The Impact of COVID-19 on Foreign Investors: Evidence from the Quarterly Global MNE Pulse Survey for the Third Quarter of 2020 December 2020 Abhishek Saurav, Peter Kusek, Ryan Kuo, and Brody Viney THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S Key Findings The effects of the COVID-19 pandemic remained widespread for multinational enterprise (MNE) affiliates in developing countries in the third quarter (July to September) of 2020. Ninety-seven percent of respondents experienced adverse effects, including reduced demand, supply chain disruptions, or reduced revenue and profits. The majority reported reducing employment and investment levels. Impacts were especially severe for manufacturing firms and smaller enterprises (firms with fewer than 250 employees). Nevertheless, these adverse effects were generally smaller than in the previous quarter. Across regions, more firms in the Middle East and North Africa experienced adverse impacts, possibly reflecting depressed commodity demand, while firms in East Asia and the Pacific generally experienced less severe impacts. MNE affiliates anticipate only limited improvement in the fourth quarter (October to December) of 2020. Despite expecting an easing of demand and supply shocks, nearly 60 percent of firms still expect income and revenue to decline. The outlook for foreign investment in developing countries remains negative. Almost 40 percent of MNE affiliates expect their parent company to invest less in their host country—primarily due to reductions in parents’ total global investments—and very few expect local investments to increase. In total, 85 percent expect investment in the host country to remain the same or decline. Some investment decisions will be driven by supply chain realignments aimed at nearshoring (40 percent of respondents reporting changes in investment levels) or diversifying production locations (40 percent). Relatedly, many MNE affiliates report adjusting their own supply chains by diversifying or changing the countries from which they source inputs. Respondents in the East Asia and Pacific region expect more changes in investment levels, with higher shares of MNE affiliates expecting both increases and decreases in investments. This pattern may reflect the region’s greater integration into global value chains that are now poised to shift. Nevertheless, there is little evidence of a consistent regional realignment pattern (for example, away from China). Over 90 percent of MNE affiliates have received COVID-19-related support from their local governments, but most firms indicated that ongoing support is needed. Relatedly, more than 60 percent of MNE affiliates have received support from their foreign parents in the form of technological, managerial, or financial assistance. It also appears that support provided by foreign parents flowed through to local supplier networks: MNE affiliates that have received support from their foreign parents are more likely to have provided support to their own suppliers. Changes in FDI policy in response to the pandemic have been far from uniform, with some respondents reporting business-friendly changes in local entry and operational rules and others reporting new restrictions. MNE affiliates that report an improvement in the regulatory environment tend to have a more positive outlook for their future investment plans. 1 | Page THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S Introduction As the COVID-19 crisis extends into the second half of 2020, the outlook for both the pandemic and the ABOUT THE SURVEY associated economic crisis remains highly uncertain. In this environment, multinational enterprises (MNEs) need The survey was administered by telephone and to weather a prolonged economic downturn while also online from October 20 to November 12, 2020. navigating government policy responses to the pandemic The resulting sample comprises 305 MNE affiliates and updating investment plans for an uncertain future. (companies with full or partial foreign owners) operating in 34 developing countries. The sample Given the importance of foreign direct investment (FDI) was evenly distributed across 6 developing regions to the crisis and recovery—especially for developing (as classified by the World Bank Group), and countries—the World Bank Group’s Global Investment manufacturing and services sectors in each region. Climate Unit is conducting quarterly pulse surveys of See Appendix A for more details about the survey. MNE affiliates throughout 2020 to gauge the pandemic’s effect on foreign investors.1 According to previous rounds of the survey, four in five MNE affiliates experienced In addition to covering the pandemic’s actual and expected reduced revenue and profits, and three in four experienced effects on businesses in the third and fourth quarters, the a decline in supply chain reliability in the first quarter of third round of the survey provides insights into firms’ 2020 (Saurav, Kusek, and Kuo, April 2020). The adverse responses to the crisis, including the flow of financial and impacts became near-universal in the second quarter of other support measures through multinational supply 2020, with over 90 percent of MNEs experiencing adverse chains, and adjustments to investment and supply chain effects (Saurav, Kusek, Kuo, and Viney, September 2020). strategies. The survey also explores MNE affiliates’ A third round of the quarterly pulse survey, reflecting the experiences with government policy support and changes third quarter of 2020, was administered in October and to FDI entry and operational rules. November 2020. The survey results show that the Together, this report’s findings will help provide policy pandemic’s adverse effects remained widespread for MNE makers and businesses with an updated picture of the affiliates in the third quarter, with only limited effects of the COVID-19 crisis on MNEs and the global improvements expected in the fourth quarter. While these outlook for foreign investment. survey results may not be generalizable to all developing countries, they are directionally indicative of MNEs’ experiences in developing countries. 1 Full results from the first round of the pulse survey are available in the analytical report at https://openknowledge.worldbank.org/handle/10986/33774 and associated blog post at https://blogs.worldbank.org/psd/impact-coronavirus-foreign-investors-early-evidence-global-pulse-survey. Results from the second round are available in the analytical report at https://openknowledge.worldbank.org/handle/10986/34638 and associated blog post at https://blogs.worldbank.org/psd/impact-covid-19- foreign-investors-evidence-second-round-global-pulse-survey. 2 | Page THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S Effects of COVID-19 on Foreign Investors in the Third Quarter of 2020 (July–September 2020) The results of the third global pulse survey indicate that through the crisis, rather than in hard-hit subsectors like the widespread effects of COVID-19 on MNE affiliates tourism and hospitality. persisted in the third quarter of 2020. Overall, 97 percent of respondents experienced adverse impacts on at least Across regions, fewer firms in Europe and Central Asia one business dimension. Of those, around two-thirds witnessed adverse impacts on supply chain reliability (32 experienced reductions in profits (net income). percent) than firms from other regions. In comparison, many more firms in the Middle East and North Africa Demand and Supply Effects experienced adverse impacts on demand (82 percent) than firms from any other region, possibly reflecting the Both demand and supply shocks continued to be significant impact of depressed commodity demand and widespread in the third quarter, albeit with reduced prices across this region. severity from the level reported in earlier survey rounds (Figure 1). Figure 1: The adverse effects of the COVID-19 pandemic on MNE affiliates persisted in Q3 2020 Overall, two-thirds of respondents reported experiencing reduced demand. On average, survey respondents experienced a 12 percent decline in demand in the third quarter of 2020, relative to the same period in 2019. On the supply side, almost three-quarters of respondents experienced reduced worker productivity—a deterioration from previous quarters. Furthermore, about 40 percent of MNE affiliates experienced a decline in supply chain reliability. Of the respondents adversely affected in this way, over one-half experienced delays in the receipt of inputs and input shortages from suppliers, while others experienced delays in outbound logistics to customers (40 percent) and issues with the quality of inputs (29 percent) (Figure 2). Still, despite the supply chain disruptions, respondents saw a 10-percent average decline in input costs. This decline reflects decreases in the price of key inputs such as energy and raw materials, which largely offset the price impacts of supply chain disruptions.2 Firms in the manufacturing sector generally experienced larger declines in performance. As expected, supply chain impacts were more acute in the manufacturing sector, where 55 percent of MNE affiliates experienced adverse impacts on supply chain reliability (compared to 28 percent in services) (Figure 3). Firms in the manufacturing sector were also more likely to have experienced adverse effects on demand and worker productivity than firms in the services industry. This pattern reflects how surveyed MNE affiliates in services tend to be in subsectors such as business and IT services (where foreign ownership is more Source: Computation based on the October-November 2020 Investor Confidence Pulse Survey. common), which have been among the most resilient 2 Source: https://www.imf.org/-/media/Files/Research/CommodityPrices/Monthly/Table1a.ashx 3 | Page THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S Figure 2: The adverse effects of the COVID-19 Revenue and Profits pandemic on the supply chain in Q3 2020 The adverse impacts on MNE affiliates’ operations in developing countries were evident in their financial performance. Two-thirds of respondents experienced adverse effects on revenue and profits (net income) in the third quarter, with average declines of 12 percent across both metrics relative to the same period in 2019. The pattern of revenue and profit impacts varied across different types of firms. Smaller-sized respondents experienced adverse revenue outcomes at higher rates than large respondents (73 percent versus 58 percent), with a similar pattern for adverse effects on profits (73 percent versus 61 percent). In addition, higher percentages of manufacturing firms experienced adverse financial impacts than did services firms. Across regions, fewer MNE Source: Computation based on the October-November 2020 Investor Confidence Pulse Survey. affiliates from Asia (both East Asia and Pacific and South Asia) experienced adverse impacts on revenue and profits Employment, Production, and Investment than firms from other regions, while firms from Europe and Central Asia seem to have suffered the most. Most MNE affiliates have scaled back their operations in response to COVID-19. Half of them report reducing their employment (by 10 percent on average), although this may reflect reduced hours or furloughs rather than Explore the Q3 MNE Pulse Survey data online. layoffs per se.3 Firm production adjusted accordingly, with approximately 60 percent of MNE affiliates reporting a reduction in overall output (with an average decrease of 11 percent). MNEs continued to delay, scale back, or cancel planned investments in the third quarter as the crisis continued and uncertainty remained high. Two-thirds of MNE affiliates reported reducing investments in their countries of operations (a similar share to the second quarter) by an average of 12 percent. These effects were also more acute in the manufacturing sector, with 62 percent of manufacturing respondents reporting reduced employment, compared to 43 percent of services respondents. Likewise, 72 percent and 70 percent of manufacturing respondents report reduced output and investment, respectively, compared to 44 percent and 61 percent of services respondents. Again, this likely reflects the resilience of subsectors such as business and IT services. Compared to large enterprises, a greater portion of smaller firms4 experienced adverse effects on employment (58 percent versus 48 percent), with the adverse impacts on investment comparable across firms of different sizes. Fewer firms in the East Asia and Pacific reduced investment in the quarter than in other regions (56 percent versus 65 percent overall). 3 Evidence from another World Bank survey of businesses suggests that 64 percent of firms have reduced hours, wages, and granted paid and unpaid leave rather than laying off workers. See http://documents1.worldbank.org/curated/en/399751602248069405/pdf/Unmasking-the-Impact-of-COVID-19-on-Businesses-Firm-Level- Evidence-from-Across-the-World.pdf. 4 Large enterprises are defined as those with 250+ employees; smaller enterprises are those with 1 to 249 employees. 4 | Page THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S Figure 3: The adverse effects of COVID-19 pandemic on MNE affiliates in Q3 2020 by region, size, and sector Note: Each figure represents the share of firms in a given region, size group, or sector that experienced adverse impacts. Source: Computation based on the October-November 2020 Investor Confidence Pulse Survey. 5 | Page THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S Anticipated Effects of COVID-19 on Foreign Investors in the Last Quarter of 2020 (October–December 2020) With the course of the pandemic and economic crisis quarter (52 percent, down from 65 percent). A section uncertain, the results of the third global pulse survey below in this report (Changes to Investment and Supply indicate that MNE affiliates anticipate only limited Chains in Response to COVID-19) explores the outlook improvements in the intensity and prevalence of for investment beyond just the next quarter, asking MNE pandemic-induced shocks in the fourth quarter of 2020. affiliates about their parent company’s investment plans The results of the survey indicate that most respondents for their host country over the coming years. (93 percent) expect to experience adverse effects on at least one dimension in the fourth quarter, only slightly In the fourth quarter, a higher share of manufacturing down from the third quarter (97 percent). MNE affiliates expect adverse impacts in employment (61 percent versus 47 percent) and output (69 percent versus Demand and Supply Effects 43 percent), compared to services sector MNE affiliates. MNE affiliates expect a slight recovery in demand, with 56 Figure 4: MNE affiliates expect the intensity and percent projecting lower demand than normal in the prevalence of pandemic-induced shocks to slightly fourth quarter (down from 63 percent in the third quarter) ease in Q4 2020 (Figure 4). The anticipated magnitude of the adverse effect (8 percent) is also marginally less severe than what was experienced in the third quarter (12 percent). Supply- side constraints are also expected to ease somewhat, with the share of firms expecting to face reduced worker productivity down to 63 percent (from 72 percent in the third quarter). A third of MNE affiliates report an unfavorable outlook for supply chain reliability (down from 41 percent). Shortages are expected to abate, but the prevalence of delays in receipt of inputs is expected to increase among these firms (Figure 5). Across regions, firms from the Middle East and North Africa expect the most substantial improvement in supply chain reliability in the fourth quarter compared to the third quarter (Figure 6). The shares of MNE affiliates expecting higher input costs or reduced liquidity changed only marginally. However, MNE affiliates expect input costs to remain lower in the fourth quarter, relative to the same period in 2019. This effect represents a continuation of the decline in input costs MNE affiliates reported in the third quarter (depicted in Figure 1 above). Employment, Production, and Investment The outlook for employment and output is less optimistic, with the share of firms expecting adverse impacts in these areas mostly unchanged from the third quarter. The outlook for investment is somewhat more positive, with a smaller share of respondents expecting to reduce Source: Computation based on the October-November 2020 Investor Confidence Pulse Survey. investment in their country of operation in the fourth 6 | Page THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S Figure 5: The anticipated adverse effects of the Revenue and Profits COVID-19 pandemic on the supply chain in Q4 2020 The majority of surveyed MNE affiliates (nearly 60 percent) still expect income and revenue to be adversely affected in the fourth quarter, although this represents a slight improvement over the third quarter when about 65 percent of MNE affiliates were adversely affected. The average expected impacts on income and revenue, 9 percent and 7 percent respectively, are also slightly lower than for the third quarter (12 percent for both). Across firms, firms in the manufacturing sector and smaller firms are more likely to expect adverse impacts in the fourth quarter. Across regions, MNE affiliates in the Middle East and North Africa actually expect adverse impacts to become more common in the fourth quarter relative to the third quarter. In contrast, only one-third of Source: Computation based on the October-November 2020 Investor Confidence Pulse Survey. South Asian firms expect the adverse effects on revenue and profits to persist, signaling a much-improved outlook On average, smaller firms’ outlooks are more negative in for the rest of the year. their outlook than large firms. Across regions, MNE affiliates in the Middle East and North Africa anticipate the most substantial improvement in employment in the fourth quarter (share expecting adverse impacts down Explore the Q3 MNE Pulse Survey data online. from 68 percent to 44 percent), perhaps reflecting the low base from which to improve. South Asian firms expect significant improvements in investment and output (share expecting adverse impacts down from 63 percent to 35 percent, and from 56 percent to 41 percent, respectively). 7 | Page THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S Figure 6: The anticipated adverse effects of COVID-19 pandemic on MNE affiliates in Q4 2020 by region, size, and sector Note: Each figure represents the share of firms in a given region, size group, or sector that experienced adverse impacts. Source: Computation based on the October-November 2020 Investor Confidence Pulse Survey. 8 | Page THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S Multinationals’ Support for Affiliates and Suppliers in Response to COVID-19 The connections between multinational parent companies, prevalent among MNE affiliates in the East Asia and MNE affiliates, and their supplier networks create a Pacific region (81 percent compared to 60 percent overall) complex web of international production relationships. (Figure 9). MNE affiliates in South Asia were also While these connections mean that economic events in relatively more likely to have received support directed one location can have ramifications elsewhere, they also towards product diversification (73 percent versus 55 create opportunities for firms to support affiliates and percent for all MNE affiliates who received parent suppliers in times of crisis. Such support mechanisms can company support). MNE affiliates from Sub-Saharan bolster resilience and accelerate recovery throughout the Africa were more likely to have received technological or supply chain, especially in developing countries. managerial support to continue operations (84 percent versus 74 percent overall). The results of the third global pulse survey indicate that such support has been extensive in the wake of the Across firm types, smaller-sized businesses were more COVID-19 crisis. Most MNE affiliates report having likely to receive new technology or guidance for the received support from their foreign parent company, and continuation of operations (84 percent versus 67 percent), more than half have also provided support to their own while large firms were relatively more likely to receive local suppliers. support in the form of new technology for supply chain mapping and management (42 percent versus 26 percent). There are indications that these support mechanisms are linked, with support from parents to affiliates correlated Supplier Support with support from affiliates to local suppliers. Support can also extend from MNE affiliates themselves Parent Company Support to their local suppliers in host countries. The results show Sixty-one percent of MNE affiliates received some form that 55 percent of respondents have offered support to of support from their foreign parent, with a similar their suppliers since the onset of the crisis, with similar percentage reported by firms operating in the percentage was reported across sectors. Across different manufacturing and services sectors and by businesses of regions, support for suppliers was most common in Sub- different sizes. Looking across regions, more firms from Saharan Africa (68 percent) and least common in Latin the Middle East and North Africa region received parent America and the Caribbean (45 percent). support than any other area (72 percent of respondents). Figure 7: Foreign parent company support for MNE In comparison, fewer than one-half of MNE affiliates in affiliates by region Latin America and the Caribbean received support from parent companies (Figure 7). Among MNE affiliates that received parent company support, the vast majority received new technologies or managerial guidance to continue operations (Figure 8). Examples of such support include IT tools for remote work and advice on operations. A sizeable share (60 percent) received financial support from foreign parent companies, in the form of credit, grants, or equity injections. Additionally, 55 percent received new technologies or managerial guidance to diversify product offerings, and 35 percent were provided new technologies for supply chain mapping and management. While trends in the nature of support received were broadly consistent across regions and sectors, financial Source: Computation based on the October-November 2020 Investor Confidence Pulse Survey. support from the parent company was particularly 9 | Page THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S Figure 8: Types of support MNE affiliates received Figure 10: Types of support MNE affiliates from parent companies provided to suppliers Source: Computation based on the October-November 2020 Investor Confidence Pulse Survey. Source: Computation based on the October-November 2020 Investor Confidence Pulse Survey. Figure 9: Parent company support by region Figure 11: Supplier support by region Source: Computation based on the October-November 2020 Investor Confidence Pulse Survey. Source: Computation based on the October-November 2020 Investor Confidence Pulse Survey. 10 | P a g e THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S Among businesses that offered support to local suppliers, Figure 12: MNE affiliate support from parent about 70 percent provided new technologies or managerial company and support to suppliers guidance to allow the continuation of operations, 62 percent provided financial support, 50 percent provided suppliers new technologies or managerial guidance to diversify product offerings, and 46 percent new technologies for supply chain mapping and management (Figure 10). Across regions, providing suppliers with new technology or managerial guidance for the continuation of operations was particularly common in South Asia (84 percent) and East Asia and Pacific (83 percent) (Figure 11). In contrast, financial support for suppliers was more prevalent among MNE affiliates in Europe and Central Asia (81 percent). The kinds of support provided to suppliers were mostly consistent across sectors and business sizes. Source: Computation based on the October-November 2020 Investor Confidence Pulse Survey. Relationship Between Parent and Supplier Support Survey findings provide suggestive evidence that the Explore the Q3 MNE Pulse Survey data online. support provided by foreign parent companies can flow through to local supplier networks in developing countries. MNE affiliates that received support from their foreign parent were significantly more likely to provide support to their own suppliers, with 63 percent of such firms doing so (compared to 44 percent of firms that had not received parental support) (Figure 12). This pattern is largely driven by supply chain support: MNE affiliates that received new technology or managerial guidance for supply chain mapping or product diversification from their parent companies were more likely to provide similar support to their local suppliers. In contrast, there was no significant correlation in the survey data between receiving financial support from the parent company and providing financial or other support to a local supplier. 11 | P a g e THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S Changes to Investment and Supply Chains in Response to COVID-19 Across successive rounds of the global pulse survey, the are also prominent, with location diversification, significant impacts of the COVID-19 crisis on investment nearshoring, reshoring, shifting to faster-growth markets, by MNEs have been clear. Investment in developing and shifting to lower-cost countries all cited by more than countries is under pressure from reduced income, an 40 percent of respondents. uncertain global economic outlook, and changes in global The importance of parent company total investment holds value chains as multinationals reevaluate production across regions, sectors, and business sizes. The next most locations and look to bolster supply-chain resilience. cited factor for manufacturing firms after global Responses to new questions in the third global pulse investment levels is nearshoring (40 percent), and the least survey provide insights on expected changes to investment cited is reshoring (26 percent). For firms in the services plans and sourcing decisions of MNE affiliates. Almost 40 sector, the second most cited factor is diversification (50 percent of MNE affiliates report that their foreign parent percent), and the least is shifting to lower-cost countries plans to invest less in their host country in the future (33 percent). (Figure 13).5 In total, 85 percent expect investment in the host country to remain the same or decline. Investment Expectations Across Regions Just 13 percent report that investment is expected to The majority of MNE affiliates in each region expect no increase, highlighting the significant investment challenges change or less investment from the parent company, and, facing developing countries in the coming years. consistent with the overall trend, only a small percentage of MNE affiliates indicate the parent company plans to Relatedly, around 40 percent of MNE affiliates report invest more (Figure 15). making changes to their own input supply networks. Figure 13: MNE affiliates with changes in Drivers of Investment Changes investment by the parent company Overwhelmingly, changes in expected investment in the local host country appeared to be driven by changes in the global level of investment by an affiliate’s parent company (Figure 14). This is particularly the case where firms expect local investment to decrease, with 88 percent of such firms citing their parent’s global level of investment as a contributing factor. At the same time, parent companies’ investment plans also reflect the desire to reorganize global value chains and production sites. Around 40 percent of firms expecting local investment to decrease cite diversifying production locations as a factor and about 40 percent cite nearshoring production. Other factors, such as reshoring, shifting production to faster-growing markets, and shifting to lower-cost areas, are cited less often. Among the small share of firms that expect local investment to increase, changes in the parent company’s global investment level are again key drivers, cited by 75 percent of such respondents. However, other drivers Source: Computation based on the October-November 2020 Investor Confidence Pulse Survey. 5 This result differs somewhat from the 52 percent of MNE affiliates that expected to reduce investment in their host country in the fourth quarter of 2020, described earlier. This is likely to reflect the longer time horizon of this question and distinctions between local investment by the affiliate and foreign investment by the parent company. 12 | P a g e THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S Figure 14: Drivers of investment changes by parent Figure 15: Parent company investment changes by company region Parent company plans to invest less (n=119) Parent company plans to invest more (n=39) Parent company plans to invest either more or less (n=158) Source: Computation based on the October-November 2020 Investor Confidence Pulse Survey. Source: Computation based on the October-November 2020 Investor Confidence Pulse Survey. However, the results do indicate that some regions may Changes to Input Sourcing by MNE Affiliates see more intense changes in MNE investment (both As adjustments to parent-company investments and increases and decreases) in the coming years. For example, supply chains begin to play out, a third of MNE affiliates 60 percent of firms in the East Asia and Pacific region also report undertaking adjustments to their own supply report that investment will change in one direction or chains by diversifying or changing the countries from another, likely reflecting this region’s greater integration which they source inputs (Figure 16). into the global value chains that MNEs may now reorganize. MNE affiliates’ reported plans are in line with an increased focus on supply chain resilience in a post-pandemic In contrast, a smaller share of firms in Sub-Saharan Africa environment. Among MNE affiliates planning to change (44 percent) and South Asia (43 percent) expect their sourcing strategy, 59 percent report planning to investment levels to change, likely reflecting a lower source more inputs from suppliers found in nearby existing level of integration. countries (nearshoring), 53 percent are seeking to source Despite commentary on the potential for global value from more countries than before (diversification), and 41 chains to shift away from China, there is limited survey percent plan to source more inputs from suppliers in their evidence of such a shift. China has a relatively high share host country (reshoring) (Figure 17). of firms expecting to increase investment (20 percent) and Across firms, more firms in the services sector report a relatively low share expecting to reduce investment (33 shifting towards inputs from local suppliers (50 percent percent). versus 33 percent for manufacturing). Also, fewer smaller- Interestingly, for Chinese MNE affiliates that expect their sized businesses (31 percent) report making changes to parent to invest more in China, reshoring and shifting to their input sourcing than large companies (42 percent). faster-growth markets rank alongside changes in total Across regions, the shares of MNE affiliates that plan to investment as the most common factors, with each of change their input sourcing is mostly comparable. these cited as a factor by more than 80 percent of respondents. 13 | P a g e THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S Figure 16: MNE affiliates making changes in input Figure 17: Type of changes in input sourcing by sourcing MNE affiliates Source: Computation based on the October-November 2020 Investor Confidence Pulse Survey. Explore the Q3 MNE Pulse Survey data online. Source: Computation based on the October-November 2020 Investor Confidence Pulse Survey. 14 | P a g e THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S Government Support and Policy Environment for Foreign Investors With an adverse outlook for foreign investment in or critically important for them to deal with COVID-19 developing countries, it is vital for governments to take (Figure 19). steps to retain existing investors and attract more investment. More than 50 percent of respondents consider tax relief from their local governments critically important, and 40 The results of the third global pulse survey indicate that percent consider it somewhat important. Similarly, more the vast majority of MNE affiliates have received some than 70 percent of respondents regard information about form of government support in response to the COVID- COVID-19, direct financial support, IPA support with 19 crisis. Furthermore, most firms report that ongoing operational issues, relaxed labor and business regulations, support is needed. There are also indications that foreign debt restructuring, and government trade finance as investors continue to face a changing policy environment somewhat or critically important. for MNE entry and operations. There are no substantial differences in the government Government Support for MNE Affiliates support received or perceived importance of government Survey results show that the vast majority of MNE support among MNE affiliates in different sectors, affiliates (97 percent) have received government support regions, or size categories. Respondents generally report of some sort to counter the pandemic’s effects. This information about COVID-19 as the most common reflects the unprecedented response to the pandemic from government support and tax relief as the most important. governments, including across developing countries. Figure 18: Government support for MNE affiliates to For respondents that received government support, deal with COVID-19 around 70 percent report receiving information about COVID-19 from the host country government, and about 60 percent received help from investment promotion agencies (IPAs) to address operational issues and grievances related to the government’s COVID -19 responses (Figure 18). Half or more of respondents report receiving trade finance (e.g., letters of credit, export credits), receiving tax relief or direct financial support (e.g., tax cuts, tax credits, deferred payments), experiencing relaxed labor or business regulations (e.g., waivers from licensing requirements, extension of registration deadlines), and receiving government assistance with restructuring or postponing private debt. Importance of Future Government Support As the crisis continues to weigh on economies, governments need to consider how long support measures should remain in place and whether further efforts are needed. When asked about the importance of future government support, most MNE affiliates report that local government support of some kind will be either somewhat Source: Computation based on the October-November 2020 Investor Confidence Pulse Survey. 15 | P a g e THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S Figure 19: Importance of government assistance for Figure 20: Changes in foreign investment rules faced MNE affiliates by MNE affiliates Source: Computation based on the October-November 2020 Investor Confidence Pulse Survey. Source: Computation based on the October-November 2020 Investor Confidence Pulse Survey. A higher percentage of smaller-sized companies consider deterioration, or no change in their host country’s overall tax relief to be critically important than large companies policy environment for FDI. Respondents are classified as (60 percent versus 47 percent). More firms from East Asia having experienced an overall improvement if most of the and Pacific (60 percent) rate tax relief as critically changes they report experiencing made the environment important than those from other regions. more business-friendly (the same logic was applied to unfavorable changes). Policy Environments for Foreign Investors In total, 39 percent experienced an overall improvement, As governments have responded to the COVID-19 crisis, while 37 percent experienced a general deterioration in the many have also introduced changes to the rules that apply policy environment for FDI. Twenty-four percent to foreign investors. Such changes may have important experienced no change or an equal amount of positive and implications for developing countries’ recovery prospects, negative changes. There are no substantial differences in as a more business-friendly policy environment for foreign policy environment changes reported by firms across investors has the potential to encourage FDI and help sectors or business sizes. revive local economies. Survey results also provide evidence of the importance of Survey results present a mixed picture of MNE affiliates’ the policy environment to MNE affiliates’ performance assessment of FDI-related policy changes. While more and investment. MNE affiliates that report an overall than half of MNE affiliates report no change in potential improvement in the regulatory environment tend to barriers to operations and investments across each policy expect greater improvements in performance from the area surveyed, 87 percent experienced at least one change third quarter to the fourth quarter of 2020. Relatedly, the that made the policy environment more business-friendly, survey provides suggestive evidence that host countries’ while 94 percent experienced at least one change making policy environments remain important determinants of the environment less business-friendly (Figure 20). These MNEs’ investment decisions amidst COVID-19 and findings highlight that policy changes in response to the potential GVC realignments. Forty-six percent of MNE crisis have been far from uniform. affiliates that experienced an overall deterioration in the policy environment reported parent company plans to To assess the potential impact of changing policy invest less in the future, compared to just 33 percent of environment for MNE affiliates, firms are further affiliates that reported experiencing an overall classified as having experienced an improvement, improvement in the policy environment (Figure 21). . 16 | P a g e THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S Figure 21: MNE investment change by policy environment Source: Computation based on the October-November 2020 Investor Confidence Pulse Survey. Explore the Q3 MNE Pulse Survey data online. 17 | P a g e THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S Appendix A: About the Survey The data for this study comes from the third quarterly pulse 6. Support from the government, including if MNE affiliates survey conducted between October 20 and November 12, received government support, the type of support 2020. Like the earlier two rounds, the third-round pulse received, and MNE affiliates’ perceptions of the survey’s goal is to monitor MNE performance along importance of several types of government supports. several supply and demand dimensions, gain information on business strategy adjustments, and assess policy 7. Policy environment change, including whether potential responses. barriers to investment and operations of foreign- owned companies have changed and in what ways. Survey Coverage Survey Administration The survey involved interviewing senior executives in affiliate operations of MNEs in the following six regions: The World Bank Group commissioned KPMG LLP East Asia and Pacific, Europe and Central Asia, Latin (KPMG) and Forbes Media LLC (Forbes, as KPMG’s America and the Caribbean, the Middle East and North subcontractor) to conduct the third pulse survey. The Africa, South Asia, and Sub-Saharan Africa. The 305 survey was conducted via phone interviews primarily, with MNEs that responded to the survey represented the six some respondents completing the survey on an online regions (about 50 respondents from each region) and the interface if that was the respondent’s preference. The manufacturing and service sectors (about 150 respondents interviews were conducted in multiple business languages. from each sector). English was the primary language, with the survey translated into other languages to meet the regional targets. Survey Content Translations were made into Arabic, Chinese, and Spanish. Questions were organized into the following sections: Each interview was approximately 15 minutes long and was conducted at times agreeable to the respondents in their 1. General information on the company and interviewee , local times. Respondents participated in and completed the including host and source country, position, number survey anonymously to protect their privacy and encourage of employees, total asset, sector, and sub-sector. participation and candid responses. The survey data was delinked from individual responses. 2. The effect of COVID-19 on the third quarter of 2020, including the company’s performance on various The survey was launched on October 20, 2020 and the dimensions compared to the same period in 2019 and fieldwork was completed on November 12, 2020. adverse impacts on aspects of the supply chain. Data Collection and Data Summary 3. The expected effect of COVID-19 in the fourth quarter of 2020, including the company’s expectation of its The survey data set contains 305 responses from MNEs performance in various dimensions compared to the operating in 34 developing countries. The figures below same period in 2019 and anticipated adverse effects present the distributions of respondents by region and on the supply chain for the fourth quarter of 2020. country of operation (Figure 22), foreign parent company location (Figure 23), business size separately by number of 4. Support from the parent company and support to suppliers, employees (Figure 24) and total assets (Figure 25), the including if MNE affiliates received parent company respondent’s position (Figure 26), and the support in response to COVID-19, the type of parent sector/subsector (Figure 29). support received, and the type of support provided to suppliers if any. Based on internal data available from Forbes’ database, the sample distributions by source company employee count 5. Investment plans, including the parent company’s (Figure 27), source company revenue (Figure 28), and investment plan changes and changes in the supply source company sector (Error! Reference source not chain in terms of input sourcing. found.) and are also presented below. 18 | P a g e THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S Figure 22: Sample distribution by region and country Figure 23: Sample distribution by location of foreign of operation parent Region/Host Country Count Percent Region/Source Country Count Percent East Asia & Pacific 40 13% East Asia & Pacific 50 16% Australia 7 2% Cambodia 2 1% China 3 1% China 30 10% Hong Kong (S.A.R.) 4 1% Indonesia 4 1% Japan 19 6% Malaysia 6 2% New Zealand 1 0% Philippines 4 1% Singapore 4 1% Vietnam 4 1% South Korea 2 1% Europe & Central Asia 50 16% Europe & Central Asia 115 38% Bulgaria 8 3% Austria 2 1% Georgia 8 3% Belgium 5 2% Russia 16 5% Denmark 2 1% Turkey 10 3% Finland 1 0% Ukraine 8 3% France 25 8% Latin America & the 51 17% Germany 17 6% Caribbean Ireland 3 1% Argentina 8 3% Italy 2 1% Brazil 14 5% Luxembourg 3 1% Cuba 4 1% Netherlands 3 1% Ecuador 5 2% Norway 2 1% Jamaica 2 1% Spain 4 1% Mexico 14 5% Sweden 3 1% Peru 4 1% Switzerland 11 4% Middle East & North 50 16% United Kingdom 32 10% Africa Latin America & the 4 1% Algeria 4 1% Caribbean Egypt 12 4% Argentina 2 1% Iran 10 3% Brazil 1 0% Jordan 10 3% Uruguay 1 0% Lebanon 6 2% Middle East & North Africa 13 4% Morocco 8 3% Bahrain 1 0% South Asia 54 18% Israel 1 0% Bangladesh 12 14% Saudi Arabia 5 2% India 31 10% United Arab Emirates 6 2% Maldives 4 1% North America 110 36% Sri Lanka 8 3% Canada 4 1% Sub-Saharan Africa 50 16% United States of America 106 35% Cote d’Ivoire 4 1% South Asia 15 5% Kenya 6 2% India 14 5% Namibia 6 2% Mauritius 1 0% Nigeria 10 3% Sub-Saharan Africa 10 3% South Africa 14 5% Kenya 1 0% Tanzania 10 3% South Africa 6 2% Total 305 100% Swaziland 1 0% Total 305 100% 19 | P a g e THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S Figure 24: Sample distribution by size (number of Figure 27: Sample distribution by parent company employees) employee size7 Size Count Percent Source Company Count Percent Smaller (<250 Employee Size employees) 132 43% 10,000+ 226 74% Larger (>=250 5000-9999 21 7% employees) 173 57% 1000-4999 31 10% Total 305 100% 500 to 999 12 4% Less than 500 15 5% Figure 25: Sample distribution by total asset Total 305 100% Assets Count Percent Figure 28: Sample distribution by parent company USD 2-5 million 19 6% revenue8 USD 5-10 million 55 18% Source Company Revenue Count Percent USD 10-50 million 100 33% Size >USD 50 million 130 43% $10 billion+ 154 50% Do not know 1 0% $5 billion to $9.9 billion 31 10% Total 305 100% $1 billion to $4.9 billion 71 23% $500 million to $999 million 18 6% Figure 26: Sample distribution by respondent’s Less than $500 million 31 10% position6 Total 305 100% Respondent’s Count Percent position Country General Manager 63 21% Country Finance Head 64 21% Country Strategy Head 53 17% Country Sales Manager 71 23% Country Operations Manager 54 18% Total 305 100% 6 Based on internal database from Forbes. 8 ibid. 7 ibid. 20 | P a g e THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S Figure 29: Sample distribution by sector and subsector Sector/subsector Count Percent Manufacturing 152 50% Basic metals 4 1% Basic pharmaceutical products and pharmaceutical preparations 12 4% Beverages 8 3% Chemicals and chemical products 7 2% Coke and refined petroleum products 2 1% Computer, electronic and optical products 19 6% Electrical equipment 14 5% Fabricated metal products, except machinery and equipment 2 1% Food products 16 5% Machinery and equipment not elsewhere classified 4 1% Motor vehicles, trailers, and semi-trailers 22 7% Other manufacturing 25 8% Other transport equipment 1 0% Paper and paper products 4 1% Repair and installation of machinery and equipment 1 0% Rubber and plastics products 2 1% Tobacco products 4 1% Wearing apparel 4 1% Wood and products of wood and cork, except furniture; of articles of 1 0% straw and plaiting materials Services 153 50% Business services 38 12% Computer and software services 20 7% Electricity, gas, and water 14 5% Financial services (including insurance) 32 10% Health 6 2% Hotels, restaurants, and tourism 6 2% Logistics, transport, and storage 6 2% Media 5 2% Real estate 2 1% Telecommunications 12 4% Wholesale and retail trade 12 4% Total 305 100% 21 | P a g e THE IMPACT OF COVID-19 ON FOR EI GN INVESTOR S Appendix B: Evidence from Similar Surveys Several organizations have also sought to assess the pandemic’s effects on business decisions and investment by directly asking global corporate decision-makers through business surveys. The World Bank’s quarterly global pulse survey for Q3 2020 contributes to this growing body of evidence by focusing on affiliates of MNEs operating in developing countries. Nevertheless, surveys by other organizations have often uncovered similar themes: • KPMG updated its survey of global CEOs in October, finding that 60 percent of chief executives were more confident about growth than they were at the onset of the pandemic. However, only 43 percent expected growth in the United States and 37 percent expected growth globally in the next three years. 9 • YPO’s global survey of chief executives in October found that 23 percent of CEOs viewed the pandemic’s impact on business outlook as significantly more damaging than in March 2020.10 In their October update to the survey, 49 percent of CEOs reported that their business outlook had become more negative since March, and 35 percent anticipated continuing adverse effects on revenue in the coming year, an improvement from the preceding survey. Further, 30 percent of chief executives expected their total number of employees and fixed investment to decline more than 10 percent in a year. • PricewaterhouseCoopers (PwC) updated its survey of global CFOs in October, finding that 54 percent of CFOs expected a decline in revenue or profits due to the crisis. 11 However, 28 percent of CFOs expected an increase in revenue or profits, up from 25 percent in September and 11 percent in June. • In a series of surveys conducted by McKinsey between March and October, the share of executives expecting a global economic contraction in the next six months declined to 29 percent, down from 66 percent at the highest point in April.12 Likewise, the share of companies expecting profits to decrease declined consistently since April (when it was above 60 percent), with only 27 percent of respondents expecting a decrease in October. 9 Results are from two surveys of CEOs conducted in 2020. The first survey included 1,251 CEOs and was conducted in January 2020. The second survey of 315 CEOs was conducted between July and August 2020. More information: https://assets.kpmg/content/dam/kpmg/us/pdf/2020/09/2020-us-ceo-outlook.pdf. 10 A global survey of chief executives who are members of YPO, an organization of chief executives spanning about 130 countries. Results are based on the second round of the survey in October 2020, which included 2,572 respondents from 100 countries. More information: https://www.ypo.org/2020/10/ypo-global-pulse-survey-offers- glimpse-into-what-ceo-of-the-future-looks-like/. 11 Results are from a survey of 176 CFOs conducted in October 2020. More information: https://www.pwc.com/us/en/library/cfo.html. 12 A global survey of business executives. Results are based on the October 2020 round of the survey, which included more than 2,241 respondents. More information: https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-coronavirus-effect-on-global-economic-sentiment. 22 | P a g e THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S Table of Figures Figure 1: The adverse effects of the COVID-19 pandemic on MNE affiliates persisted in Q3 2020 ......................... 3 Figure 2: The adverse effects of the COVID-19 pandemic on the supply chain in Q3 2020 ...................................... 4 Figure 3: The adverse effects of COVID-19 pandemic on MNE affiliates in Q3 2020 by region, size, and sector .. 5 Figure 4: MNE affiliates expect the intensity and prevalence of pandemic-induced shocks to slightly ease in Q4 2020 .................................................................................................................................................................................... 6 Figure 5: The anticipated adverse effects of the COVID-19 pandemic on the supply chain in Q4 2020 .................. 7 Figure 6: The anticipated adverse effects of COVID-19 pandemic on MNE affiliates in Q4 2020 by region, size, and sector .......................................................................................................................................................................... 8 Figure 7: Foreign parent company support for MNE affiliates by region ................................................................... 9 Figure 8: Types of support MNE affiliates received from parent companies .......................................................... 10 Figure 9: Parent company support by region ............................................................................................................... 10 Figure 10: Types of support MNE affiliates provided to suppliers ........................................................................... 10 Figure 11: Supplier support by region ........................................................................................................................... 10 Figure 12: MNE affiliate support from parent company and support to suppliers ................................................... 11 Figure 13: MNE affiliates with changes in investment by the parent company ....................................................... 12 Figure 14: Drivers of investment changes by parent company ................................................................................... 13 Figure 15: Parent company investment changes by region ........................................................................................ 13 Figure 16: MNE affiliates making changes in input sourcing .................................................................................... 14 Figure 17: Type of changes in input sourcing by MNE affiliates .............................................................................. 14 Figure 18: Government support for MNE affiliates to deal with COVID-19 ............................................................. 15 Figure 19: Importance of government assistance for MNE affiliates ........................................................................ 16 Figure 20: Changes in foreign investment rules faced by MNE affiliates ................................................................. 16 Figure 21: MNE investment change by policy environment ...................................................................................... 17 Figure 22: Sample distribution by region and country of operation .......................................................................... 19 Figure 23: Sample distribution by location of foreign parent ..................................................................................... 19 Figure 24: Sample distribution by size (number of employees) ................................................................................. 20 Figure 25: Sample distribution by total asset ............................................................................................................... 20 Figure 26: Sample distribution by respondent’s position............................................................................................ 20 Figure 27: Sample distribution by parent company employee size ............................................................................ 20 Figure 28: Sample distribution by parent company revenue ...................................................................................... 20 Figure 29: Sample distribution by sector and subsector ............................................................................................. 21 23 | P a g e THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S References KPMG. 2020. Directors Quarterly: October 2020. https://boardleadership.kpmg.us/relevant- topics/articles/2021/directors-quarterly-october-2020.html McKinsey & Company. 2020. The Coronavirus Effect on Global Economic Sentiment, October 29, 2020. https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-coronavirus-effect-on- global-economic-sentiment PricewaterhouseCoopers. 2020. CFO Insights: Latest Findings from PwC’s Pulse Survey. https://www.pwc.com/us/en/library/cfo.html Saurav, Abhishek; Kusek, Peter; and Kuo, Ryan. April 2020. The Impact of COVID-19 on Foreign Investors: Early Evidence from a Global Pulse Survey. World Bank, Washington, DC. https://openknowledge.worldbank.org/handle/10986/33774 Saurav, Abhishek; Kusek, Peter; Kuo, Ryan, and Viney, Brody. September 2020. The Impact of COVID-19 on Foreign Investors: Evidence from the Second Round of a Global Pulse Survey. World Bank, Washington, DC. https://blogs.worldbank.org/psd/impact-covid-19-foreign-investors-evidence-second-round-global-pulse-survey Sigmond, Mary. 2020. YPO Global Survey Offers Glimpse at the CEO of the Future. YPO. https://www.ypo.org/2020/10/ypo-global-pulse-survey-offers-glimpse-into-what-ceo-of-the-future-looks-like/ 24 | P a g e 25 | P a g e