The global economic recovery shifted towards the defense industry and the management of new crises, while disruptions expanded to sectors such as oil & gas, aluminum, and cereals, according to ECLAC.
ISSUE 118 | 2023
ENERGÍABolivia
The recovery of world economies that began to emerge in 2021, driven by the progress of COVID-19 vaccination, the subsequent lifting of mobility restrictions, and the approval of large stimulus packages for recovery in central economies, was interrupted in 2022, states the ECLAC’s analysis in the document.
On one hand, it adds that the war in Ukraine added new challenges to the impacts that the pandemic had on global value chains. In addition to the humanitarian crisis and geopolitical impact, inflationary pressures deepened, and resources were redirected towards the defense industry and the management of new crises, thus, disruptions expanded to the sectors such as oil & gas, aluminum, and cereals, as well as sectors that produce agricultural inputs.
“On the other hand, the emergence of new variants of SARS-CoV-2 and resurgences led to the establishment of restrictive measures in industrial cities in China, adding further difficulties to the recovery of global value chains,” it says.
In this scenario, it is difficult to predict if the recovery of global investment flows observed in 2021 can be sustained. It states that in 2020, foreign direct investment (FDI) inflows were heavily affected by the COVID-19 pandemic, experiencing one of the largest year-over-year declines (-35%), surpassing even the impact of the international financial crisis of 2008 and 2009.
“However, it should be noted that this recovery could be fragile. In addition to the scenario of high international tension that is shaping up in the first half of 2022, this rebound occurs in a medium-term context where the growth of FDI inflows is stagnant. Between 1990 and 2000, FDI inflows in the world grew at an average annual rate of 23%; between 2001 and 2007, this rate decreased to 11%, and between 2008 and 2021, it reached 2%. Furthermore, the weight of these cross-border capital flows in the economy has been declining, so that in 2019 and 2020, it accounted for 1.8% and 1.2% of global GDP, respectively,” it states.
REVITALIZATION
It also indicates that the revitalization of FDI inflows in 2021 was observed in both developed and developing economies, with greater growth in developed economies (134%), which had experienced the sharpest decline in 2020, while the increase in inflows in developing economies was lower (30%). It adds that since these economies had a higher starting point, they received more investments (53% of the total) (UNCTAD, 2022). “FDI inflows to the United States grew by 144%, with a strong focus on cross-border mergers and acquisitions, while the European Union has seen a decline in these inflows (-34%),” it notes.
It highlights that investment inflows in China increased (13%), mainly due to investments in services, while investments in other developing economies in Asia increased by 27% compared to 2020.
It also points out that recovery plans in developed economies, mostly focused on creating new infrastructure, have influenced the characteristics of this result, and indeed, the increase in FDI inflows has been much more pronounced in developed countries: almost three-quarters of the global increase was due to the resurgence of FDI in those countries.
“One of the characteristics of the recovery of FDI in 2021 was the great dynamism of cross-border mergers and acquisitions, which historically have had a greater preponderance in developed economies. The number of transactions grew by 22%, reaching 6,486, and the associated amount increased by 51% compared to 2020, totaling $1.1 trillion, the highest value in the last seven years. This growth in mergers and acquisitions is explained by various reasons,” emphasizes the report.
“Firstly,” it says, “the crisis of 2020 prompted companies to conduct a rigorous review of their assets, considering whether they needed cash availability or if some of their assets were no longer core to the business. Thus, in 2021, many assets became available at a time when demand was beginning to revive, and many companies had favorable balance positions and growth needs. Secondly, purchases to acquire digital capabilities and advance digital transformation deepened in 2021, driven by the growth of online activities due to lockdowns. High-tech sectors, along with finance and the materials and health industries, were the ones that concentrated the greatest interest in this investment modality (IrwinHunt, 2022; Loeb, 2022). Thirdly, in 2021, there was an increase in the market participation of acquisitions by private equity firms and special purpose acquisition companies (SPACs).”
THE HIGH PRICE OF COMMODITIES
The report explains that in line with the FDI figures of 2021, by January 2022, investors from central economies began to have optimistic prospects regarding FDI worldwide, citing geopolitical tensions, inflation, and the high price of commodities as the most relevant risks (Kearney, 2022). A month later, tensions escalated, and a reality of high inflation and weak growth was formed, making it difficult to sustain positive investor expectations. In fact, if we analyze the project announcements made by transnational corporations in 2021, it is evident that companies-maintained caution regarding future new investments (greenfield projects) throughout the year, except in some technology-intensive sectors.
“In 2021, the value of FDI project announcements grew by only 12% and reached a figure of around $645 billion, which is still below the annual average of the 2010s ($800 billion),” it notes.
Furthermore, it emphasizes that this recovery was mainly concentrated in developed regions, Europe, and North America, while the value of announcements in many emerging regions remained stable and decreased in Latin America and the Caribbean.
Thus, the share of developed economies in the total global value of FDI project announcements increased from 45.1% in 2019 to 60.7% in 2021. Additionally, in 2020, the value of investment projects in developed economies exceeded 50% for the first time, and this situation was consolidated in 2021. This aspect is particularly evident in the case of European Union countries, which increased their share from 19.2% of the total global value in 2019 to 27.0% in 2021.
THE CASE OF CHINA
The report observes that, in the case of China (including Hong Kong Special Administrative Region of China), the value of project announcements decreased from an average of 11.0% between 2010 and 2019 to 5.4% in 2021. It suggests that the decline in project announcements in China may also be linked to the search for greater resilience in value chains by large transnational companies.
“The interest in making new investments during the second year of the pandemic, in addition to focusing on Europe and North America, was concentrated in a few sectors: renewable energy (13% of the total amount), semiconductors (12%), communications (11%), real estate (8%), software and IT services (5%), and food and beverages (5%), which accounted for 54% of the total investment announcements. Among these six sectors, the largest growth was recorded in the semiconductor sector (386%), which represented 73% of the year-over-year variation, while the only sector in this group that received a lower amount of investment announcements than in 2020 was the renewable energy sector (-7%),” the report emphasized.
It is thought that the dynamism of the announcements in the semiconductor sector is due, on the one hand, to market dynamics, as its demand has skyrocketed, and on the other hand, to geopolitical considerations based on which this industry has been defined as strategic.
The report highlights that until 2019, investment announcements for semiconductor manufacturing were mainly concentrated in China, which accounted for 33% of the announced investment amounts in FDI between 2005 and 2019, followed by the United States (11%) and Japan (8%) in second and third place, respectively.
“The increase in investment inflows in China (13%) was mainly due to investments in services…”
It is argued that that this situation changed dramatically in 2020 and 2021. In 2021, the three countries with the highest amount of investment announcements in this industry were Germany (24%), the United States (23%), and Japan (18%), while investment announcements in China accounted for only 7%.
INTEL
According to ECLAC, the largest announcement was made by the American company Intel for the opening of a state-of-the-art semiconductor factory in Germany with an investment of $19.3 billion. This investment is part of the company’s strategy, which plans to invest up to 80 billion euros in the European Union over the next decade throughout the semiconductor value chain, from research and development (R&D), manufacturing, and foundry services to the development of the latest packaging technologies, with the aim of creating a next-generation European chip ecosystem, addressing the need for a more balanced and resilient supply chain (Intel, 2022).
On the other hand, the South Korean company Samsung announced a new facility in the United States with an investment of $17 billion to manufacture advanced semiconductors for applications in mobile phones, 5G, high-performance computing, and artificial intelligence (Samsung, 2021). This is Samsung’s largest investment in the United States, where the company has been operating for 25 years, and it aims to enhance the resilience of the chip supply chain.
“The announcement of new facilities in the United States and European Union cannot be dissociated from the initiatives that these economies are pushing to strengthen themselves in the semiconductor industry and other industries they consider strategic, thus countering China’s position. In the United States, two packages of laws aimed at creating opportunities for manufacturing and technological and economic strengthening, as well as innovation and competition, were discussed. This process led to the approval of a law in August 2022 on science and the creation of helpful incentives to produce semiconductors (Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act of 2022), which proposes the creation of a $52 billion subsidy program for private companies that establish semiconductor production facilities in the country,” the report emphasizes.
It points out that in the European Union, on the other hand, the European Commission launched the Industrial Alliance on Processor and Semiconductor Technologies in 2021, aiming to bring together the public, private, and academic sectors to identify existing deficiencies in microchip production and the necessary technological advancements to progress in their production.
Furthermore, in 2022, a European chip law was proposed, aiming to provide a total of €43 billion in public investment, both at the community and national level, by 2030. The objective is to increase the attractiveness of the European Union for the establishment of plants by technology companies.
In this context, the ECLAC sees an international scenario of great uncertainty for FDI. On the one hand, multinational companies have implemented a defensive strategy, channeling liquidity surpluses towards mergers and acquisitions, at the expense of launching new projects, with a strong focus on developed economies. On the other hand, the war in Ukraine has caused a significant change in the global economic landscape, with implications that are impossible to predict.
