The tectonic plates of the most recent industrial revolutions are shifting when compared with previous industrial revolutions: the third and the fourth revolutions have evolved at an exponential rate rather than a linear pace. This era is no different.
People are the centrepiece of the Fourth Industrial Revolution (industry 4.0). People, not technology, are the drivers of the industry 4.0 transformation. People adapt to changes with new strategies. When disruption happens, it happens fast. When trends collide, then disruption happens fast – in fact, so rapid that the tectonic plates of productivity and growth are shifting at a speed that reshapes the competitive and social landscape, and redefines the boundaries of trade, prosperity and values.
Being unique is the ultimate competitive advantage in a world that is disrupted faster than ever: the question is not whether you will join in, but how. In an age of disruption, it is required that you rethink the core differentiating aspects. Differentiation is what you do, every day, through repeatable activities to serve your customers better than the competition.
The changes shaping society also have an impact on foreign direct investment (FDI) and the way companies manage and develop FDI projects. In other words, it disrupts the FDI industry in itself. This disruption is taking place against the changes happening in the global (geopolitical) economy as well as declining FDI flows and the resulting heightened competition for FDI among countries. The convergence of all these developments has led to the growth of what we would call FDI 4.0.
What is FDI 4.0?
The most workable definition as of yet is that FDI 4.0 is cross-border foreign involvement that capitalises on the Fourth Industrial Revolution to attract FDI for the benefit of planet, people and profit and involves different players (in transformed industries or new innovative industries or within the digital economy). FDI 4.0 is characterised by the following:
- Companies that chose hybrid international business models often requiring less capital-intensive FDI or otherwise redefine ownership patterns in global value chains, such as new forms of investment (NFIs) focused more on collaboration and partnerships.
- Companies in disrupted traditional industries (such as automotives or electronics) or new emerging industries (industry 4.0 activities that have become industries of their own, such as AI, cybersecurity or robotics) and may well be within the digital economy. Hence, FDI 4.0 takes place in the transformation of traditional industries as well as within the emergence of new industries. A good example of the latter is the growth of more than 200 new sectors that have been identified and are closely related to the growth of industry 4.0 technologies.
- Companies in small, niche and emerging sectors that are sometimes even in a start-up or next-stage phase for which a start-up innovation ecosystem (including boot camps, funding opportunities, academic partnerships and specific sustainable real estate facilities) in host country markets is critical for their success.
- FDI 4.0 can be very specialised as it is not purely driven by companies in mature sectors but often by pioneering innovative technological activities (for instance, AI, quantum technologies, augmented and virtual reality or cybersecurity).
Is FDI 4.0 really different to traditional FDI? Obviously, the answer is yes, but this does not imply that traditional FDI is disappearing. It is more the case that the two forms of FDI co-exist, with FDI 4.0 the most likely to grow rapidly over the coming years. The table below summarises the main differences between ‘traditional FDI’ and FDI 4.0.
What does the data on FDI 4.0 say?
There is abundant data on traditional FDI flows (including mergers and acquisitions) and greenfield FDI, but data on partnerships between companies, one of the characteristics of FDI 4.0, is less readily available. Below is an overview of data on domestic and cross-border partnerships from the GlobalData database.
The table shows the number of partnerships and their value. Partnerships are defined as: co-development, co-marketing, joint ventures, licensing agreements and other forms of partnerships. The number of partnerships grew to between 4,500 and 5,000 deals in 2019 and 2020, but the value of all partnership deals increased to more than $208m in 2020.
An example of a corporate FDI 4.0 partnership agreement is provided by LightSource bp, a renewable energy company from the UK, which has signed a partnership agreement with Envision Digital International (Envision Digital), a Singapore-based global AI and internet of things (AIoT) software service provider, to accelerate the growth and optimisation of solar power in the fight against climate change.
The partnership will see Lightsource bp leveraging Envision Digital’s AIoT platform to optimise the performance and operation of its solar assets. Lightsource bp recognises Envision Digital’s unique expertise in AIoT and digital transformation, and has selected Envision to be its advanced analytics partner for its existing and rapidly growing portfolio of solar projects globally.
Through the partnership and the advanced analytics from Envision Digital’s AIoT platform, Lightsource bp will be able to gain data-driven insights to enable automation, efficiency, value and, ultimately, substantial volumes of additional low-carbon power.
What should governments and IPAs do to attract FDI 4.0?
Unlocking the opportunities of FDI 4.0 for the economic development goals of countries will require governments and investment promotion agencies (IPAs) to rethink traditional approaches to FDI promotion and facilitation and develop a new approach. On the one hand, this approach would focus on building a digitalisation-friendly investment climate. This can involve targeting country-specific digital investment goals, and leveraging new, often asset-lite, models of internationalising FDI (in other words, NFIs), focused much more on collaborations and partnerships between companies and countries. On the other hand, it would involve targeting and leveraging more specialised FDI activities associated with the digital economy and FDI 4.0 (focus on new and emerging sectors), typical high-growth or R&D-intensive FDI activities as well as sustainable FDI that contributes to countries' attempts to meet the 2030 targets of the UN's Sustainable Development Goals (SDGs).
Building a favourable investment and business climate this way is crucial as companies operating in these high-growth industries will require a different competitive landscape and business climate to those operating in traditional FDI activities. Even more so than in the past, countries will have to explore where their strengths and weaknesses lie, and communicate their value propositions to foreign investors more clearly. Supportive domestic start-up innovation and start-up ecosystems, which can be an appealing proposition for foreign investors operating in high-growth Industry 4.0 sectors, need to be created and maintained and clearly communicated. FDI 4.0 requires a strong and well-developed start-up and innovation ecosystem and requires digitalisation, which is not a 'like to have' but a necessity. The Covid-19 pandemic has only accelerated this process.
Developing a clear FDI vision, strategy and road map that highlights the path to further economic growth is essential for many countries. Also, for companies operating within the FDI 4.0 space, a clear country vision and strategy (including its sustainability and contribution to achieving the SDGs) is important. For these types of investors, creating a broad economic and societal impact has become a corporate mission and it is embedded in all their activities.
At the same time, governments and policymakers should be aware that these new FDI strategies and road maps are unique for every country and cannot be ‘exported’ to other locations. A competitive business environment for attracting FDI 4.0 should be much more focused on differentiation and uniqueness, and countries and cities should clearly define and communicate their unique competitive advantages.
If calibrated in the right way, investment promotion policies, strategies and tools crafted to respond to these opportunities can create engines that support the future of trade, economic growth, employment and the creation of decent jobs, as well as develop innovative solutions that change the competitive and economic landscape of a country. Recognising this, the authors of this article, with the support of the UN Economic and Social Commission for Asia and the Pacific, partnered with IPAs in the Asia-Pacific region to draft tailored road maps to leverage FDI 4.0 during several country capacity-building workshops. These workshops and the associated FDI 4.0 road maps that came out of them underscored the bold and thoughtfully coordinated efforts to leverage the FDI 4.0 approach, which can enable countries to bolster FDI and contribute to building back better in a post-Covid world, and even get them back on a path back towards potentially achieving the SDG targets.
In short, FDI 4.0 requires a fundamentally different approach towards investment promotion and attraction. Governments should start to rethink approaches to FDI promotion and consider leveraging a new approach. This approach should be much more about teamwork. Just as collaboration is an integral part of FDI 4.0 projects, teamwork within governments – collaboration among all stakeholders responsible for FDI and economic development in general – to attract and promote FDI should also be the foundation of a new investment promotion strategy focused on FDI 4.0.
Finally, as FDI 4.0 is about transformation and innovation, talent is the backbone of FDI 4.0. It is a priority and a necessity, and countries must go beyond just attracting talent or developing activities and strategies to attract these workers; it is also about nurturing, developing and retaining talent and introducing policies to make sure that happens. In particular building a skill-based economy requires us also to rethink which skills and competencies are necessary in the new world of FDI 4.0, which should be reflected in new education systems setting new priorities in which creativity and learning from failures can flourish.
Henrik von Scheel and Heather Lynne Taylor-Strauss also contributed to this article.