Levers and sweeteners: outward FDI as an economic diplomacy tool

The transformative potential of FDI to develop economies, transfer knowledge and technical know-how, boost innovation and exports and facilitate integration into global value chains is well documented. FDI also remains by far the largest source of external finance in developing countries worldwide. Little wonder then that a growing number of countries are leveraging their profiles as major outward investors to enhance trade and broader economic ties with key target countries, often emerging or developing markets.

The Japanese have long espoused this concept. In many investment promotion agencies (IPAs) and broader trade and investment organisations, there will be a Japan desk, helping Japanese businesses to understand, access and succeed in the market, while assisting their host organisations with investment pipelines. This win-win approach of foreign helpdesks embedded in IPAs has been adopted by Japan in markets from Indonesia to India, from Thailand to Vietnam, and the concept has been replicated by countries such as South Korea, and more recently supranational bodies such as the EU, whose helpdesk in Indonesia’s IPA, BKPM, I established and led for two years.

Going courting 

Markets such as the UK have adopted alternative approaches to leveraging outward FDI for economic diplomacy. As the UK’s imminent departure from the EU spurs the country into forging and strengthening economic ties elsewhere, the government has been courting emerging markets, for example in Africa, with initiatives designed to spark foreign investment. Take Invest Africa, a £16.4m ($21.6m) programme established in 2017 and led by the UK’s Department for International Development, which seeks to attract £1bn of FDI in the manufacturing sectors in east Africa by 2021. 

More recently, during a week-long tour of the continent in August 2018, UK prime minister Theresa May announced £4bn in government investment to support economic development across Africa, which the UK government expects to be matched by private sector investment. The extent to which this translates into new trade agreements and an exports dividend for the UK remains to be seen, and it looks like a global charm offensive will be needed if the UK is even to come close to offsetting the trade and investment disruptions Brexit could cause to its ties with the world’s largest single market, the EU.

Then there are the world’s economic superpowers, the US and China, which are currently leveraging outward FDI in very different ways to enhance their national interests.

Rather than encouraging outward FDI by US firms, president Donald Trump has been ramping up pressure on multinationals such as Apple to bring manufacturing and other key operations back to the US. While reshoring is not new (US companies such as GE, Ford, Whirlpool and others have all reshored significant operations in the past few years), the Trump administration’s aggressive drive to reshore more and raise tariffs on major trading partners has undoubtedly signalled a step change in the US’s economic dealings with the world.

China looks out

While the US is becoming increasingly introspective in many ways, China, the prime target of Mr Trump’s trade measures, continues to leverage its profile as a major outward investor both in its immediate and broader neighbourhood and further afield, including Africa and Europe. In Asia and Africa, the world’s second largest economy has invested hundreds of billions of dollars in infrastructure projects as part of its Belt and Road Initiative. These investments have provided a host of cash-strapped governments in smaller countries with much-needed financing for major infrastructure projects, while enabling Beijing to exert an ever-greater degree of economic influence over countries it deems to be of strategic importance, from Sri Lanka and Oman to Djibouti and Ethiopia. 

Further afield in Europe, China has identified investment opportunities in strategic assets such as the UK’s nuclear power industry: in 2017, the UK government approved China General Nuclear Power Group’s purchase of a stake in the Hinkley Point C nuclear power station. This clearance came at a time when the UK government was under pressure to demonstrate that ‘Global Britain’ is more than a catchphrase and that the country truly is open to doing business with the rest of the world, and especially with those countries at the top of the UK’s wish list for trade deals. As the Brexit deadline draws nearer, that pressure shows no signs of abating, and it is expected that there will be more high-profile strategic investments into the UK from China in the months and years to come.

Saudi situation

There are also some countries that are proving controversial and divisive when it comes to outward FDI strategies, none more so than Saudi Arabia. The Gulf’s powerhouse is on a global investment drive as it seeks to diversify its economy away from oil, and is offering foreign companies a host of promising investment opportunities. Yet the scandal surrounding the death of journalist Jamal Khashoggi has led many Western governments and CEOs to steer clear of Saudi Arabia’s 2018 Future Investment Initiative forum, (nicknamed ‘Davos in the Desert’). Filling that void, sizeable delegations from China and Russia still attended, eager to tap into the vast procurement and other commercial opportunities on offer.

Just as the battle to attract FDI remains competitive, so too does the outward FDI arena. In 2019, we can expect to see a growing number of countries around the world leveraging their outward FDI offerings to enhance their economic prospects and interests.

Dan Nicholls is an FDI consultant and managing director of Destination Strategies.