Global FDI Outflows in Developed, Developing and Transition Economies
This report studies the World Investment Report 2020 and gives a brief of the pattern in the global FDI (Foreign Direct Investment) outflows in the developed, developing and transition economies. Further focusing on the investment trend in the developed and developing economies it discusses the potential factors such as COVID pandemic and cross-border activities that affected the trends. The latter half of the report discusses the Japanese car industry and the impact of sustainability issues on the automotive market. It discusses the risks that the industry faces today and will face in the upcoming future and provides recommendations for the smooth operation and prosperity of the industry taking sustainability into consideration.
The World Investment Report 2020 recorded a dramatic fall in FDI all over the world with a forecast of a decrease up to 40% in the Global FDI, bringing the FDI below $1 trillion for the very first time since 2005 (UNCTAD, 2020). The outflow impact of the investment, largely varied in different regions was altogether highly severe for all the parts of the globe. The trend in different economies is discussed further.
Since the developing economies were highly dependent on the global value chain (GVC) and also failed to impose economic support measures they saw a huge fall in the FDI, although the distribution was highly unequal in different parts of the region. FDI outflows from Africa decreased by 35 per cent to $5.3 billion -The largest contributor in this outflow trend remained South Africa. Togo and Morocco however saw an increase in the trend in 2019. Developing countries of Asia that constitute of 30.8% share in the total world index showed a decrease in flows of -4.9% to $474 billion in. According to the report, FDI in Latin America and Caribbean saw 10.3% growth in FDI up to $164 billion in 2019 and the FDI being expected to half in 2020 (United Nations, 2020).
Developed economies that comprise of 52% of global share saw a hike in the outflows as the repatriations waned. The flows collectively increased by 5.1% to $800 billion. The pandemic expected to cause a decline in the FDI flows between 25 and 40 %. The outflows rose by 72% to $917 billion in 2019. Several of the developed countries including US, Germany and Netherlands recorded high volatility in the outflow. The outflow of Japan hiked by 58% to $227 billion due to rise in cross border M&As. FDI flows to Europe were expected to fall by 30-45% more than North America and other regions since the region entered into the crisis on a bigger fragile foot (United Nations, 2020).
The transition economical regions- Russian Federation, Azerbaijan, Ukraine, Georgia, Serbia etc. constitute of 3.6% share in the world. Outward FDI continued in these areas due to falling Multinational Economic earnings. The FDI outflows trend reduced to 1.8% in 2019. FDI flows were expected to fall up to 30-45%. Since the cross border transits were already low in 2019 the fell further in 2020 accounting to lowest quarterly sales. The outward FDI are further expected to continue to decline as an impact of economic recession (United Nations, 2020).
Factors Affecting FDI Trends in Developed and Developing Economies
Potential Factors affecting the FDI trend 2020 in Developed and Developing Economies
The first, foremost and most important factor behind the steep slide in the FDI of the entire world economy is the outbreak of the pandemic. The pandemic showed its immediate negative impact on the FDI of 2020 and 2021. The FDI flows in 2021 expected decline less than $900 billion. The lockdown imposed due to the spread of virus in various parts of the world put all the investment related plans on hold. The pandemic will continue to have lasting negative impact on the economy in the upcoming years also. Although the developed economies were also severely hit by the COVID but the efficient monetary and fiscal support policies by the national governments helped the onset of recovering from the loss. Whereas, the developing economic countries have faced a greater sever loss due to the pandemic due to the weak economy of the countries. The poor capacity to handle the condition of the pandemic has widened the preexisting gaps in the economic ratios among the developed countries and the developing countries. Many people lost their livelihood, shifting many of them further below the poverty line. Due to the high population, weak political and economic policies of the countries and the scattered middle- income group the global poverty gap is further to be widened (UNCTAD, 2020).
2. Cross-Border M&As
The cross border M&A sales decreased as low as 40% in 2019 in the developed countries. The US companies managed to cut off significant deals accounting to 32% of the transactions. Although many large project investments between various MNCs and tech giants came to an halt. The dealings fell short in service sector followed by the manufacturing sector resulted in the decrease trend of FDI in developed economies. Whereas in the developing economies the net M&A transactions decreased by around 37%. The halt in the renewable power generation and mining project investments further affected the FDI in the developing economies. Transport and infrastructure project delays will result in backward shift in the lifestyle for the countries (UNCTAD, 2020).
Although the impact was severe in the developed economies but they were quite stable in comparison of the developing economies. They had comparatively higher level of financial flows. They focused to preserve their domestic infrastructure and sensitive industries. For major developing countries, like Africa where the oil prices went extremely low and service industries like entertainment, tourism, aviation, hospitality saw huge losses that resulted in impact on the net GDP of the economy. The work stoppage and China’s discontinuation of exports did not only affect the home country but also overall global production hub. The slump in the demand of automotive, electronics and other non-essential commodities further weakened the economy of developing countries (UNCTAD, 2020).
Sustainability refers to fulfilling the needs of the present generation while ensuring no harm to the resources for the future generation (Salas-Zapata & Ortiz-Muñoz, 2019). Although sustainability is mostly associated with environmental concerns, its scope is much broader than that. Sustainability also includes the business’s responsibility to society and economic development. When a business’s approach is sustainable, it benefits all, the environment, the society, and the firm in the long run. Sustainability helps leaders in bringing innovation, creativity, improvement, and growth within the organization (Iqbal et al., 2020).
Impact of COVID-19 Pandemic on FDI
In the recent decades there has been a constant pressure by the government and environmentalists for the automotive industry to adopt sustainable practices into their models. Strict emission regulations and quotas have been imposed on the automobiles to regulate further pollution of the environment. Due to the greater urge of an improved lifestyle, large amount of population is investing in their own vehicles for comfort and a status symbol. The transportation industry is accountable for a quarter of the CO2 emission from the fossil fuels (Wang & Ge, 2019). Hence, it becomes important for such a diverse spread industry to take accountability toward the environmental impact of their products. The current trends in the innovation of manufacturing industry such as zero waste emission vehicles and carbon neutral manufacturing, the growing demand for electric cars is a good enough proof of the increasing competition between the companies to prove their sustainable growth and development. The key areas to consider for the sustainable transformation of the automotive industry include- climate change and carbon gas emission, sustainable value chain and digitization and security (Jursch, 2017).
The concept of sustainability in the automotive sector is not related to a single segment like facility of green fuel emission or electric car driven technology, rather it is a holistic approach to be implemented thorough the lifecycle of a car from its research till its sales and even in the pre-sales cycles. Sustainability also includes ensuring fair labor policies and healthy company environment with work safety that is often ignored by many companies (OSHA, 2016). Implementing a circular lifecycle in the development and design of the car will ensure restoration and regeneration of the resources instead of irresponsible procurement and disposal concept (Capgemini Research Institute, 2020). The following flowchart depicts how sustainability can be implemented across various steps in an automobile development lifecycle:
Figure 1: Sustainable practices through various stages of car manufacturing
Source: Author
Japanese Automotive industry is the world’s third largest automobile producing industry comprising of around 78 factories and 5.5 million of human capital. Since the Second World War, the manufacturing industry has contributed towards Japan’s technologically driven economy. The automotive industry of Japan is a very strong pillar that contributes as high as 89% in the manufacturing segment of Japan (Regan, 2020). Along with car manufacturing, Japan is well indulged in exporting the automotive parts to different suppliers across the world. With the increase in globalization in the recent decades Japan has wide spread its supply market and comes in the top traders of the parts both domestically as well as internationally.
Its technologically advanced notion has contributed abundantly towards advanced cars for the present as well the future. Japanese cars are re-known for maintaining its image over the years by providing high quality, safe, reliable, fuel-efficient, affordable, well designed and facilitated cars. The manufactures have won customer’s trust by providing well-built cars for a wide variety of audience- the luxurious market and also the affordable cars range. Japan’s manufacturing industry also laid its focus towards environment friendly models including their hybrid cars that run on both gasoline and electricity (JTB Communication Design, 2019). This vision of Japanese cars has made them stay on the top of the game all this time. Hence today, the Japanese car manufacturers themselves come with a trade mark of trust. Some of the bestselling brands of the Japanese industry include- Toyota, Nissan, Yamaha, Suzuki (Regan, 2020).
Sustainability Issues in Japanese Car Industry
It has been a need of the hour to completely abandon the use of conventional vehicles that consume non-renewable conventional fuels like petrol and diesel and cause a less efficient internal combustion contributing to sustainable and environmental issues like oil and air pollution. To control the emission of greenhouse gases and to fulfill the global vision of zero-emission mobility, the automotive industry needs to concentrate on dual segments- reducing emission during manufacturing and reducing emission when the vehicle is in operation with cleaner powertrains (H-O et al., 2014). Many solutions towards this issue have been suggested and implemented resulting in generation of technology of PHVs- Plug in Hybrid Vehicles that use fuel but can be charged with electricity and EVs- Electric Vehicles that get charged only with electricity form the grid (Sun et al., 2020). EVs are the current key technology for the automotive segment to contribute towards a sustainable future with low greenhouse gas emission, and less air pollution. In 2021 sales of 2.4 million plug-in hybrids and 4 million pure EV sales were recorded worldwide (Irle, 2021).
Being a member in the Paris agreement, Japan has promised to abide by the environmental practices to reduce its greenhouse gas emission by 26% till the year 2030 and its commitment to be carbon-neutral by 2050; as a result of which the government is constantly pressurizing the car manufacturing industry of Japan (Doyle & Farand, 2020).This is rather challenging for the Japanese OEMs (original equipment manufacturers) and is creating a misalignment between the two parties.
There is a huge debate between Japan’s commitment to ban the sale of cars operating on gasoline by 2035 encouraging the adaptation of pure Electric Vehicles (EVs) or hybrids- vehicles that run on fuel as well as electric battery. Many of the automakers are not encouraging the plan because of the current low awareness and demand of the same. Since the universal adoption of the concept of EVs is still years apart, the manufacturers fear of the decrease in the exports supply chain due to low demand. Some of the car tech giants of Japan- Mazda and Honda have recently launched hybrid cars but on a very small and limited scale. Nissan, has although acknowledged pure EVs, Toyota manufacturers have a stand on the hydrogen fuel technology (Ramey, 2020). Hence the varying opinions of these massive automobile units can bring uncertainty in the future policy and implementation. The government might face opposition form large volume industries including the automakers themselves. The two of the strong automotive companies and their take on sustainable practices are further discussed.
Nissan that became first mass producer of Battery automated cars a decade ago recorded a sales of 5,00,000 cars in 2020. The giant saw and hopped on to the big wave of EV and created ripple in no time. It is the best positioned Japanese automaker to compete for emission free cars in the global market. They aim to offer all electrified vehicles by 2030s in key markets. Also the company focuses to promote its new hybrid technology- E-Power (an electric motor powered by gas generator). The company claimed to be power neutral by 2050 (Dooley & Ueno, 2021).
Risks and Recommendations for Japanese Car Industry
Japan’s commitment of being carbon-neutral by 2050 has been pressurizing the car industry. Akio Toyoda, the president of Toyota who heads the Japanese Automotive Group, thanks to the enormous success and contribution of Toyota in Japan’s economy; has altogether a different stand on being carbon neutral. According to him the internal combustion engine is not be merged with eliminating the carbon (Helven, 2022). Toyota stands for promotion of Hydrogen powered transmission rather than going electric. They aim to stick to be carbon neutral without racing with the world toward BEVs (Battery Electric Vehicles). At a recent gathering where the car giants Ford, General Motors, Volvo, and Mercedes signed to eradicate fossil fuel cars by 2040, Toyota restrained itself from the summit. But this vision comes with a lot of difficulties in implementation process. Currently Japan has 154 hydrogen stations. Also one of the key reasons to stick by the hydrogen fuel vehicles is to save the 5.5 million employees involved in automotive sector that will be affected due to the electric vehicles (Helven, 2022). Also the electric cars being costlier than the gasoline are going to make people less mobile due to affordability issue. Since BEV vehicles consisting of oil, coal, gas, nuclear all will still produce 42% more emission than hybrid vehicles, hybrid is still a safer choice. The main factors Toyota needs to consider is to compete with the price, model range and operating cost with both the conventional fuel operating cars and the EVs to stay in the competition (CNBC News, 2021).
Figure 2: Hydrogen Fuel Tank
Source: (Horwitz, 2015)
To combat with its leading competitors the Japanese car industry needs to take risks and invest in new innovations to stand out rather than following the trend. Japan had held a kick start in BEVs thanks to Nissan its supplies has now faded. Reports even state that by 2030 Japan’s car battery market is to fall below 10%. Their slower drift towards EVs has made them behind in the race. They need to combat to the declining export rates and their shrinking domestic demand. The key element Japan needs to focus is to increase its export potential to be popular abroad (Holder, 2019). One efficient way is through effective collaborations and mergers with the home companies and partnership with the foreign OEMs. Some of the ongoing projects such as Honda with General Motors for fuel cell cars, Toyota with BMW for advanced battery tech in Europe (Schreffler, 2021). Such partnerships need to be up-scaled. The current automobile manufacturers focus on hybrid cars should come to greater spread by tie up with foreign automakers. Japan also needs to keep itself in the race of EV car models to fulfill the upcoming demand. Japan has a wide technological scope and potential. Late expectance and emergence into the trend will only backfire it, widening the gap with the competitors. Toyota’s vision for hydrogen fueled vehicles will provide a diverse option to the future rather than just to be EV centralized. These cars if can be in budget will become a great choice for the future. Along with this Japanese cars can focus on Circular Car Initiative (CCI) to achieve the zero emission goals (Wolff & Deloison, 2020). Ensuring recycling and reusing the car components and focusing to eliminate pollution during manufacturing they can gain valuable image in zero materials wastage and zero pollutants. This increase in degree of circularity and sustainable practices will help the Japanese Car Industry to compete and gain a strong position in the market.
Comparative Analysis of FDI Trends in Developed and Developing Economies
Conclusion
Firstly this report depicted the trend in the FDI of different economies and studied major impact of factors like the pandemic outbreak on the trend. It also stated ratios and figures of the outflow for the ongoing years. Secondly, the report studied the Japanese car industry and how sustainability had an impact on the automotive segment. It concluded that by adopting the EV and hybrid car models and hydrogen fuel engines the industry can prosper in sustainable goals. It should further focus on collaborations and partnerships for innovative solutions in the areas of sustainable development. Also by adopting circular model it can create greater future impact in the global competitive automobile market.
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