How industry 4.0 will change FDI

Whereas a revolution comprises significant change in a government’s political landscape, technological revolutions represent the significant replacement of one technology with another. These changes are characterised by new innovations and the ways in which they are applied. Consequently, every technological revolution has an indelible effect on the way people live their lives.

So, what are the defining characteristics of the fourth technological revolution (4.0)? It comprises, according to Klaus Schwab, the founder and executive chairman of the World Economic Forum, "a range of new technologies that are fusing the physical, digital and biological worlds, and impacting all disciplines, economies, and industries.” In short, the velocity and breadth of this technological revolution is unprecedented. “

Matthew Porio, managing partner of Finance IQ, a financial training group that helps clients adapt to changes in the global economy, says businesses should “not only anticipate the changes that technology itself brings, but also how the relationships between these aforementioned disciplines change as a result… The changes in correlations are always more interesting and unpredictable.”

Winners and losers

There has been no shortage of pithy predictions about the disparate consequences of this revolution. While optimists regarding the spread of innovation highlight potential increases in global income levels and quality of life for people around the world, sceptics argue that the primary beneficiaries of 4.0 will be affluent stakeholders who do not need it. The reality is that the impact of this unprecedented speed and scope of change will have different effects on various industries, communities and even planets. 

In the context of FDI, all stakeholders need to reconsider their roles in the investment process and how these changes will affect their business model in the short and medium terms. The three areas of FDI that will experience the most significant change are production, governance and risk management. In order to understand how 4.0 will affect FDI projects, it is helpful to ask and answer three questions. 

• Who is the FDI stakeholder and what are its objectives? 

• What factors are used to determine the stakeholder’s ability to achieve objectives and how will 4.0 affect that model? 

• How does the technological revolution change the relevance of these variables? 

Who is the stakeholder and what are its objectives? 

There are many different stakeholders in FDI projects. While foreign investors and host governments are the two most prominent parties in FDI projects, there are many other players affected by the process. For example, local communities where the project takes place and the non-government organisations that represent them are two other stakeholders that are affected by the presence of FDI projects. Moreover, vendors and other members along the regional supply chain that supports the project are greatly affected by FDI decisions. In order to determine how the technological revolution will affect the stakeholders, each participant will have to identify his or her role and their primary objectives in the process. 

US-based Company A is making a decision about whether or not to manufacture widgets in three emerging and frontier markets. While the company has some experience in overseas manufacturing, it is trying to determine the overall cost savings. This analysis requires exploration of how 4.0 will affect the viability of exporting production. 

A host government official in emerging market Country B is responsible for attracting and promoting inbound FDI. The government official has been a staff member of Country B’s department of commerce for 20 years and is likely to remain in this capacity until he retires. Many of his colleagues are political appointees whose service will terminate when the incumbent president’s term expires. The government official realises that 4.0 is changing the dynamics of crossborder business and is trying to develop a strategy that adapts to it. 

Which aspects of the investment climate affect the stakeholder’s ability to achieve these objectives and how will 4.0 influence this? 

While the stakeholder’s role in an FDI project determines its primary objectives, the identification of its objectives helps determine which aspects of the investment climate are most important. Historically, teams who are responsible for selecting expansion locations identify and explore the variables that inform their decision. 

Traditionally, Company A’s expansion decisions comprise due diligence reviews of costs and risk. For this reason, Company A looks at minimum wage, the influence of unions in labour relations and the graduation rates of college students in potential host countries. When it finds a country that meets its requirements in these three categories, the company initiates plans for expansion. The fourth technology revolution will change the way in which existing criteria are used to examine potential host countries and the type of criteria examined. 

Historically, emerging market Country B has attracted inbound investments from companies in developed markets who are interested in capitalising on inexpensive labour. Since the government official started in this capacity, his primary responsibility has focused on generating and closing leads of potential inbound investors. However, 4.0 is blurring the distinction between developing and developed countries, and consequently, the benefits of inexpensive labour in Country B will be much less significant. For this reason, the government official is trying to overhaul the government’s strategy. Whereas he used to focus on the short-term goals of managing leads, he aims to spend more resources on developing a strategy that adapts to the changes brought on by 4.0

How will the technological revolution affect the investment climate in the host countries for FDI projects? 

In addition to revolutionising business processes, the unprecedented velocity and scope of 4.0 will change the way that foreign investors select locations and methods of business expansion. The due diligence process comprises consideration of how 4.0 will affect project profile factors and how much project-specific characteristics will determine the extent to which external factors and technological innovation affect the decision model. In some cases, aspects of 4.0 will change the way in which country indicators are explored. In others, innovations will overhaul the due diligence process by changing which indicators are used to make short- and medium-term decisions. 

Company A’s analysis about the impact of 4.0 will focus on the direct and indirect effects of automation. Direct effects analysis will ask one primary question: will manufacturing jobs for widgets be replaced by machines that produce them more efficiently than human beings? If widgets can be made using automation, then Company A’s primary motivation for focusing on production in less developed countries will vanish. If machines can replace these jobs, Company A will strongly consider production in the US. In the event that the widget manufacturing process cannot be automated, Company A’s analysts will focus on the indirect effects of artificial intelligence (AI). The indirect analysis requires consideration of how AI will affect wages, labour relations and education statistics in developing countries where they might set up. For example, AI’s replacement of employees in a given industry will produce excess supply of labour, and consequently minimise the leverage and negotiating power of labour. As a result, many experts argue that the changes of 4.0 will favour providers of capital over labour. 

Because the competitive advantage of doing business in Country B will diminish as 4.0 flourishes, government officials must find another way to attract inbound FDI. In the 4.0 investment environment, the key to attracting inbound projects is to develop agile economies that embrace innovation. Foreign investors who are creating new technologies require investor-friendly regulations that foster rather than stifle innovation. Developing economies can adapt to the digital economy under 4.0 by providing investors with tax credits and other incentives that help technology start-ups. While it will be difficult to convince elected officials to focus on medium- to long-term goals, host countries that develop a regulatory framework which encourages innovation will be the most coveted host countries for FDI in 4.0. 

Smarter decisions

The three-point framework does not pretend to forecast all industry and country-specific changes. Nor does it provide answers that point to an irrefutable conclusion. Rather, it provides a roadmap to help stakeholders in FDI projects make smarter decisions. By applying the framework, investors, governments and other stakeholders can use objective data to contemplate how 4.0 will influence their plans.

One thing is abundantly clear: all stakeholders in FDI projects must rethink processes for making decisions in the short term and also consider how different paths of industrial change will affect their ability to succeed in the medium and long terms. Whether companies will explore how advances in automated processes will affect production in emerging and frontier markets, or whether governments in countries that rely upon natural resources will consider how 4.0 will affect the supply and demand of oil, the game is changing and so are the rules that govern it. 

Border issues

The institutional framework of each country provides a lens through which to examine the extent to which external factors affect the internal investment climate in a given country. Whereas some countries develop economic and political policies that insulate them from external changes, others link their fate to those of other countries on whom they depend for economic stimulus. For example, a host country that enters into regional trade agreements with neighbouring countries reduces barriers to travelling and trading with neighbouring countries. Porous borders encourage an exchange of people, money and ideas. Whereas the countries that have low barriers to entry will be affected by 4.0, those that insulate themselves will be less affected. 

Robert Ginsburg is president of RBG Global, which advises foreign investors and host governments on crossborder investment and trade.