6 minute read 24 Nov 2021
Garden worker using digital tablet at greenhouse

Seven signs that the climate for foreign investment is improving

By Yannick Cabrol

Assistant Director, Economic Advisory Services, EY UK&I

Focused on FDI, hospitality, tourism, sport and culture.

6 minute read 24 Nov 2021

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

In brief
  • Output among MNEs in developing countries was back to pre-COVID-19 levels – but with striking regional differences.
  • MNEs that didn’t opt for layoffs during the pandemic saw better worker productivity and output than before the COVID-19 pandemic.
  • Fewer companies reported experiencing adverse effects due to the pandemic than in Q1 2021.

With output back at pre-pandemic levels, better performance among companies that didn’t lay people off, and a leap in the proportion planning to invest, the World Bank’s Q2 2021 Pulse Survey on foreign investment trends, carried out by EY, suggests a return to form for MNEs operating in developing countries.

That said, certain regions seem to be falling behind, indicating a twin-track recovery. And while the proportion of companies planning to increase their investment levels has gone up, lingering uncertainty is preventing most from changing their plans.

In this article, we’ve collated the findings into seven insights to help investors, businesses and governments navigate the changing investment landscape. Click here to read the full report.

1. Overall, output is back to pre-pandemic levels even if smaller companies are still more impacted

On average, the level of output among MNEs in developing countries was 0.6% higher than before the crisis. And, while differences remain between sectors and business models, the gap between SMEs, defined as companies with fewer than 250 employees and large companies has shrunk. In Q1, average output was 2.3% lower for SMEs than pre-pandemic and 3.7% higher for large companies. In Q2, average output was 0.3% lower for SMEs and 1.3% higher for large companies.

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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.

Government and public sector average increase in input costs bar

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%).

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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.

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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.

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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. 

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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.

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  • About the survey

    To gather the data, EY canvassed 300 MNEs in developing countries from 19 July to 13 August 2021, on behalf of the World Bank. The survey results therefore provide a snapshot of the experiences of MNEs in developing countries in general, rather than reflecting the specific situation in any one country. 

Summary

EY teams surveyed MNEs in developing countries for the World Bank’s Q2 2021 Pulse Survey on foreign investment trends. Overall, the findings tell a positive story of a return to pre-pandemic form and an improving investment outlook. But there are signs of a twin-track recovery, and uncertainty is still holding companies back from changing their investment plans.

About this article

By Yannick Cabrol

Assistant Director, Economic Advisory Services, EY UK&I

Focused on FDI, hospitality, tourism, sport and culture.