Seven signs that the climate for foreign investment is improving

The findings of the World Bank’s Q2 2021 Pulse Survey show confidence returning as the impacts of the pandemic lessen their hold.

2. Fewer companies are feeling negatively affected by the crisis, though its impact remains

In another sign that conditions are improving, the share of companies reporting no adverse impacts from the pandemic to date rose from 7% in Q1 to 22% in Q2.

Nonetheless, the price pressures that emerged in Q1 remain. While fewer companies cited rising input costs than in Q1, large companies were hit harder than SMEs. This could have contributed to closing the output gap between large companies and SMEs mentioned above.

What’s more, 64% of all respondents said they had less access to liquidity than before the pandemic, compared with 48% in Q1.

3. MNEs in Asia, and the Middle East and North Africa (MENA), are falling behind other regions

The overall upward trend hides stark regional differences. In Asia and MENA, output ranged from 2.8% to 1.5% below pre-pandemic levels. That’s compared with a range of 3.2% to 4.1% above pre-pandemic levels in Europe, Sub-Saharan Africa and Latin America.

More Asian MNEs were also still feeling the pandemic’s effects: 68% of companies in East Asia and Pacific, and 52% in South Asia reported adverse impacts on output, compared with 18% in Europe, and just 6% in Sub-Saharan Africa. This difference correlates with a bigger drop in employment and in turn worker productivity in those regions, which led to lower profits. Two main reasons could explain those regional differences. On the one hand, COVID-19 hit Asia particularly hard during Q2 of 2021. On the other hand, manufacturing, which remains more affected than services, represents a larger share of the value added in Asia (about 24%) than in Europe (16%).

4. MNEs that didn’t make layoffs are performing better than before the pandemic

43% of respondents who retained their workforce during the crisis are now reaping the rewards. Overall, their workers were 5.4% more productive than before the pandemic, while those that made layoffs were 0.3% less productive. However, there were significant regional differences. Worker productivity jumped by 6% in Latin America, for example, while languishing below pre-pandemic levels in Asia and MENA.

Interestingly, the companies with the most ambitious recruitment plans over the next three years were those that cut employee numbers during the pandemic. This suggests the outlook is improving, but some sectors remain cautious. Manufacturing companies have kept employee numbers low (with 77% reducing their workforce during the pandemic compared with 37% of services) and have more modest recruitment plans.

5. In the future, MNEs will increasingly require managerial, analytical, and problem-solving skills

Looking ahead over the next three years, 71% of companies expect task management and problem-solving skills to be in the top three required skills, while 45% highlighted a demand for social or “soft” skills. This trend was consistent across all sectors, company sizes and business models, with a slightly higher prevalence among MNEs headquartered in Europe.

Around three-quarters (72%) of companies also plan to increase the proportion of employees with tertiary education, such as a university degree, over the next three years. These findings suggest that MNEs may be looking for more qualified workers to improve overall skill levels and to promote innovation.

6. Investment plans are gradually returning to normal as policy restrictions lift

In Q1, just 8% of respondents planned to increase their levels of investment in their host country; in Q2, it was 21%.

The easing of COVID-19 restrictions could help explain this leap. Just 9% of MNEs said policy restrictions were stopping them from changing their investment plans, compared with 48% in Q1. 

7. Lingering uncertainty is still limiting the appetite of companies to invest

Despite the improving climate, the majority of MNEs said they didn’t plan to increase their levels of investment. And in a level comparable with the Q1 survey, 86% of respondents cited uncertainty about future demand as the main reason for sticking to the status quo.

This may change as commercial tensions, trade wars and sanitary measures ease, improving perceptions of the global business climate in the medium term. The appropriate government support would be pivotal here. When asked about the most effective way of encouraging investment in their host country, more respondents (41%) chose support from investment promotion agencies in the top three investment policy initiatives, more than any other policy intervention.