THE IMPACT OF COVID-19 ON FOREIGN INVESTORS: EVIDENCE FROM THE SECOND ROUND OF A GLOBAL PULSE SURVEY SEPTEMBER 2020 Abhishek Saurav, Peter Kusek, Ryan Kuo, and Brody Viney Global Investment Climate World Bank Group worldbank.org/en/topic/investment-climate KEY FINDINGS Based on the latest results of a quarterly survey of multinational enterprise (MNE) affiliates in developing countries: • The adverse effects of the COVID-19 pandemic became near-universal for MNE affiliates over the second quarter (April to June) of 2020, with over 90 percent experiencing some adverse effects. More than 80 percent of MNEs saw their net income decline, by an average of 37 percent, while two-thirds decreased investment and over half reduced employment in developing country affiliate operations. • MNEs expect pandemic-induced shocks to ease over the third quarter (July to September) of 2020 as economies gradually reopen and companies adjust to new market conditions. Over half of respondents still expect adverse income effects, but the anticipated magnitude of effects is less severe. MNEs report an improved outlook for supply chain reliability, possibly signalling adaptation and resilience. • MNEs also report an improved outlook for supply chain reliability, possibly signalling adaptation and resilience. Over half of MNEs (58 percent) have turned to digital technologies. Some are diversifying suppliers (37 percent) and production sites (18 percent). There are early signs that some firms are shifting production closer to consumers by nearshoring or reshoring (14 percent). • Only about a third of MNEs affiliates have received COVID-19-related support from host governments, and some MNEs report receiving less support than domestic firms. This could be due to ineligibility based on ownership status, firm size, or other factors, or gaps in information and implementation. • There are signs that FDI operational and entry rules (including screening and approvals) are becoming more restrictive, which could limit the scope for FDI to be able to contribute to a robust economic recovery in developing countries. 1 INTRODUCTION The COVID-19 pandemic has had a profound impact on the global economy, triggering the ABOUT THE SURVEY deepest global recession of the past eight decades. Together, the crisis and public health response The survey was administered using a short have caused both a severe supply shock in the form web-based survey sent to a wide sample of of reduced worker availability and supply chain known MNE email addresses. The period of disruptions, and a massive demand shock as data collection was July 1 – August 26, 2020. consumption became restricted and confidence The resulting sample comprises 78 MNE fell. The World Bank forecasts a 5.2 percent affiliates (companies with foreign owners) contraction in global GDP in 2020, including a operating in 30 developing countries. The 2.5 percent decline in emerging markets and results of the pulse survey are not developing economies (World Bank 2020). generalizable to all developing countries but are directionally indicative of the experience Multinational enterprises (MNEs) have of MNEs operating in developing countries. experienced successive and cascading effects from these demand and supply shocks, with significant During the recovery from COVID-19, higher FDI implications for foreign direct investment (FDI). In inflows can ease capital constraints, contribute to the short term, there has been a large reduction in output and employment growth, and increase FDI activities, with the number of greenfield aggregate productivity through positive project announcements from January to May 2020 productivity spillovers and technology transfers. down 50 percent on the same period in 2019, and M&A transaction values also down 50 percent.i Given the importance of FDI to the crisis and Global FDI flows, which peaked at USD 2 trillion in recovery, the World Bank Group’s global 2015, are expected to decline significantly further, Investment Climate Unit is conducting quarterly to just USD 1 trillion in 2020 (UNCTAD 2020). ‘pulse’ surveys of foreign investors to gauge the effect of the pandemic on foreign investors. The Depending on the course of the pandemic, the results of the first round, for the first quarter of global economic recession could be protracted, 2020, were published in April 2020 (Saurav, Kusek, further disrupting cross-border trade, investment, and Kuo 2020). Survey data showed that more than and global supply chains. At the same time, some 80 percent of MNEs had been adversely affected, governments have adopted or are considering with four in five experiencing reduced revenues policies that make rules for FDI entry more and profits and three in four experiencing a decline restrictive (UNCTAD 2020). As a result, the long- in supply chain reliability. A vast majority of MNEs term future for FDI is uncertain as MNEs make (85 percent) expected conditions to worsen in the changes in their business operations and possibly second quarter of 2020. revisit production locations, supply chain sourcing, and investment allocations across regions. A second round of the pulse survey, representing the second quarter of 2020, was administered in FDI plays a key role in countries’ economic July-August 2020. In addition to the coverage of development and is often the largest source of the actual effect of the pandemic on businesses in external finance for many developing countries — the past 3 months and the likely effect of the greater than remittances, private debt and pandemic in the next 3 months, the second round portfolio equity, or official development assistance of the survey also covers adjustments in business (Kusek, Saurav and Kuo 2020). FDI can boost strategy and changes to the policy environment for developing countries’ economic resilience and entry and operations of MNEs. ease the economic fallout of the coronavirus crisis. i Based on World Bank analysis of fDi Markets (greenfield FDI) and Thompson Reuters (M&A) data. 2 worldbank.org/en/topic/investment-climate A GROWING BODY OF EVIDENCE Other organizations have also attempted to assess the effects of the pandemic on business decisions and investment by directly asking global corporate decision makers using business surveys. These have provided useful real-time insights, including: • In an initial March survey, YPO’s global survey of chief executives* found that 51 percent of global CEOs viewed the pandemic as a severe business risk. In their June update to the survey, 64 percent of COEs reported their business outlook had become more negative since March and 48 percent anticipated continuing negative effects on revenues over the coming year (Sigmond 2020). Further, 39 percent expected their total number of employees and total fixed investment to be down more than 10 percent in a year’s time. • PricewaterhouseCoopers (PWC) also updated their survey of global CFOs in June**, finding that 51 percent of CFOs expect a decline in revenues and/or profits of more than 10 percent as a result of the crisis (PWC 2020). Over 90 percent of respondents indicated that capital expenditure investments were the most likely to be deferred or cancelled as companies adjust to the crisis. • In a series of surveys conducted by McKinsey between March and July***, the share of executives expecting a global economic contraction in the next six months has declined slightly but remains at 44 percent (McKinsey 2020). Likewise, the share of companies expecting profits to decrease has declined consistently since April (when it was above 60 percent) but remains at 37 percent. The World Bank’s quarterly global pulse survey contributes to this growing body of evidence by focusing on affiliates of MNEs operating in developing countries. * A global survey of chief executives who are members of YPO, a community/organization of chief executives spanning about 130 countries. Results are based on the second round of the survey in May 2020 which included more than 2,700 respondents from 100 countries. More information: https://www.ypo.org/2020/06/business-outlook-improves-among- global-chief-executives-in-latest-ypo-survey/. ** A global biweekly survey of finance leaders. Results are based on the June 15th, 2020, round of the survey which included more than 980 respondents from 23 countries. More information: https://www.pwc.com/gx/en/issues/crisis- solutions/covid-19/global-cfo-pulse.html. *** A global survey of business executives. Results are based on the July, 2020, round of the survey which included more than 2,110 respondents. More information: https://www.mckinsey.com/business-functions/strategy-and-corporate- finance/our-insights/the-coronavirus-effect-on-global-economic-sentiment. 3 EFFECTS OF COVID-19 ON FOREIGN INVESTORS IN THE PAST THREE MONTHS (APRIL-JUNE 2020) The first global pulse survey indicated a severe data suggest that MNEs are delaying or canceling effect of COVID-19 on MNEs, with 80 percent planned investments. In the second quarter of reporting reductions in revenues and profits in the 2020, two-thirds of MNEs have reduced first quarter of 2020. Eighty-five percent of investment in developing country operations, with respondents expected adverse effects on revenue an average decline of 37 percent. More than half and profit to continue through the second quarter of MNEs continue to be adversely affected through of 2020. ii lower availability of finance and have reported reducing their employment by 20 percent on These findings were further supported by public average. announcements: the majority of the world’s 5,000 largest MNEs revised their earnings expectations Figure 1: The adverse effects of the COVID-19 between February and May 2020, with an average pandemic are now near-universal for MNEs downward revision of 36 percent (UNCTAD 2020). Question: Over the last 3 months (April-June Results from the second round of the global pulse 2020), what has been your company's actual survey confirm these findings. experience, as compared to what would have been expected without COVID-19? Data from the second round of the survey suggest that the adverse effects of the COVID-19 pandemic Net income 37% 80% became near-universal for MNE affiliates over the Investment 37% 67% second quarter of 2020, with 94 percent experiencing some adverse effects. The demand Revenues 34% 82% and supply shocks in the first half of 2020 have Demand 32% 73% resulted in sizeable declines in income and revenues for over 80 percent of MNEs. The average Supply chain reliability 32% 77% declines in the second quarter of 2020 are 37 Output 26% 65% percent and 34 percent, respectively. Availability of finance 24% 59% On the demand side, the crisis has reduced demand for three in four MNEs, with demand Worker productivity 23% 59% down by a third on average. On the supply side, Employment 20% 52% three in four MNEs have experienced a decline in supply chain reliability, limiting access to raw and Input costs 2% 38% intermediate inputs essential to production. About 0% 50% 100% 60 percent of MNEs report an average 23 percent decline in worker productivity. Firm production has Share of MNEs reporting adverse impacts adjusted accordingly, with two-thirds of MNEs Average adverse impact across MNEs reporting an average reduction of output by a Source: Computation based on the July-August 2020 Investor quarter. Confidence Pulse Survey. Consistent with the “wait and see” approach in the face of heightened business uncertainty, survey ii Sample differences mean that these results are not directly comparable to expectations for the second quarter that MNEs reported in the first pulse survey. Full results from the first round of the pulse survey are available in the analytical report at https://openknowledge.worldbank.org/handle/10986/33774 and associated blog post at https://blogs.worldbank.org/psd/impact-coronavirus-foreign-investors-early-evidence-global-pulse-survey. 4 worldbank.org/en/topic/investment-climate ANTICIPATED EFFECTS OF COVID-19 ON FOREIGN INVESTORS IN THE NEXT THREE MONTHS (JULY-SEPT 2020) Looking ahead, the economic outlook remains The outlook for investment and production reflects uncertain and depends on how the pandemic, its the expected recovery in demand and easing of economic effects, and policy responses evolve. The supply-side constraints. Less than 40 percent of uncertainty weighs on businesses as they assess firms expect to curtail investment or experience mechanisms to survive the immediate disruption, lower production in the third quarter (down from adapt to changed market conditions, and recover three in four in the second quarter). from the shocks of the pandemic. Figure 2: MNEs expect the intensity and prevalence of Responses to the second global pulse survey pandemic-induced shocks to ease, signaling adaptation indicate that MNEs expect both the intensity and and resilience prevalence of pandemic-induced shocks to ease in Question: Over the next three months (July-Sept the third quarter of 2020. As economies gradually 2020), what is likely to be your company's reopen and companies adjust to new market experience, as compared to what would have been conditions, this outlook may reflect MNEs’ expected without COVID-19? confidence in their resilience and ability to adapt in the face of a sustained disruption. Net income 14% 53% Availability of finance 13% 47% While survey data show that over half of all MNEs still expected income and revenues to be adversely Supply chain reliability 13% 49% affected, this represents a marked improvement Investment 10% 37% compared to results in the first and second quarters of 2020, when more than 80 percent of Revenues 9% 53% MNEs were adversely affected. The average Worker productivity 7% 41% expected impact on income and revenues is also less than half of the negative impact in the second Demand 7% 48% quarter. Output 6% 39% MNEs expect a modest recovery in demand with Employment 4% 32% only about half projecting demand to be lower Input costs 3% 36% than normal in the third quarter (down from three in four in the second quarter). The anticipated 0% 25% 50% 75% magnitude of effect is also less severe, as compared to the effect in the first and second Share of MNEs reporting adverse impacts quarters of 2020. Average adverse impact across MNEs Supply-side constraints are also expected to ease Source: Computation based on the July-August 2020 Investor Confidence Pulse Survey. in the third quarter of 2020. A smaller share of firms reported concerns about supply chain reliability and worker productivity going forward, with expected impacts in these areas far milder on average when compared to impacts experienced in the first and second quarters. 5 CHANGES TO BUSINESS STRATEGY IN RESPONSE TO COVID-19 Even before the pandemic struck, foreign investors (33 percent) report taking steps to better faced significant business pressures, including understand their tiered structures of suppliers changing patterns of industrialization, rising (such as through supplier mapping), and thus gain economic nationalism, and a growing emphasis on greater visibility into potential vulnerabilities of environmental sustainability (Kusek, Saurav, and their supply chains. Kuo 2020). The crisis has forced even more significant and rapid changes to business strategy, A substantial share of MNEs (37 percent) are including finding ways to manage production undertaking more significant adjustments to their disruptions and scale up digital solutions. supply chains, diversifying their suppliers or countries from which they source products and Over the long-term, MNEs may also consider services. About one in five respondents is structural changes to their supply chains to undertaking changes to diversify production diversify risk and increase resilience. The second locations. A small but significant share (14 percent) round of the global pulse survey investigates the reported shifting production sites closer to strategies that firms have employed to counter the consumers by nearshoring or reshoring. effects of COVID-19. Major changes to global value chains such as Survey data show that three in five MNEs report diversification and geographic relocation of adopting digital technologies to improve their production sites are likely to take time to supply chain management. These technologies implement, so it is possible that the early trends include data science applications, distributed identified in this survey data will strengthen. If this ledgers, automation of tasks and processes, and eventuates, the implications for global trade and the internet of things. These technological investment are likely to be significant. solutions enable global businesses to optimize capacity, maintain inventory, and manage logistics. Relatedly, a sizeable share of respondents Figure 3: MNE responses have focused on supply chain optimization and resilience Question: To counter the effects of COVID-19, how has your company adjusted its business strategy? Digital technologies for supply chain management 58% 40% 2% Diversification of suppliers or sourcing countries 37% 58% 5% Mapping of supply chain tiers to increase visibility 33% 53% 13% Diversification of production sites 18% 73% 8% Loans or equity capital from parent 17% 72% 12% Nearshoring or reshoring 14% 81% 5% Share of profits repatriated 0% 67% 33% 0% 20% 40% 60% 80% 100% Increase No change Decrease Source: Computation based on the July-August 2020 Investor Confidence Pulse Survey. Note: for these questions no time period was specified. 6 worldbank.org/en/topic/investment-climate GOVERNMENT SUPPORT FOR FOREIGN INVESTORS In responses to the first global pulse survey, For those respondents that believed that they investors indicated that tax relief, financial support received less support, the primary reasons cited such as loans and grants, and relaxed labor and include that MNEs are typically not eligible for business regulations would be the most important support (53 percent). This may be due to foreign areas of government support for MNEs. Over ownership restrictions applied to government subsequent months, many countries around the support policies and programs, or other eligibility world have instituted business support programs criteria such as company size or industry that may to counter the adverse economic impact of the rule out MNE affiliates. pandemic (see IMF 2020). Respondents also cited having less information Despite the high demand for government support about government support (35 percent) or being and prevalence of policy responses, results from eligible but less favored as compared to local firms the second global pulse survey indicate that two- (24 percent), as common reasons for receiving less thirds of MNEs have not received any government support. These results highlight the need for fair assistance to counter the effects of the pandemic. implementation and wide dissemination of A sizeable share of MNEs (30 percent) also report information about support policies to ensure MNEs receiving less government support as compared are fully able to access the support available. with local businesses (non-MNEs). Figure 4: Many MNEs have received little or no government assistance Question: Has your company received any national or local government support to counter the effects of COVID-19 on your business? Received government support to counter the effects of COVID-19 31% 64% 5% Received less government support than local firms 30% 53% 17% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Yes No Don't know Of companies that indicated they received less support (n=17): Question: If your company recieved less support, why has your company received less support from the government as compared to other local companies (non-MNEs) in your industry? We were not eligible 53% Local companies had more information about government 35% support We were technically eligible, but local companies were 24% favored We were technically eligible, but did not apply 6% 0% 10% 20% 30% 40% 50% 60% Source: Computation based on the July-August 2020 Investor Confidence Pulse Survey. Note: for these questions no time period was specified. 7 THE CHANGING POLICY ENVIRONMENT FOR FOREIGN INVESTMENT Business support policies and programs have not Results from the second global pulse survey been the only policy response to the pandemic demonstrate that MNEs are witnessing these affecting MNEs. Many governments have been changes to the business environment first-hand. introducing changes to foreign investment rules Over a quarter of MNEs indicated that rules for over recent months. Among developed business operations and market entry for foreign economies, the EU introduced new guidance on investors have become less business-friendly in FDI screening in March 2020 that emphasizes their country of operation as a result of COVID-19. protecting strategic health-related industries, and countries including France, Germany, the United While the majority of MNEs reported no change, Kingdom, Australia, and Canada have all tightened and a small number (9 percent) reported their FDI screening regimes. China, India, and improvements, the evidence of tightening of FDI South Africa have all also made changes. rules in some countries accords with wider trends. A more restrictive policy environment for foreign The move to a more restrictive regulatory investors could limit the scope for FDI to be able to environment for FDI continues a trend of rising contribute to a robust economic recovery in many protectionism that started with withdrawals from countries. trade and investment agreements in recent years and includes a rise in the number of new policy measures restricting investment, often related to national security (UNCTAD 2020). Figure 5: MNEs report that foreign investment rules are becoming more restrictive Question: As a result of COVID-19, how has the policy environment for foreign investors/MNEs changed in your country of operation? Rules for business operations 9% 62% 29% Rules for market entry and investment 9% 65% 26% screening/approvals 0% 20% 40% 60% 80% 100% More business-friendly No change Less business-friendly Source: Computation based on the July-August 2020 Investor Confidence Pulse Survey. 8 worldbank.org/en/topic/investment-climate REFERENCES IMF. 2020. Policy responses to COVID-19: Policy tracker. https://www.imf.org/en/Topics/imf-and- covid19/Policy-Responses-to-COVID-19 Kusek, P., Saurav, A., & Kuo, R. 2020. Outlook and Priorities for Foreign Investors in Developing Countries: Findings from the 2019 Global Investment Competitiveness Survey in 10 Middle Income-Countries. 2019I2020, 24. http://pubdocs.worldbank.org/en/314571591134463825/211536-Chapter-1.pdf McKinsey. 2020. The coronavirus effect on global economic sentiment, July 27, 2020. https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the- coronavirus-effect-on-global-economic-sentiment PWC. 2020. 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