporting any adverse effects fell from 89% in Q4 2020 to 79% in Q1 2021.
Change in average impact of the COVID-19 pandemic on MNE affiliates over 2020
2. 68% of companies were still operating at below 75% of their pre-pandemic capacity
Despite signs of improvement, companies are expected to make a gradual recovery over the coming year, with 52% not expecting to return to full capacity until 2022 or later. Because of this, companies have mostly focused on increasing output from their existing capital and workforce to respond to recovering demand. But 44% expected to invest in new capital and 20% expected to expand their workforce in Q2 2021.
3. The longer-term outlook for foreign investment in developing countries is still subdued
Overall, 92% of companies reported that their foreign parent had no plans to increase or decrease the amount it invests in their host country over the next one to three years. And just 8% expected investment to go up. There’s also little evidence of companies majorly reorganizing their supply chains: only 15% said they were planning on nearshoring or reshoring activities.
Company’s foreign parent investment change in host country
4. Uncertainty about future demand is the key factor holding investment back
More than half of respondents (52%) cited the relaxation of investment constraints as the most effective way of encouraging more investment. So, removing restrictive policies could be a critical move for governments to attract additional investments.
Top 5 policy initiatives
5. Almost all MNE affiliates have increased their use of digital technologies
Remote working, e-commerce and supply chain management are just some of the ways MNEs have been using digital technology as a result of the COVID-19 pandemic. Foreign parent companies have played a critical role in this, including directly transferring technologies to their affiliates and providing financial support, guidance and training.
Strategies as result of the pandemic
6. Half of MNE affiliates have focused more on sustainability and decarbonizing their products and servicesGovernment policies were the top drivers of companies adopting sustainable solutions, but three-quarters of companies also cited pressure or direction from foreign parent companies. As global investors, governments and consumers increasingly focus on sustainability, we expect this to flow through to production in developing countries.
Sustainability measures in the country
*While we can’t generalize that these survey results apply to all developing countries, they do give an indication of the experiences of MNEs in developing countries.
The findings show that the negative impacts of the pandemic are easing, and companies expect to recover gradually over the coming year. But uncertainty about future demand, along with policy constraints, is holding back investment.
0 comments: