Foreign direct investment in the era of new industrial revolution

The Fourth Industrial Revolution presents both opportunities and challenges for attracting foreign direct investment (FDI) as it significantly transforms how companies organize their international production networks – a key driver of FDI.

Faced with the transformative and disruptive impact of technological advancement, multinational corporations (MNCs) have been looking for alternative ways of doing business to maintain their competitiveness.

The increased application of industrial automation has transformed the operational strategies of international businesses, with significant implications for host economies, which rely on foreign direct investment.

On the other hand, developing economies have been struggling in adopting to the new realities of the Fourth Industrial Revolution. Lack of up-to-date regulatory framework, technological infrastructure, institutional capacity and labour skills have further complicated these efforts.

Moreover, access to, or acquiring, state-of-the-art technologies has always been a challenge for developing economies. Many countries found the solution in attracting FDI that can help transfer necessary know-how and technologies for their economic development.

As the global investment landscape moves from traditional efficiency-seeking foreign direct investment to resilience-seeking FDI with the application of Industry 4.0, attracting such funds has been more competitive.

In the early decades of globalization, multinational corporations sought new locations mainly to increase efficiency where labour cost was one of the main determining factors. However, that is no longer the case. Though labour cost still plays an important role, there are now other considerations driven by automation capabilities and operational resilience metrics.

As MNCs have been integrating advanced technologies into their production processes, the requirement of less human intervention is resulting in the creation of highly-efficient and automated manufacturing processes.

With the introduction of new technologies, companies have been increasingly using robots, artificial intelligence (AI) and the internet of things (IoT) in manufacturing processes, thus reducing the need for employing workers with traditional skillsets.

According to the World Economic Forum’s The Future of Jobs Report 2023, humanoid and non-humanoid robots are expected to be net negative job creators in the next five years.

Data from International Federation of Robotics (IFR) shows that the operational stock of industrial robots reached about 3.5 million as of 2021, a 15% increase compared to previous year. Over the past decade, the operational stock of industrial robots has more than tripled and continues to grow. In 2021 alone, more than half million new robots were employed by industrial corporations.

While industrial automation is clearly creating challenges for foreign direct investment, in addition to increasing nearshoring, and reshoring to a limited extent, the silver lining is that MNCs will still be looking for new locations as their quest is not driven by labour cost-efficiency only, but also by resilience, among other reasons.

As such, logistic metrics, proximity to source and end markets, and market entry requirements will still be among the key locational factors for MNCs, with a diminishing role of labour cost as a determinant.

Moreover, new manufacturing technologies augmented by AI and 3D printing lead to “distributed manufacturing, mass customization and commodification of production”, hence firms will be looking for new locations to establish modular production facilities closer to the end markets they serve.

The social and economic impact of industrial automation could be more alarming for governments. As robots replace workers and Industry 4.0 creates a shift towards high-skilled jobs that require leveraging advanced technologies, it will be more challenging for policymakers to generate new employment opportunities for masses, unless they take preemptive actions.

That being the case, it is also true that the Fourth Industrial Revolution will create new employment opportunities for people with new skillsets to match growing demand in digitalization, cybersecurity, data privacy and more.

Against this backdrop, countries are faced with significant hurdles to attract foreign direct investment in such a difficult environment. However, countries who may offer agile and flexible production ecosystems can also turn these difficulties into opportunities for attracting FDI.

By improving their industrial and digital infrastructures and investing in education to reskill labour force, countries can attract quality FDI necessary for their economic development. Nevertheless, this is a long journey that takes years.

An advanced manufacturing base is imperative to tapping into opportunities created by the new industrial revolution and attracting more investment from multinational corporations. According to a study by the World Bank, only a handful of countries graduated from limited manufacturing to advanced manufacturing in the global value chains, which are indispensable to MNCs’ global operations.

Country transitions between different types of global value chain participation:

Developing countries cannot wait for decades to transform their economies. They can avoid dependency through smart policies and collaboration with national and international stakeholders, such as the World Economic Forum’s Centre for the Fourth Industrial Revolution (C4IR) – a global platform for public-private collaboration helping shape the development and application of emerging technologies.

Take Türkiye, for example. Acknowledging the need for agile governance given the speed of change and the transformation in all walks of life associated with the Fourth Industrial Revolution, Türkiye joined the Forum’s C4IR Network to prepare its industrial base for the technological revolution.

The C4IR is hosted by the Turkish Employers’ Association of Metal Industries (MESS), and the centre works with other countries across the globe on developing governance frameworks for fair and inclusive deployment of new technologies and industrial transformation. MESS has also established a new state-of-the-art technology platform, MEXT Technology Center, to support its members along their digital transformation journeys towards Industry 4.0.

Reskilling and upskilling also play a key role in mitigating the negative impact of industrial automation, which decreases the need for unskilled or low-skilled workers and creates opportunities for high-skilled workers.

The Forum’s Reskilling Revolution initiative, which was launched in 2020 and “aims to empower one billion people with better education, skills and economic opportunity by 2030”, is another platform that countries and organizations can take advantage of.

In conclusion, foreign direct investment practitioners should be agile and adaptive to this new investment landscape wrought by the new industrial revolution, and investment promotion agencies should recalibrate their value propositions and promotion strategies to remain attractive and relevant for new-generation FDI projects.

Meanwhile, governments should design smart policy frameworks to foster a conducive environment for Industry 4.0 practices. Advanced manufacturing capabilities and qualified labour force together with investment rationales are key to attracting new investments.

The new industrial revolution may present challenges for attracting foreign direction investment, but it also presents opportunities. Stakeholders should ensure they are best placed to seize them.