Foreign direct investment during the pandemic: A buffer for jobs?

By Fares Al-Hussami and Martin Wermelinger of the Investment Division in the OECD Directorate for Financial and Enterprise Affairs

The Covid-19 pandemic has caused a global humanitarian, social and economic crisis. Poverty will rise for the first time since 1998, with hundreds of millions of jobs lost and livelihoods affected.

Many of the jobs affected by the pandemic depend on investments and operations of multinational enterprises (MNEs) and their buyers and suppliers in global value chains. But foreign direct investment (FDI) is estimated to fall by at least 30% in 2020 – meaning that fewer jobs than expected have been and will be created.

MNE operations in many sectors will remain crippled for some time, resulting in massive job loss in MNEs themselves and in their suppliers globally, as well as in associated industries such as transport and hospitality.

How bad is the fall in investment and retrenchment of operations of MNEs for jobs? Can MNEs help other firms adapt to new forms of work during the post-Covid recovery?

Less FDI means fewer jobs

New establishments of MNEs in host economies – whether greenfield investments or acquisitions of existing firms – involve changes in the demand for labour. Wages and other working conditions such as job stability, occupational health and safety at work might also be affected.

Greenfield FDI projects in 2019 have generated every month nearly 80 000 new jobs in the OECD and more than 100 000 in the developing world (Figure 1). The decline in greenfield FDI earlier in 2020 reduced potential job creation by nearly 50%, implying that up to 500 000 jobs that could have been expected to be created in the first five months of 2020 never materialised.

This might not seem like much at a time when hundreds of millions of jobs have been lost worldwide in 2020, but it does make even more difficult the ambition of creating jobs to advance the Sustainable Development Goals (SDGs). This strain could have widespread consequences on jobs and incomes if FDI stayed low for a longer period of time.

In OECD countries, new private investments coming on stream in infrastructure and services have shielded these economies from a collapse in expected job creation, as recent FDI in these sectors actually led to a small recovery in employment in June and July 2020.

In contrast, developing countries have been hit by sharp declines in FDI in infrastructure, automotives, consumer electronics, textiles, and business services, all of which has hampered job creation. These sectors are typically massive job creators and were receiving large investments before the pandemic. FDI-led job creation has remained low in developing countries since March 2020. Economies with attractive agro-food and communications sectors are weathering the crisis with less damage, as FDI in these highly job-creating sectors has risen during the crisis.

Figure 1. The impact of the COVID-19 crisis on jobs created through FDI

Jobs created in 1’000

Source: Author’s calculation from Financial Times fDi Markets, as of 10 September 2020.

Foreign businesses have cut jobs massively but less than domestic firms…

The crisis has caused foreign investors to curtail their operations in host countries, with knock-on effects on jobs, incomes and livelihoods. Some foreign firms have been able to shield their workforce from such impacts and are choosing to keep and pay employees during the suspension of their activities, but many businesses have had to lay off workers or reduce working hours of their staff.

So foreign firms are not fully providing the buffer with respect to crisis-era job losses that might be expected from FDI. Instead, they are acting more like domestic firms, albeit with fewer layoffs relative to their domestic peers (Figure 2). Perhaps foreign firms find it costly to reduce their workforce during a crisis: higher skilled staff are typically harder to find and firms will face substantial competition to attract them once the recovery occurs. Some MNEs may also be more resilient to disruptions in global supply chains by relying on a larger set of suppliers and buyers.

Figure 2. Foreign firms are adapting their businesses to new forms of work

Note: Each indicator is an average of 19 countries. The countries are: Albania, Chad, Cyprus, El Salvador, Georgia, Greece, Guatemala, Guinea, Honduras, Italy, Jordan, Moldova, Nicaragua, Niger, Russian Federation, Slovenia, Togo, Zambia, and Zimbabwe.
Source: Author’s calculations based on the World Bank Enterprise Surveys “Covid-19: Impacts on Firms”.

…and they have rapidly moved to new forms of work

A priority for companies operating during the pandemic is to protect the health and safety of workers, and to reduce their exposure to Covid-19 in the workplace. This can be particularly challenging in sectors such as garments, construction or healthcare.

Foreign firms have managed relatively better than their domestic peers to adapt their modus operandi to the new business and work realities created by the crisis: 30% of foreign firms surveyed by the World Bank in 2020 started or increased their online activities, compared to only 25% of their domestic competitors (Figure 2). Similarly, almost 50% of foreign businesses have either begun or ramped up remote working; while only 27% of local firms did so.

Differences in the ability to perform jobs remotely have affected the impact of confinement and other social distancing measures on both individuals’ employment outcomes and disruptions to local economies. The impact is probably larger in poorer economies, where only few workers can telework. More skilled workers have higher odds to work remotely.

The scope for teleworking will affect future investments and jobs created

MNEs can promote new forms of work in host countries, either through imitation effects or through business relationships with local suppliers. But not all tasks can be performed from home, and investments in some sectors create more jobs than in others (Figure 3). FDI in business and digital services typically creates a high number of jobs, many of which can be done from home. FDI in other sectors, such as in manufacturing or healthcare, also create many jobs but which for the most part do not lend themselves to teleworking.

Figure 3. FDI-jobs in the developing world and the feasibility of teleworking, by industry
Note: Shares of jobs that can be done at home are calculated based on estimates for the United States. CAPEX: announced capital expenditure.
Source: Author’s calculations based on Financial Times fDi Markets and Dingel and Neiman (2020) “How Many Jobs Can be Done at Home?”, Covid Economics: Vetted and Real-Time Papers 1: 16-24.

Regulations on teleworking arrangements could also affect companies’ investment (or divestment) decisions, the type of investment they intend to do and the way they adjust their ongoing operations. Unlike domestic firms, multinational employers must consider how different approaches to address the impact of the pandemic can be implemented in the various countries in which they operate. This can be challenging for companies that wish to implement uniform global practices, but that may be prevented from doing so due to varying policies across countries.

In the OECD area, countries have adapted their regulations to teleworking. This is probably less relevant for developing countries with high levels of informal employment and lower scope for teleworking. But MNEs, with support from labour unions and development partners, could still play a leading role in adapting themselves to new work realities without waiting for regulatory measures to contain the pandemic. Their good practices could serve as a basis for promoting global agreements to protect workers’ health, employment and wages. Policymakers could help to promote such practices and global standards.

How to rebuild jobs through FDI during the recovery?

On 30 September 2020, at the virtual OECD Roundtable on Investment and Sustainable Development, investment and development communities will discuss how to work together to mitigate the effects of FDI disruptions, contain the drop in FDI, and build back better. How to rebuild jobs through investment and partnerships with MNEs will be one important aspect of the discussion.

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Time: 30 September, 13.30-15.30 (CET)

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For more information visit www.oecd.org/Investment

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