THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S : Q1 2021 The Impact of COVID-19 on Foreign Investors: Evidence from the Quarterly Global Multinational Enterprise (MNE) Pulse Survey for the First Quarter of 2021 June 2021 Abhishek Saurav, Peter Kusek, Ryan Kuo, and Brody Viney 1 THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S : Q1 2021 Contents Table of Figures................................................................................................................................................................................... 3 Executive Summary ............................................................................................................................................................................ 4 Introduction ......................................................................................................................................................................................... 5 Effects of COVID-19 on MNE Affiliates in the First Quarter of 2021 ....................................................................................... 6 MNE Capacity Utilization, Recovery, and Expansion Expectations for 2021 ............................................................................. 9 Changes to Investment and Supply Chains in Response to COVID-19 ..................................................................................... 12 Increased Technology Adoption and Sustainability Measures by MNEs .................................................................................... 14 Appendix A: About the Survey ........................................................................................................................................................ 16 2 THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S : Q1 2021 Table of Figures Figure 1: Average year-on-year impact of the COVID-19 pandemic on MNE affiliates over 2020-21..................................... 5 Figure 2: Share of MNE affiliates reporting adverse impacts during Q4 2020 and Q1 2021, and average impact during Q1 2021 (N=300) ...................................................................................................................................................................................... 6 Figure 3: Share of MNE affiliates reporting specific supply chain challenges during Q1 2021 (N=94) .................................... 7 Figure 4: Share of MNE affiliates reporting adverse effects of COVID-19 pandemic in Q4 2020 by sector, region, business model and size (N=300) ..................................................................................................................................................................... 8 Figure 5: MNE’s level of operation in Q1 2021, relative to pre-pandemic levels (N=300) ........................................................ 9 Figure 6: Road to recovery: Expected cumulative share of firms operating at full capacity (N=300)........................................ 9 Figure 7: Share of MNEs that took or expected to take steps to meet increased demand in Q1 and Q2 2021 (N=300) ..... 10 Figure 8: Share of MNEs that expected to take steps to meet increased demand in Q2 2021, by level of operating capacity in Q1 2021 (N=300) ......................................................................................................................................................................... 10 Figure 9: Share of firms citing biggest risks threatening their recovery in 2021 (N=300) ......................................................... 11 Figure 10: Expected changes in investment in the host country (Q3 N=305; Q4 N=329; Q1 N=300) ................................. 12 Figure 11: Level of certainty about parent company’s investment plans for ho st country (N=300) ........................................ 12 Figure 12: Main drivers for the absence of change in investment plans (among respondents expecting investment to remain the same) (N=275) ............................................................................................................................................................................ 12 Figure 13: Policy initiatives mentioned by respondents as encouraging investment in their host country (N = 300) ............ 13 Figure 14: Share of firms that increased take-up of technology and sustainability (N = 300) .................................................. 14 Figure 15: Share of firms that increased take-up of technology and sustainability, by sector (N = 300) ................................. 14 Figure 16: Support from parent foreign company in the adoption of technologies (N = 300) ................................................ 15 Figure 17: Main drivers of the adoption of sustainability measures by MNE affiliates (N = 300) ........................................... 15 Figure 18: Sample distribution by region and country of operation ............................................................................................ 17 Figure 19: Sample distribution by location of foreign parent ....................................................................................................... 17 Figure 20: Sample distribution by size (number of employees) .................................................................................................... 18 Figure 21: Sample distribution by assets in host country .............................................................................................................. 18 Figure 22: Sample distribution by respondent’s position .............................................................................................................. 18 Figure 23: Sample distribution by business sector and subsector (ISIC 4.0) ............................................................................... 19 3 THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S : Q1 2021 Executive Summary • The pandemic’s adverse effects on multinational enterprises (MNEs) in developing countries continued to ease in the first quarter of 2021 (Q1 2021). Impacts remained widespread with 93 percent experiencing at least one adverse impact, but fewer firms report negative demand, output, revenue, and profit impacts (relative to Q1 2020) than in prior survey rounds. The average magnitude of these impacts was also more limited. The recovery in demand has seen price pressures appear, with 52 percent of firms reporting elevated input costs relative to Q1 2020. With input costs excluded, the share of firms reporting any adverse effects fell from 89 percent in Q4 2020 to 79 percent in Q1 2021. • Despite these signs of improvement, 68 percent of firms were still operating below their pre- COVID capacity in Q1 2021. Firms expect a gradual recovery over the coming year, with 52 percent of firms not expecting to return to full capacity until 2022 or later. The excess capacity means that, so far in 2021, firms have mostly focused on increasing output from their existing capital and workforce to respond to recovering demand. Nonetheless, 44 percent of firms expect to invest in new capital and 20 percent expect to expand their workforce in Q2 2021. • The longer-term outlook for foreign investment in developing countries remains subdued. Overall, 92 percent of firms report that their foreign parent had no plans to change (increase or decrease) the company’s level of investment over the next 1-3 years. Just 8 percent of firms expect the level of investment to increase, and there is little evidence of a major reorganization of supply chains with only 15 percent of firms reporting that nearshoring or reshoring was influencing investment plans. • Uncertainty about future demand is the key factor holding investment back, but policy and regulatory restrictions are also a factor for almost half of firms. Removal of restrictive investment policies could be critical to help stimulate new investments, as over half of all respondents cite the relaxation of investment restrictions as one of the top initiatives that would support additional investment. • Survey results confirmed that almost all MNE affiliates have increased their adoption of digital technologies for remote working, e-commerce, and supply chain management in response to the pandemic. Foreign parent companies played a critical role in technology adoption, including directly transferring technologies to their affiliates and providing financial support, guidance, and training. • Half of MNE affiliates also report increasing their focus on sustainability and decarbonization of products and services, with foreign parent companies again playing a critical role. Government policies were the top driver of companies’ adoption of sustainable solutions, but pressure or direction from foreign parent companies to improve environmental performance was also cited by three-quarters of firms. These results show that, as global investors, governments, and consumers increasingly focus on sustainability, this focus will flow through to production in developing countries. 4 THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S : Q1 2021 Introduction For more than a year, the world has been grappling with the unprecedented global health, social, and economic ABOUT THE SURVEY3 crisis caused by the COVID-19 pandemic. Consumer The survey was administrated online from April 14th demand, supply chains, workplaces, and daily life have to May 14th, 2021. The resulting sample comprises been severely affected. Moreover, the crisis continues to 300 MNE affiliates (companies with full or partial impact people, businesses, and economies, including both foreign ownership) across 36 developing countries. developed and developing economies.1 The sample was evenly distributed across the six Since the onset of the crisis, the World Bank’s Global developing regions following the World Bank Investment Climate Unit has been undertaking quarterly Group taxonomy, and across manufacturing and ‘pulse’ surveys of multinational enterprises (MNEs) services sectors in each region. operating in developing countries to assess the effects of the pandemic on the companies’ operations and the outlook for foreign direct investment (FDI).2 MNEs play While significant challenges lie ahead, there are also a critical role in the global economy, and FDI is a key opportunities for policymakers in developing countries to source of capital investment and employment in support new investment that can capitalize on current developing countries, making it an important factor in trends in technology and sustainable investment. economic recovery prospects. Figure 1: Average year-on-year impact of the Looking back on the five survey rounds conducted since COVID-19 pandemic on MNE affiliates over 2020-214 early 2020 reveals the extraordinary business recovery that has been underway, with the average effects on MNE 0% revenues improving from as low as 40 percent below pre- -7% -1.3% crisis levels in Q1 2020, to almost break even in year-on- -12% year terms in Q1 2021 (Figure 1). -2.3% -12% -14% Nonetheless, results from the most recent survey suggest -34% -25% most firms are still operating below full capacity, and the -30% outlook for FDI remains subdued. Survey results also reveal how trends that existed prior to COVID-19 have -37% -38% been accelerated by the pandemic, including digitization, automation, and a growing focus on sustainability. -50% Q1 2020 Q2 2020 Q3 2020 Q4 2020 Q1 2021 Investment Revenues 1 Gill, Indermit, and Phillip Schellekens. “COVID-19 is a developing country pandemic.” Brookings Institute blog, May 27, 2021. https://www.brookings.edu/blog/future-development/2021/05/27/covid-19-is-a-developing-country-pandemic/ 2 Full results from prior rounds of the survey are available at: https://openknowledge.worldbank.org/handle/10986/33774 (first); https://openknowledge.worldbank.org/handle/10986/34638 (second); https://openknowledge.worldbank.org/handle/10986/34924 (third); and https://openknowledge.worldbank.org/handle/10986/35321 (fourth). 3 The fifth round of the survey was conducted by EY Advisory (EY) and Euromoney PLC (Euromoney) on behalf of the World Bank Group. The authors thank Vincent Raufast, Hugo Alvarez, Yannick Cabrol, Clémence Marcout, Clodagh Nash, Lawrence Bowden, Duncan Kerr, and Aura Popa for their contributions to the report. 4 Chart shows results of multiple survey rounds with different sample sizes and methodologies, presented together for illustrative purposes. For Q1 2020, n=104. For Q2 2020, n=78. For Q3 2020, n=305. For Q4 2020, n=329. For Q1 2021, n=300. See prior reports (linked above) for detail on methodologies and sample composition for each survey round. 5 THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S : Q1 2021 Effects of COVID-19 on MNE Affiliates in the First Quarter of 2021 The vast majority of MNE affiliates in developing Importantly, many firms were already experiencing the countries were still feeling the effects of COVID-19 in Q1 early impacts of COVID-19 in the first quarter of 2020, 2021. Overall, 93 percent of firms reported at least one which is the reference period for this survey round. This adverse impact in Q1 2021 (relative to Q1 2020), suggests that demand—as well as other performance unchanged from the prior survey round. However, the indicators—remained below pre-pandemic levels. scale of effects continued to ease from Q4 2020. Demand Answers to subsequent questions on firms’ operating increased, productivity rose, and a growing share of firms capacity in Q1 2021, explored in the next section of the reported elevated input costs as recovery builds report, support this interpretation. momentum. Excluding input costs, the share experiencing at least one adverse impact fell from 89 percent in Q4 Supply chains and input costs 2020 to 79 percent in Q1 2021. Some firms continued to experience problems with the Demand and output recovery reliability of supply chains in Q1 2021. The share of firms that reported adverse supply chain effects (31 percent) and Demand has been consistently improving for the last three the average scale of the impact (minus one percent) quarters and, on average, was one percent higher in Q1 remained largely unchanged from Q4 2020. Among firms 2021 than in Q1 2020 (Figure 2). Similarly, on average, experiencing supply chain issues, input shortages firms reported their total output was 2 percent higher in continued to be the primary concern (Figure 3). Q1 2021, as firms ramped up production to meet demand. At the same time, the share of respondents that reported The share of firms that experienced adverse demand and elevated input costs increased more than four-fold, from output impacts fell to less than 40 percent. Adverse effects just 12 percent in Q4 2020 to 52 percent Q1 2021. The continued to be more prevalent among manufacturing rise in input costs affected more manufacturing firms firms than services, and among smaller firms than large (69 percent) than services firms (35 percent). ones (Figure 4), indicating an uneven recovery. Figure 2: Share of MNE affiliates reporting adverse impacts during Q4 2020 and Q1 2021, and average impact during Q1 2021 (N=300) From January to March 2021, what was your company’s performance in your country of operation, 80% compared to the same period in 2019? 52% 56% 57% 60% 48% 49% 37% 35% 39% 40% 31% 20% 13% 0% -2% 9% -1% 3% -1% 1% 2% -2% -3% -4% -20% Q4 2020 - Share of MNE affiliates reporting adverse impacts Q1 2021- Share of MNE affiliates reporting adverse impacts Average impact Q1 2021 Note: Firms reported impacts as percentage variation from the same quarter in the prior year. Firms are classified as having an adverse impact if they report a negative outcome (or positive for input costs). 6 THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S : Q1 2021 Figure 3: Share of MNE affiliates reporting specific pandemic, and productivity improvements may also signal supply chain challenges during Q1 2021 (N=94) that these investments are beginning to pay off. You indicated that your company has The share of MNEs that reported their employment levels experienced adverse supply chain effects due to were negatively impacted remained comparable to Q4 COVID-19. Can you specify? 2020, despite the increase in output, reinforcing that Shortage of inputs from 70% output per worker improved from pandemic-period lows. suppliers 91% The share of MNEs that reported negative employment Delay with outbound logistics 63% to your company's customers 49% impacts varied widely between small (57 percent) and large Issues with input quality from 11% firms (34 percent), highlighting that the recovery process suppliers 39% remains unevenly distributed across firms (Figure 4). Delay in receipt of inputs from 41% suppliers 33% The negative effects of COVID-19 on MNE investment 0% 20% 40% 60% 80% 100% continued to gradually diminish. In Q1 2021, 37 percent Services Manufacturing of respondents reported reduced investment compared with Q1 2020 levels (down from 43 percent in Q4 2020). While this may in part reflect prices rebounding from a Investment levels were close to Q1 2020 levels, down just low base, the most severe price drops (for example oil one percent on average from Q1 2020. prices) occurred after the end of the Q1 2020 reference period. Another possibility is that price pressures reflect Revenue and profits ongoing costs of supply chain disruptions. However, only Despite the rise in input costs, firms continued to report around a third of respondents that reported elevated input improving revenue and profit results. On average, revenue prices also reported experiencing supply chain issues. and profits were down just 2 and 3 percent respectively in Instead, for many firms, it is likely that price pressures Q1 2021 (relative to Q1 2020), a significant improvement were driven by rapidly rising demand for inputs as the compared to Q4 2020 when firms reported both revenue recovery in global demand builds momentum. Supporting and profits were down as much as 14 percent on average. this conclusion, around two-thirds of firms that reported Firms that reported elevated input costs actually reported elevated input prices also reported experiencing elevated better profit results on average, suggesting that these price demand in Q1 2021. pressures are a sign of broader recovery. 5 Productivity, employment, and investment Regional differences The share of MNEs that reported adverse effects on In every region, the majority of companies reported at worker productivity dropped significantly, from 67 least one adverse impact of COVID-19 from the ten percent in Q4 2020 to 13 percent in Q1 2021. The average business dimensions surveyed (Figure 4). MNEs located effect likewise improved, from minus 13 percent in Q4 in the Middle East and North Africa (MENA) were the most likely to report adverse effects across business 2020 (relative to Q4 2019) to positive 9 percent in Q1 2021 (relative to Q1 2020). dimensions, potentially reflecting the region’s greater dependence on oil prices which remained low in Q1 2021. Again, this may partly reflect that worker productivity had already begun to be affected by the pandemic in the Firms in East Asia and Pacific and South Asia were also reference period. As explored in the next section of the more likely to report reduced demand, output, report, firms primarily sought to increase the productivity employment, investment than firms in other regions. This of their existing workforce to meet growing demand in the may in part reflect the resurgence of COVID-19 cases experienced in some countries in these regions in 2021, early stages of the recovery period. In addition, multiple survey rounds have identified that firms have increased which began to emerge late in Q1 2021. their investments in technology in the wake of the 5World Bank. 2021. Global Economic Prospects: Chapter 4: Emerging Inflation Pressures: Cause for Alarm? June 2021. https://www.worldbank.org/en/publication/global-economic-prospects 7 THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S : Q1 2021 Figure 4: Share of MNE affiliates reporting adverse effects of COVID-19 pandemic in Q4 2020 by sector, region, business model and size (N=300) Sector Region Business model Company size Latin Middle East East Asia Sub-Saharan Europe and America and Export- Market- Total Manufacturing Services South Asia and North <250 emp. >=250 emp. and Pacific Africa Central Asia the oriented oriented Africa Caribbean Supply chain 31% 45% 18% 48% 32% 58% 12% 24% 14% 46% 25% 37% 21% reliability Input costs 52% 69% 35% 46% 54% 38% 66% 44% 64% 27% 10% 17% 12% Liquidity 48% 54% 42% 56% 36% 70% 34% 40% 52% 53% 46% 52% 41% Worker 13% 17% 9% 6% 8% 10% 2% 32% 20% 9% 15% 12% 15% productivity Investment 37% 40% 34% 50% 40% 64% 10% 26% 32% 52% 30% 40% 31% Demand 35% 42% 28% 58% 44% 72% 4% 18% 14% 52% 28% 42% 23% Output 39% 47% 31% 58% 42% 72% 6% 30% 26% 53% 33% 45% 29% Employment 49% 52% 47% 90% 82% 92% 10% 12% 10% 77% 37% 57% 34% Revenue 56% 64% 48% 60% 42% 86% 32% 58% 58% 60% 54% 60% 49% Net income 57% 64% 49% 62% 42% 86% 34% 58% 58% 61% 55% 61% 50% Any business dimension 79% 82% 75% 91% 93% 100% 50% 66% 72% 87% 75% 80% 72% (excl. input costs) Any business 93% 99% 87% 99% 100% 100% 88% 80% 90% 99% 90% 92% 97% dimension Note: Darker shading reflects higher intensity. For example, 45 percent of manufacturing firms surveyed experienced adverse supply chain reliability in the first quarter of 2021, relative to the first quarter of 2020. 8 THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S : Q1 2021 MNE Capacity Utilization, Recovery, and Expansion Expectations for 2021 The potential contribution of MNEs to developing country By contrast, MNEs in services sectors such as business, IT, economies depends in large part on their investments in and financial services, which make up the majority of the productive capital and ability to create good jobs. Yet firms services firms in the observed sample, have been better are unlikely to make new investments and hire new workers able to adapt to the challenges of the pandemic period. while they have spare capacity in the wake of the pandemic. Similarly, 89 percent of export-oriented firms (MNE Survey results suggest that, despite improving economic affiliates producing intermediate or final goods in their host conditions over Q1 2021, most companies have yet to country for export purposes) were below 75 percent of reach a level of production that utilizes their full capacity, their pre-crisis production level, compared to 58 percent of and most do not expect to return to pre-pandemic levels domestic market-oriented ones. of production until 2022 or later. In Q1 2021, firms largely met increasing demand by improving the productivity of Expected return to full capacity existing employees and assets, although there are Looking ahead, most firms expect a long road to recovery. indications that more firms will begin to undertake capital With only one percent of survey respondents operating at investment and hire new workers in Q2 2021. their pre-pandemic capacity in Q1 2021, one additional percent of firms expect to reach full capacity in Q2 2021 Current capacity level and only another 13 percent expect to do so by Q3 2021 For most companies, production remained below pre- (Figure 6). In fact, more than half of firms expect they will pandemic levels in Q1 2021. Overall, more than two thirds only return to their pre-pandemic level of production in (68 percent) of respondents reported operating below 2022 or later. 75 percent of their pre-pandemic capacity, including The most impacted MNEs have the slowest recovery 39 percent operating below 50 percent (Figure 5). trajectory. Eighty-four percent of companies that were Three-quarters of manufacturing companies were below operating below 50 percent of their pre-pandemic levels 75 percent of their pre-crisis production level, compared to forecast that recovery could take until 2022. 60 percent of services companies. This reinforces prior Manufacturing, smaller, and export-oriented firms are also findings that the magnitude of supply and demand shocks less likely to expect they will recover by the end of 2021. resulting from the pandemic have been more severe for MNE affiliates in the manufacturing sector. Figure 5: MNE’s level of operation in Q1 2021, relative Figure 6: Road to recovery: Expected cumulative to pre-pandemic levels (N=300) share of firms operating at full capacity (N=300) From January to March 2021, to what extent was When do you expect your company to return to your company in your host country operating at operating at pre-pandemic capacity (i.e., the pre-pandemic capacity (i.e., the output and output and efficiency levels of 2019)? efficiency levels of 2019)? 100% 100% 50% of pre-pandemic capacity 0% or less 80% 1% 50%-75% of pre-pandemic capacity 60% 31% 39% 75%-95% of pre-pandemic 48% 40% capacity Around 100% of pre-pandemic 20% 15% 1% 2% capacity 0% 29% More than 100% (over pre- Q1'21 Q2'21 Q3'21 Q4'21 2022 pandemic capacity) 9 THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S : Q1 2021 Outlook for capacity expansion in 2021 Figure 7: Share of MNEs that took or expected to take steps to meet increased demand in Q1 and Q2 2021 As noted in the first section of the report, many MNE (N=300) affiliates in developing countries experienced a recovery in demand and increased their level of output in Q1 2021. Which of the following steps were taken / do you However, spare capacity in the wake of the pandemic expect your company to take to meet increased meant that only limited investment in new capital and demand? hiring of new workers was needed to meet this demand. Increased productivity 94% 93% The vast majority of respondents (93 percent) indicated that they relied mainly on their existing assets and Invest in new technology to 60% increase productivity 69% workforce to meet increased demand in Q1 2021, and the same share expected to continue doing so in Q2 (Figure Increase hours for existing 55% workforce 58% 7). This is consistent with the finding that firms experienced large improvements in worker productivity in Invest in new capital to expand 44% capacity 36% this quarter. A majority of firms also adopted complementary strategies of investing in technologies to Expand total workforce 20% 10% increase productivity (69 percent) and increasing hours for their existing workforce (58 percent) in Q1 2021. Not Applicable – Do not expect 1% demand to increase 1% Fewer firms reported they that had taken expansionary 0% 20% 40% 60% 80% 100% steps, such as investing in new capital (36 percent) or Q2 2021 Q1 2021 expanding their total workforce (10 percent) in Q1 2021. Still, a growing share of firms expected to take these steps in Q2, signaling a gradual shift from relying on existing Figure 8: Share of MNEs that expected to take steps capacity to expansion of capacity as recovery continues. to meet increased demand in Q2 2021, by level of operating capacity in Q1 2021 (N=300) Firms that were already operating close to their pre- pandemic capacity levels in Q1 2021 were significantly From April to June 2021, which of the following more likely to invest in new capital and hire new workers steps will your company take to meet increased in Q2, highlighting the close relationship between capacity demand? utilization and expansion (Figure 8). Increase productivity 98% Most firms operating above 75% of their pre-pandemic 91% levels in Q1 expected to invest in new technology Invest in new technology to 99% (99 percent) and capital (81 percent) in Q2, and many increase productivity 41% expected to expand their workforce (41 percent). On the Increase hours for existing 2% other hand, only a small number of those operating below workforce 79% 75% of their pre-pandemic levels expected to make similar Invest in new capital to 81% investments and workforce decisions. Instead, such firms expand capacity 26% generally planned to increase hours for their existing workforce in Q2 to meet increasing demand. Expand total workforce 41% 10% Risks threatening MNEs’ recovery Not applicable – Demand did 1% not increase 1% The resurgence of COVID-19 remains the most significant risk threatening recovery, ranking among the top three 0% 20% 40% 60% 80% 100% concerns for 68 percent of respondents (Figure 9). In light >75% capacity <75% capacity of significant recent surges of COVID-19 in countries such as India, as well as the continued challenges of vaccine access and distribution in developing countries, these 10 THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S : Q1 2021 Figure 9: Share of firms citing biggest risks threatening their recovery in 2021 (N=300) Which of the following pose the biggest risk to recovery for your company in your host country in 2021? Resurgence of COVID-19 and health-related restrictions 36% 17% 15% Economic overheating causing input costs rises 19% 20% 18% Slower than expected recovery in market demand 14% 23% 19% Major restructure of global value chain your company operates in 10% 12% 19% Repayment of debt and other financial obligations 6% 10% 13% New trade barriers and other protectionist measures 7% 10% 11% Removal of COVID-19-related government support 5% 4%3% Climate-related natural disasters 2%4%3% 0% 10% 20% 30% 40% 50% 60% 70% 80% 1st Rank 2nd Rank 3rd Rank concerns are well founded. This highlights the fact that recovery in demand. Other potential risks were cited far dealing with the spread of the disease remains the most less often by firms, demonstrating the importance of important policy priority for governments and will directly overall macroeconomic conditions to firms’ recovery affect the prospects for economic recovery. prospects. Survey data highlight that economic recovery is delicately Interestingly, removal of COVID-19-related government balanced, with risks on both the upside and downside. support was perceived as a risk by very few firms. Given Many firms (57 percent) pointed to the threat of an the evidence in earlier survey rounds that most firms had economic overheating scenario, where rapid global access to some form of government support, this result economic recovery causes input shortages and price suggests that companies may be less dependent on crisis- increases as a key risk. At the same time, a similar share (56 related support in 2021 than in the earlier pandemic period. percent) reported concerns about a slower-than-expected 11 THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S : Q1 2021 Changes to Investment and Supply Chains in Response to COVID-19 Improved economic conditions during Q4 2020 and Q1 Figure 10: Expected changes in investment in the host 2021 have contributed to a stabilization of MNEs’ country (Q3 N=305; Q4 N=329; Q1 N=300) investment plans. However, the longer-term outlook for Are you aware of any plans by your company's FDI in developing countries remains subdued, with foreign parent to change the amount that it uncertainty about future economic conditions holding invests in your host country in the next 1-3 years? back more investment. Still, opportunities remain for governments to encourage investment through policy and Q3 2020 39% 46% 13% regulatory reforms, such as relaxing entry restrictions. Q4 2020 7% 75% 17% Changes to investment plans Q1 2021 92% 8% Overall, 92 percent of respondents expected no change in their parent company’s level of investment in their host 0% 20% 40% 60% 80% 100% country over the next 1-3 years. This result was consistent Don't know Plans to invest less across sectors and regions, and continued a trend towards No change is expected Plans to invest more a more stable investment outlook across multiple survey rounds (Figure 10). Critically, however, only 8 percent of Figure 11: Level of certainty about parent company’s firms expect their parent company to increase investment, investment plans for host country (N=300) suggesting that FDI flows to developing countries may remain subdued for some time. How certain are you about your parent company's investment plans for your host Only 20 percent of respondents were “very certain” about country? their company’s investment plans (Figure 11). When asked why investment levels would likely remain unchanged, 3% Somewhat certain 20% three out of four cited uncertainty about future demand, Very certain and almost half cited low expected demand growth Somewhat uncertain (Figure 12). Together, these results reinforce the 76% importance of global economic recovery to future Very uncertain investment and suggest MNEs are continuing to take a ‘wait-and-see’ approach. Figure 12: Main drivers for the absence of change in investment plans (among respondents expecting investment to remain the same) (N=275) Why is the amount of investment expected to stay the same? Uncertain about future demand (new investments are on hold) 74% Company has sufficient capacity to meet demand 52% Policy and regulatory restrictions on investment are prohibitive 48% Expect limited or no growth in demand 48% Future expansions likely to be realized through outsourcing 14% Future investments will be mainly reshoring or nearshoring 9% Costs are prohibtive in host country 7% 0% 20% 40% 60% 80% 100% 12 THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S : Q1 2021 More than half of firms expecting investment to remain the Reduced restrictions on prices, technology or formats of same stated that existing spare capacity was also a factor, products was the second most cited investment policy confirming the clear connection between capacity priority. Such policy restrictions particularly stand out utilization and expansionary investment discussed above. among respondents based in East Asia, with 30 percent of respondents ranking them first, against 16 percent for the Policies to encourage investment whole panel. These results highlight that policymakers Government policies and regulations that apply to foreign should seek opportunities to support investment in the investors can play a critical role in enabling and recovery period through strategic adjustments to encouraging greater FDI inflows. For example, in the Q4 investment policies, reduced operational restrictions, and 2020 survey, 86 percent of respondents that expected to support for MNEs. invest more in coming years cited changes in the regulatory Supply chain and business model changes environment as an important factor shaping their plans. Similarly, in Q1 2021 almost half of the respondents that Confirming the trend observed over Q4 2020, survey expected no change in their parent company’s level of results from Q1 2021 provide little evidence of significant investment cited policy and regulatory restrictions as a changes to global supply chains of MNEs. Overall, just contributing factor discouraging additional investment 15 percent cited nearshoring or reshoring as a factor (Figure 12). influencing their parent company’s investment plans over the next 1-3 years, and only 2 percent are changing the To better understand what policy changes could make a countries from which they source their inputs. difference, firms were asked what types of policy initiatives could encourage further investment in their host country Similarly, very few anticipate changes in the role their host of operation (Figure 13). Among the top three policy country will play in their company’s operations. Only initiatives ranked by respondents, two directly relate to 8 percent expect greater vertical integration within their investment constraints. More than half of respondents host country, while 4 percent expect a shift to handling cited relaxation of investment constraints and restrictions more advanced activities in their host countries. among the top three most desired initiatives. Figure 13: Policy initiatives mentioned by respondents as encouraging investment in their host country (N = 300) What investment policy initiatives would be the most effective to support additional investment by your company in your host country? Relaxation of investment constraints and restrictions 22% 15% 15% Reduced restrictions on prices, technology, or format of products 16% 17% 14% Easier approvals to start and operate a foreign-owned business 11% 15% 13% Reduced local content or local staff requirements 10% 13% 9% Reduction of trade barriers 8% 9% 12% Increased support from investment promotion agencies (IPA) 9% 9% 10% Improved legal environment and investor protections 8% 6% 9% Financial incentives (cash grants or government equity, loans) 5% 7% 7% Tax relief (tax cuts, tax credits, deferred payments) 6% 3% 6% Easier hiring and bringing in expatriate staff 5% 5% 5% 0% 10% 20% 30% 40% 50% 60% 1st Rank 2nd Rank 3rd Rank 13 THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S : Q1 2021 Increased Technology Adoption and Sustainability Measures by MNEs The challenges presented by the COVID-19 pandemic, as While fewer respondents reported increasing their use of well as longer-term trends in the global economy, have automation and robotics (27 percent), this remains driven many firms to increase their adoption of new relatively high considering the capital intensity of such technologies. Importantly, foreign parent companies have investments. Automation and robotics were more likely to played a significant role in the adoption of these be adopted by manufacturing firms (35 percent) compared technologies by their affiliates, highlighting the potential to services firms (19 percent) (Figure 15). for FDI to facilitate technology transfer to developing Similarly, adoption of these technologies was higher countries. among respondents employing 250 or more workers (44 MNEs have also placed greater emphasis on implementing percent) than smaller companies (18 percent), possibly sustainability measures, with foreign parent companies reflecting the fact that acquisition and deployment costs of again playing a critical role. This shift has been driven by a these technologies make them more accessible to larger combination of government policy, rising parent company firms. expectations, and firms’ own co ncerns about the risks posed by climate change. Increased automation also appears more prevalent among firms located in Sub-Saharan Africa, Europe and Central Technology adoption Asia, and Latin America and the Caribbean, compared to those in Asia and MENA (although this may reflect firms As observed in previous survey rounds, the vast majority in Asia and MENA already being more advanced in terms of respondents reported they had increased their of automation.) deployment of technology-driven strategies as a result of the pandemic (Figure 14). These included digital Across the board, MNEs that increased technology technologies for remote working (96 percent), supply adoption reported that their foreign parent company chain management (93 percent), and e-commerce played a critical role in the process. For example, among solutions (88 percent). firms that adopted digital technologies, 98 percent Figure 14: Share of firms that increased take-up of Figure 15: Share of firms that increased take-up of technology and sustainability (N = 300) technology and sustainability, by sector (N = 300) To what extent have you changed your To what extent have you changed your deployment of the following strategies as a result deployment of the following strategies as a result of the pandemic? of the pandemic? Digital tools for remote 96% 4% Digital tools for remote 97% working working 95% Digital solutions for e- 93% 6% Digital solutions for e- 95% commerce commerce 91% Digital tools for supply chain 88% 11% Digital tools for supply chain 86% management management 90% Increased sustainability of 48% 49% Increased sustainability of 37% products and services products and services 59% Automation and robotics 27% 70% 19% Automation and robotics 35% 0% 20% 40% 60% 80% 100% 0% 20% 40% 60% 80% 100% Increased No change Decreased Services Manufacturing 14 THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S : Q1 2021 received financial support to do so from their foreign companies commit to sustainability goals and face more parent, 98 percent received guidance, and 94 percent stringent policies at the headquarters level, these changes received access to technologies directly (Figure 16). These are likely to continue to flow through their corporate results underscore how the linkages from foreign parent structures and supply chains, including to their affiliates in companies to affiliates provide a powerful mechanism for developing countries. technology transfer to developing countries. There are also signs that firms are internalizing the risks Adoption of sustainability measures posed by climate change and environmental degradation in their own decision making. The risk of disruption and Alongside technological change, governments, investors, losses due to climate change was cited among the top companies, and consumers are increasingly focused on drivers by 71 percent of firms. By contrast, pressure from sustainability and the need to confront the climate crisis. local investors and pressure from customers and clients This focus extends to MNE affiliates in developing were rarely cited by firms as a factor. countries, with 48 percent reporting they increased their efforts to improve sustainability and decarbonize their Figure 16: Support from parent foreign company in operations since the onset of COVID--19 (Figure 14). the adoption of technologies (N = 300) The focus on sustainability was more prevalent among What role did your foreign parent company play manufacturing and export-oriented firms (Figure 15). As in your adoption of the following? with technology adoption, foreign parent companies 28% played a critical role in supporting affiliates to address Played no significant role 2% 1% sustainability issues (Figure 16). Provided finance to support 97% 98% Among firms increasing their sustainability focus, external adoption 98% pressures were also a major driver of change (Figure 17). Provided guidance and 84% 98% Foremost was pressure from local governments and training 51% regulators to improve environmental performance, cited Provided access to 89% 94% among the top three drivers by 83 percent of firms. This technologies/tools directly 94% reflects the “public good” nature of environmental issues 0% 20% 40% 60% 80% 100% and underscores the importance of robust environmental Adoption of sustainability and decarbonization measures policies to drive changes in private sector behavior. Adoption of automation and robotics Pressure from foreign parent companies was also cited Adoption of digital engagement and management tools among the top drivers by 75 percent of firms. As global Figure 17: Main drivers of the adoption of sustainability measures by MNE affiliates (N = 300) Which of the following were the main drivers of your company's adoption of sustainability measures in your host country? Pressure from local government/regulators to improve 40% 25% 18% environmental performance Pressure or direction from foreign parent company to improve 19% 35% 20% environmental performance Risk of disruption/loss due to climate change (e.g. weather events) 29% 27% 15% Pressure from local investors to improve environmental 6% 9% 8% performance Pressure from clients/customers to improve environmental 5% 4% performance 0% 20% 40% 60% 80% 100% 1st Rank 2nd Rank 3rd Rank 15 THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S : Q1 2021 Appendix A: About the Survey The data for this study comes from the fifth quarterly Pulse survey conducted between April 14 and May 14, 2021. Like the previous four rounds, the fifth-round Pulse survey goal is to monitor MNE performance along several supply and demand dimensions, gain information on business strategy adjustments, and assess policy responses. We specifically added MNE capacity and recovery to our field of work for this survey round. Survey Coverage The survey involved interviewing senior executives in affiliate operations of MNEs in the following six regions: East Asia and Pacific, Europe and Central Asia, Latin America and the Caribbean, the Middle East and North Africa, South Asia, and Sub- Saharan Africa. The 300 MNEs that responded to the survey represented the six regions (50 respondents from each region) and the manufacturing and service sectors (150 respondents from each sector). Survey Content Questions were organized into the following sections: 1. General information on the company and interviewee , including host and source country, position, number of employees, total asset, sector, and sub-sector. 2. The effect of COVID-19 on the first quarter of 2021, including the company’s performance on various dimensions compared to the same period in 2020 and adverse impacts on aspects of the supply chain. 3. The capacity and recovery strategies of MNE affiliates in 2021, including the current capacity level of MNE affiliates, the steps taken to recover from the pandemic effects, recovery strategies considered by MNEs for the next quarter, and the potential risks that could threaten their recovery. 4. Investment plans and policy initiatives, including the parent company’s investment plan changes, changes in the supply chain in terms of input sourcing and policy initiatives that could encourage investment. 5. Investment of MNEs in technology and sustainability, including the changes in the deployment of those strategies, their foreign parent company’s support in the adoption of such strategies and the drivers of MNEs adoption of sustainability measures. Survey Administration The World Bank Group commissioned EY Advisory (EY) and Euromoney PLC (Euromoney, as EY’s subcontractor) to conduct the fifth Pulse survey. The survey was conducted online, in English. Each online survey was approximately 20 minutes long. Respondents participated in and completed the survey anonymously to protect their privacy and encourage participation and candid responses. The survey data was delinked from individual responses. The survey was launched on April 14, 2021 and the fieldwork was completed on May 14, 2021. Data Collection and Data Summary The survey data set contains 300 responses from MNEs operating in 36 developing countries. The figures below present the distributions of respondents by region and country of operation (Figure 18), foreign parent company location (Figure 19), business size by number of employees (Figure 20) and total assets (Figure 21), the respondent’s position (Figure 22) and the business sector/subsector (Figure 23). 16 THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S : Q1 2021 Figure 18: Sample distribution by region and country Figure 19: Sample distribution by location of foreign of operation parent Region/Host Country Count Percent Region/Source Country Count Percent East Asia & Pacific 50 17% East Asia & Pacific 56 14% Cambodia 2 1% Australia 8 3% China 20 7% China 10 3% Indonesia 6 2% Hong Kong SAR, China 2 1% Malaysia 8 3% Japan 3 1% Philippines 6 2% Korea, Rep 43 1% Thailand 2 1% Malaysia 1 0% Vietnam 6 2% New Zealand 1 0% Europe & Central Asia 50 17% Singapore 9 3% Bulgaria 8 3% Taiwan, China 3 1% Georgia 8 3% Thailand 1 0% Russia 16 5% Europe & Central Asia 119 40% Turkey 10 3% Austria 3 1% Ukraine 8 3% Belgium 5 2% Latin America & the Caribbean 50 17% Croatia 1 0% Argentina 8 3% Denmark 8 3% Brazil 14 5% France 20 7% Cuba 4 1% Germany 20 7% Ecuador 4 1% Ireland 6 2% Jamaica 2 1% Italy 6 2% Mexico 14 5% Netherlands 7 2% Peru 4 1% Norway 2 1% Middle East & North Africa 50 17% Poland 2 1% Algeria 4 1% Spain 3 1% Egypt 12 4% Sweden 5 2% Iran 10 3% Switzerland 11 4% Jordan 10 3% Turkey 1 0% Lebanon 6 2% United Kingdom 19 6% Morocco 8 3% Middle East & North Africa 12 4% South Asia 50 16% Israel 1 0% Bangladesh 16 5% Jordan 1 0% India 20 7% Qatar 2 1% Maldives 4 1% Saudi Arabia 1 0% Pakistan 4 1% Syrian Arab Republic 1 0% Sri Lanka 6 2% United Arab Emirates 6 2% Sub-Saharan Africa 50 16% North America 98 33% Cote d’Ivoire 4 1% Canada 2 1% Kenya 6 2% United States 96 32% Namibia 6 2% South Asia 3 1% Nigeria 10 3% Bangladesh 1 0% South Africa 14 5% India 15 5% Tanzania 10 3% Pakistan 2 1% Total 300 100% Sub-Saharan Africa 12 4% Botswana 1 0% Ghana 1 0% Kenya 2 1% Mauritius 1 0% Nigeria 2 1% South Africa 3 1% Uganda 1 0% Zambia 1 0% Total 300 100% 17 THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S : Q1 2021 Figure 20: Sample distribution by size (number of Figure 22: Sample distribution by respondent’s employees) position Size Count Percent Respondent’s position Count Percent Smaller (<250 employees) 195 65% Country General Manager 107 36% Larger (>=250 employees) 105 35% Country Finance Head 37 12% Total 300 100% Country Strategy Head 10 3% Country Sales Manager 70 23% Figure 21: Sample distribution by assets in host country Country Operations Manager 61 20% Other 15 5% Assets Count Percent Total 300 100% Less than 2 million 41 14% USD 2-5 million 103 34% USD 5-10 million 34 11% USD 10-50 million 55 18% >USD 50 million 58 19% Do not know 9 3% Total 300 100% 18 THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S : Q1 2021 Figure 23: Sample distribution by business sector and subsector (ISIC 4.0) Business sector/subsector Count Percent Manufacturing 150 50% Basic metals 5 2% Beverages 7 2% Chemicals and chemical products 16 5% Coke and refined petroleum 2 1% Computer, electronic and optical products 15 5% Electrical equipment 20 7% Fabricated metal products, except machinery and equipment 1 0% Food products 11 4% Machinery and equipment not elsewhere classified 19 6% Motor vehicles, trailers, and semi-trailers 8 3% Other manufacturing 17 6% Other transport equipment 2 1% Paper and paper products 2 1% Pharmaceuticals 11 4% Recorded media 1 0% Rubber and plastics products 5 2% Tobacco 1 0% Wearing apparel 6 2% Wood products 1 0% Services 150 50% Accommodation and food services 5 2% Administrative and support services 6 2% Education 1 0% Electricity and gas supply 7 2% Financial services (including insurance) 19 6% Health and social services 17 6% Information and communication 38 13% Other services 4 1% Professional, scientific and technical activities 17 6% Real estate 1 0% Transportation and storage 26 9% Water and waste services 1 0% Wholesale and retail trade 8 3% Total 300 100% 19 THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S : Q1 2021 20