Foreign direct investment and global value chains in the wake of COVID-19

Part I. Multinational corporations and their suppliers are being hit hard

This blog is part one in a 3-part series on the way in which global value chains are affected by COVID-19.
^{Part II. Lead firms of global value chains continue to make agile adjustments
Part III: Governments should prepare for the ‘new normal’ in global value chains – here is how}

Global value chains are significantly affected by COVID-19

The COVID-19 pandemic has posed an unprecedented challenge to global value chains (GVCs), hampering the supply of raw materials, intermediate inputs, and final goods.  Governments around the world are scrambling to contain the outbreak that has hit hard major GVC network hubs, including China, Europe, and the United States (figure 1). The closing of factories, disruptions in transport, and rising concerns of essential supplies are directly affecting how companies operate across the globe with risks to global employment for years to come.   

_{Figure 1. Global value chain participation network, 2019}

Shocks have already spread from directly hit sectors to others,  and are spreading from across regions through supply linkages. The worst may be yet to come. Vulnerability to COVID-19 may be highest in countries not yet severely affected, including developing countries with weak health systems and small open economies highly reliant on international trade and investment. 

As the architects of GVCs, multinational corporations are being hit hard

At the epicenter of this turmoil are multinational corporations—companies that made investment decisions to fragment and relocate production, in a process that has shaped the geography of global value chains over the last three decades. These enterprises account for 22% of global output and contribute about 70% of total trade—particularly in sectors highly involved in global value chains, such as motor vehicles, electrical equipment, chemicals, and electronics (figure 2). Multinationals also contribute a substantial share of employment. U.S. multinationals alone employed 42.3 million workers worldwide in 2016 and represent 22% of total private industry employment in the United States. Multinational companies in the Netherlands created approximately 1.4 million full-time jobs in 2014—almost 20 % of all full-time jobs created in the country. In China, multinationals employ more than 26 million workers, accounting for 6.4% of total urban employment.

_{Figure 2. Multinationals dominate GVC-intensive sectors} 

As a result of the immediate supply restrictions, the demand shock and general decline in investor confidence, COVID-19 is expected to reduce FDI by 30% to 40% this year. This will badly affect industries reliant on a wide range of inputs sourced globally as machinery, electronics and textile. Already, the top 5,000 multinational corporations have reduced their earnings estimates by 30 % for the year (table 1). In some industries, earnings are expected to fall by as much as 200%. This could cause lasting damage to supply chains because more than half of foreign direct investment consists of reinvested earnings by these corporations. New greenfield projects are being delayed. Cross-border mergers and acquisitions have slowed down significantly compared to last year, on course to drop by 50% to 70% globally in April 2020.

Suppliers to multinationals are facing the largest pressure

Suppliers to multinational corporations are under huge pressure to keep their businesses afloat. A survey of Bangladeshi garment suppliers reveals how they have been affected in three phases and through different channels: in Phase 1, Wuhan’s lockdown reduced access to raw materials (fabrics) for garment suppliers. Around 90% of suppliers reported delayed shipments and higher prices of raw materials. In Phase 2, as the pandemic began to hit to bottom line of buyers, 80% of suppliers began to face increased delays in payments up to more than 10 days. And in Phase 3, the scourge of COVID-19 lead buyers to cancel orders either in process or completed, leaving suppliers in dire financial conditions.

Supply chain disruptions are inflicting palpable pain on workers in supplier firms. In Bangladesh alone, at least 1.2 million garment workers have been furloughed as a result of order cancellations. Many suppliers in Myanmar, Cambodia and Bangladesh have suspended work without paying workers for orders already completed, as some multinationals, operating in a survival mode, have not been paying their suppliers. These firms, integrated in global value chains, normally tend to be the more productive ones. But in the wake of the COVID-19, they are also likely to be the more exposed to the shocks. Losing this part of the economy would slow recovery and depress overall productivity.