THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S : Q4 2020 The Impact of COVID-19 on Foreign Investors: Evidence from the Quarterly Global MNE Pulse Survey for the Fourth Quarter of 2020 March 2021 Abhishek Saurav, Peter Kusek, Ryan Kuo, and Brody Viney 0|Page THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S : Q4 2020 Key Findings 1. The adverse effects of the pandemic were still being felt in the fourth quarter (October to December) of 2020, although the situation is gradually improving. Overall, 93 percent of the surveyed affiliates of multinational enterprises (MNEs) in developing countries reported being adversely affected on at least one business dimension in the fourth quarter of 2020, compared to 97 percent over the previous quarter. MNEs in the manufacturing sector continued to be more negatively affected than those in services, a trend largely driven by weak demand and lingering supply chain disruptions. All affiliates based in the Middle East and North Africa and East Asia and Pacific were adversely affected on at least one dimension. 2. Looking back on 2020 overall, the large majority of MNE affiliates (86 percent) reported that their operations and financial performance were less disrupted over the second half of 2020, pointing to a gradual improvement throughout the course of the year. Improvement in market conditions, easing of supply chain challenges, and more government support were key factors driving better performance of MNE affiliates in the second half of 2020. 3. In the past year, MNEs have increased adoption of new technologies, as well as measures to increase environmental sustainability. Around 90 percent reported deploying new digital solutions to manage supply chains and engage with customers in response to the pandemic, while three-quarters took steps to increase the sustainability of their products and services. There is evidence that affiliates of MNEs headquartered in developed countries were more likely to deploy advanced technologies such as automation. 4. Improving economic conditions have translated into a less negative outlook for future investment by MNEs, with limited plans for a significant reorganization of investment locations and supply chain structures. Very few MNE affiliates expect to reduce investment in their host countries in the next 1-3 years. Three-quarters expect to maintain their current level of investment, and 17 percent expect to increase investment. 5. Government policies continue to play a critical role in MNEs’ ability to weather the crisis and they are shaping the prospects for the future of foreign investment. In this survey round, more than half of MNE affiliates reported some positive changes in their host countries’ regulatory environment for investment, possibly reflecting the lifting of pandemic-related investment barriers. Notably, MNE affiliates that expect their parent company to invest more in the host economy in the coming years most commonly identify expected or realized changes in the investment policy environment as a driver of their expansion plans. 1|Page THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S : Q4 2020 Introduction From the outset of the COVID-19 pandemic in early 2020, it was clear that uneven public sector capacity, ABOUT THE SURVEY4 resources, and resolve in countries would play an The survey was administrated online from February important role in determining the course of the ensuing 5 to March 4, 2021. The resulting sample comprises health, social, and economic crises. 1 329 MNE affiliates (companies with full or partial Since then, a year of experience has shown that the course foreign owners) across 37 developing countries. The of the pandemic is unpredictable. While the rollout of sample was evenly distributed across the 6 vaccinations is a cause for optimism that the end of the developing regions following the World Bank pandemic may be around the corner, access remains Group taxonomy, and manufacturing and services uneven and progress mixed. As a result, there is sectors in each region. tremendous uncertainty about the abatement of crises and prospects of a global recovery within and across countries (IMF 2021).2 This mix of uncertainty and optimism could well define the “new normal” in 2021. A fourth round of the quarterly pulse survey, reflecting the last quarter of 2020, was administered in February 2021. In this environment, multinational enterprises (MNEs) This round of the survey included new questions have been forced to weather a long-lasting economic reflecting on 2020 as a whole, and the impacts of the crisis downturn while also anticipating the restart of their on technology adoption and environmental sustainability disrupted activities. Given the importance of foreign trends. direct investment (FDI) to the prospects for economic recovery—especially for developing countries—the The report’s findings will help provide policy makers and World Bank Group’s Global Investment Climate Unit is businesses with an updated picture of the effects of the conducting quarterly pulse surveys of MNE affiliates to COVID-19 crisis on MNEs and the global outlook for gauge the pandemic’s effect on foreign investors. 3 The foreign investment. surveys aim to provide insight into the impacts of the pandemic on foreign investors, as well as how their plans and strategies are evolving. View the data online via the MNE Pulse Survey Online Dashboard 1 World Health Organization (WHO) Director-General's opening remarks at the media briefing on COVID-19, 11 March 2020. 2 International Monetary Fund (IMF) World Economic Outlook Update, January 2021. 3 Full results from prior rounds of the survey are available at: https://openknowledge.worldbank.org/handle/10986/33774 (first round); https://openknowledge.worldbank.org/handle/10986/34638 (second round); and https://openknowledge.worldbank.org/handle/10986/34924 (third round). 4 The fourth 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, Clémence Marcout, Serah Adesanya, Carlos Adams, Loïc Blanc, Lawrence Bowden, Duncan Kerr, and Aura Popa for their contributions to the report. 2|Page THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S : Q4 2020 Effects of COVID-19 on MNE Affiliates in the Fourth Quarter of 2020 The effects of pandemic were still being felt in the fourth quarter were mainly in the form of shortages of inputs and quarter of 2020, although MNE affiliates’ performance delays with outbound logistics (experienced by 84 percent improved slightly compared to the previous quarter. and 61 percent respectively among respondents reporting Overall, 93 percent of respondents reported being adverse effects on their supply chain) (Figure 2). adversely affected on at least one business dimension, The share of respondents facing elevated input costs rose, compared to 97 percent in the previous quarter. with input costs up slightly (3 percent) on average. These Demand and supply chain effects results suggest that the start of the recovery may have created demand shocks for some inputs as firms started to Adverse demand and supply effects continue to be ramp up their production once more. widespread, but the situation improved slightly relative to the third quarter of 2020. On the demand side, 46 percent Firms in the manufacturing sector continued to be more of the respondents experienced reduced demand, down adversely affected than firms in services. Demand was from 63 percent in the third quarter (Figure 1). However, down for more than half of firms in the manufacturing the average demand impact experienced across firms sector (by 10 percent on average), compared to less than remains more or less the same (7 percent reduction in two fifths of those in services (4 percent on average) demand compared to 8 percent in the previous quarter). (Figure 4). This reflects that the MNE affiliates surveyed in services were primarily in subsectors such as IT and On the supply side, supply chain issues also appear to have finance that have weathered the crisis well (relative to eased somewhat, with 31 percent of respondents others such as hospitality).5 Manufacturing firms were also experiencing adverse effects, compared to 41 percent more affected by supply chain issues. during Q3 of 2020. Supply chains issues in the fourth Figure 1: Share of MNE affiliates reporting adverse impacts6 during Q3 and Q4 2020, and average impact during Q4 2020 (N = 329) From October to December 2020, what was your company’s performance in your country of operation, compared to the same period in 2019? 80% 66% 66% 67% 63% 60% 48% 49% 46% 43% 40% 31% 20% 12% 0% -3% 3% -11% -7% -7% -8% -13% -14% -14% -13% -20% Q3 - Share of MNE affiliates reporting adverse impacts Q4 - Share of MNE affiliates reporting adverse impacts Average impact Q4 5 https://openknowledge.worldbank.org/handle/10986/34923 6 Firms are classified as having an adverse impact if they report a negative outcome relative to 2019 (or positive for input costs). 3|Page THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S : Q4 2020 Figure 2: Share of MNE affiliates reporting specific Figure 3: Share of MNE affiliates affected on at least supply chain effects during Q4 2020 (among those one business dimension (e.g. output, employment, experiencing adverse supply chain effects) (N=102) etc.) during Q4 2020 (N=329) You indicated that your company has experienced adverse supply From October to December 2020, what was your chain effects due to COVID-19. Can you specify? companys performance in host country compared to the same period in 2019? Shortage of inputs 84% Middle East and North Africa 100% East Asia and Pacific 100% Delay with outbound logistics 61% South Asia 95% Delay in receipt of inputs 48% Europe and Central Asia 93% Sub-Saharan Africa 91% Issues with inputs quality 9% Latin America and the… 82% 0% 20% 40% 60% 80% 100% 0% 20% 40% 60% 80% 100% Investment and employment decline in profit of 14 percent across the two periods, largely unchanged from the third quarter result. Effects on MNE’s investment appeared to ease in the fourth quarter, with 43 percent of respondents reporting In line with differences in demand, production and reduced investment levels, down from 65 percent in the financial performance measures were worse in the third quarter. The average magnitude of the impact on manufacturing sector. For example, 71 percent of investment eased to a 7 percent reduction in Q4, respondents in the manufacturing sector reported reduced compared to 12 percent in Q3. These results are output in the fourth quarter of 2020, compared to 55 consistent with the expectations of the executives percent of respondents in the services sector. surveyed in relation to the third quarter of 2020. Regional differences Two-thirds of respondents were still experiencing reduced worker productivity, and half continued to have reduced In every region, the vast majority of companies—ranging employment in the fourth quarter, with these employment from 82 to 100 percent across regions—declared adverse impacts little changed from earlier in the year. impacts from the COVID-19 pandemic on at least one business dimension in the fourth quarter of 2020 (Figure Employment effects were more common among smaller 3). Firms in the Middle East and North Africa and East firms, with 55 percent of respondents with less than 250 Asia and Pacific regions were the most likely to report any employees reporting reduced employment, compared to adverse impacts in the fourth quarter. 40 percent of larger firms. Reduced employment was also more common among firms with an export-oriented Across impact categories (Figure 4), several patterns of business model (73 percent) compared to those oriented regional impacts can be identified. Supply chain impacts towards their local market (39 percent). and elevated input costs were particularly concentrated in the East Asia and Pacific, South Asia, Middle East and Output, revenue, and profits North Africa, as were employment impacts. By contrast, employment impacts were fairly limited in Europe and Despite the indications of improved demand, adverse Central Asia and in Latin America. In addition, investment impacts on output and financial performance were still was most affected for MNE affiliates in East Asia and widespread. Firms responding to the prior survey round Pacific, Middle East and North Africa and South Asia, indicated that they expected financial performance to whereas investment in Europe and Latin America was improve in the fourth quarter. However, production closer to normal. output, revenues, and net income were all down for around two thirds of MNE affiliates, with an average 4|Page THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S : Q4 2020 Figure 4: Share of MNE affiliates reporting adverse effects of COVID-19 pandemic in Q4 2020 by sector, region, business model, and size Sector Region Business model Company size Middle East Sub- Europe and Latin Manufactur East Asia Export- Market- <250 Total Services South Asia and North Saharan Central America & >=250 emp. ing and Pacific oriented oriented employees Africa Africa Asia Caribbean Supply chain 31% 37% 25% 52% 45% 44% 18% 18% 12% 48% 53% 23% 34% reliability Input costs 12% 15% 8% 17% 20% 10% 16% 4% 4% 14% 15% 16% 24% Liquidity 48% 52% 44% 62% 55% 56% 41% 45% 32% 54% 56% 46% 53% Worker 67% 73% 62% 79% 73% 63% 66% 73% 51% 77% 79% 63% 70% productivity Investment 43% 48% 38% 62% 52% 60% 39% 20% 26% 49% 54% 40% 45% Demand 46% 54% 38% 62% 46% 58% 32% 49% 32% 49% 53% 44% 48% Output 63% 71% 55% 58% 54% 58% 59% 80% 68% 58% 56% 65% 61% Employment 49% 48% 50% 85% 70% 83% 34% 15% 14% 73% 86% 39% 55% Revenue 66% 71% 61% 60% 52% 58% 63% 85% 75% 59% 56% 69% 65% Net income 66% 71% 62% 60% 59% 60% 66% 82% 70% 61% 59% 69% 66% Any business 93% 95% 92% 100% 95% 100% 91% 93% 82% 97% 92% 96% 90% dimension Note: Darker shading reflects higher intensity. For example, 37 percent of surveyed manufacturing firms experienced adverse supply chain reliability in the fourth quarter of 2020, relative to the fourth quarter of 2019. 5|Page THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S : Q4 2020 MNE Performance and Technology Adoption Over the Course of 2020 Looking back on 2020 as a whole, MNE affiliates reported the first and second quarterly surveys (corresponding to an overall improvement in financial and operational the first and second quarters of 2020), firms reported performance in the second half of 2020 relative to the first declines in net income of around 40 percent on average. half. While many factors played a role in shaping firm Since then impacts have eased, with net income down by performance across the year, decreased severity of only 12-14 percent during the third and fourth quarters. lockdown orders and improvement in market conditions were the most significant factors cited by firms. Improved performance in the second half of 2020 was experienced fairly consistently across regions. South Asia The year also saw MNE affiliates deploy a range of new had the lowest share of respondents reporting strategies and technologies to adapt to the crisis and other, improvement across the year, but even in this region three- longer-term market trends. These included widespread quarters of firms reported that financial performance had uptake of digital tools and a growing focus on improved, and 70 percent reported improvements in environmental sustainability. operational performance. Improvements in performance Drivers of improvement Overall, 86 percent of respondents reported their company When asked to rank the most important factors that drove experienced better financial performance over the second improved performance in the second half of 2020, half of 2020, compared to when COVID-19 first emerged improvement of market conditions was selected (Figure 5). By contrast, only 8 percent reported more overwhelmingly as the most important driver, cited among disruptions to their companies’ operations than during the the top three by 58 percent of respondents and ranked the first half of 2020. Similarly, 86 percent of respondents most important factor by 39 percent (Figure 7). reported their operations were less disrupted over the Reduced severity of supply chains issues was also critical, second half of 2020 (Figure 6). cited by 47 percent. Together, these findings reinforce the These results are consistent with the quarterly results pattern of gradual improvements in quarterly demand and observed across four rounds of the MNE Pulse Survey. In supply chain impacts identified across survey rounds. Figure 5: Share of firms reporting change in financial Figure 6: Share of firms reporting change in performance between the first half and the second half operational performance between the first half and the of 2020 (N = 329) second half of 2020 (N=329) In terms of financial outcomes, how did your company perform in In terms of its ability to continue operations and production, how the second half of 2020 (July-December) compared to the first half did your company perform in the second half of 2020 (July- of 2020 (January-June), when COVID first emerged? December) compared to the first half of 2020 (January-June), when COVID first emerged? Performed 6% More 8% worse 8% 7% disruption of financially operations No change No change Performed better Less disruption 86% of operations 86% financially 6|Page THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S : Q4 2020 Figure 7: Share of firms citing drivers of improved financial performance in the second half of 2020 (N=284) What were the main reasons your company performed better financially in the second half of 2020? (Rank all that apply). Market conditions (e.g., demand) were more favorable 39% 12% 7% Supply chain issues were less severe 13% 20% 14% More government support was available 13% 17% 17% Lockdown orders were less severe 12% 16% 10% Learning and operational/product changes from the first half of 2020 assisted in the second half of 2020 8% 7% 12% Impacts in the first half of 2020 (e.g., staff cuts, delayed investments) were resolved in the second half of 2020 6% 12% 14% More support from foreign parent company was available 5% 8% 9% The number of COVID-19 infections decreased 5% 7% 10% 0% 20% 40% 60% 1st Rank 2nd Rank 3rd Rank The increased availability of government support was also population—and therefore lockdown orders—were more identified as critical to improved performance, cited by 47 severe, the main drivers cited for better performance were percent. This result reinforces the central role that less severe lockdown orders and government support government policy responses have played in shaping the (both ranked first by 20 percent of respondents). capacity of the private sector to weather the crisis, highlighted in prior MNE Pulse survey rounds. In contrast, The equal importance given to government support and lockdown orders reflected the close links between these changes in lockdown orders and the number of COVID- 19 infections were only the fourth and eighth most cited policy responses. Private sector activity is particularly impacted during lockdowns, further stressing the need for factors respectively. government support. However, reasons for better performance varied across regions (Figure 8). For example, MNE affiliates in East Technology and sustainability adoption Asia and Pacific, South Asia, and the Middle East and Deployment of new strategies and adoption of new North Africa were most likely to emphasize the technology was widespread among MNE affiliates in 2020 importance of improvement in market conditions (as were (Figure 9). Adapting to the challenges presented by the firms with an export-oriented business model), suggesting pandemic, the vast majority of respondents (91 percent) these firms were the most affected by tough market reported they had increased their deployment of digital conditions over the first half of 2020. business-to-customer (B2C) tools such as e-commerce and Firms in these regions rarely cited reduced COVID-19 digital engagement. infections or lockdown orders as the most important Most firms (88 percent) also reported the increased use of factor in their recovery. As many countries in Asia quickly digital management tools, either for supporting staff to gained control of the pandemic early in the year, the results work remotely, or to manage and monitor supply chains. highlighted that the main constraint weighing on MNE These findings align with the findings of prior rounds of affiliates in the region was weak demand—an especially the survey, which found that 58 percent of MNE affiliates heavy constraint in an area where MNE affiliates are had increased their use of digital tools for supply chain particularly export-oriented. management in the second quarter of 2020. In Europe and Central Asia, as well as Latin America and the Caribbean, where the pandemic’s health impact on the 7|Page THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S : Q4 2020 Figure 8: Share of firms citing drivers of improved financial performance in the second half of 2020, by sector, region, business model and headquarters location (1st rank) Sector Region Business model HQ location Middle Europe East Sub- Latin Manufac South East and and Export- Market- Developi Develop Services Asia and Saharan America & 1st Rank turing Asia North Central oriented oriented ng ed Pacific Africa Caribbean Africa Asia The number of COVID-19 7% 2% 2% 0% 0% 8% 8% 8% 4% 5% 2% 5% infections decreased Lockdown orders were less 8% 16% 4% 9% 2% 21% 13% 20% 8% 14% 12% 12% severe More government support was 13% 13% 9% 12% 9% 8% 17% 20% 7% 15% 19% 12% available More support from foreign 6% 3% 0% 0% 0% 6% 8% 12% 0% 6% 2% 5% parent company was available Learning and operational/product changes 8% 9% 11% 7% 7% 6% 13% 4% 8% 8% 14% 7% from the first half assisted in the second half of 2020 Supply chain issues were less 17% 10% 7% 9% 11% 17% 17% 18% 10% 15% 5% 15% severe Market conditions (e.g., 37% 41% 67% 58% 64% 23% 17% 10% 60% 29% 37% 39% demand) were more favorable Impacts in the first half of 2020 were resolved in the 5% 6% 0% 5% 7% 10% 6% 6% 3% 7% 9% 5% second half of 2020 Note: For instance, 67% of respondents based in East Asia and Pacific ranked the improvement of market conditions as the main driver of better performance over the second half of 2020, compared to the first half of 2020. 8|Page THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S : Q4 2020 Figure 9: Share of firms reporting changes in the Figure 10: Share of firms reporting changes in the deployment of technologies (N=329) deployment of technologies, by sector (N = 329) To what extent have you changed your deployment of To what extent have you changed your deployment of the following strategies in your host country as a result the following strategies as a result of the pandemic? of the pandemic? E-commerce and customer 8% 91% E-commerce and customer 90% engagement solutions engagement solutions 93% Digital management tools for supply chain and remote 11% 88% Digital management tools for 86% supply chain and remote working 90% working Increased sustainability and Increased sustainability and decarbonization of products and decarbonization of products and 63% 24% 73% services services 83% Automation and robotics 44% Automation and robotics 48% 45% 46% 0% 50% 100% 0% 20% 40% 60% 80% 100% Decreased No change Increased Don't know Services Manufacturing A growing global focus on sustainability, the threat of Figure 11: Share of firms reporting changes in climate change, and the need for a ‘green recovery’ has deployment of technologies, by HQ location (N=329) played out alongside the pandemic. In response, To what extent have you changed your deployment of approximately two-thirds of MNE affiliate reported taking the following strategies in your host country as a result steps to increase sustainability and decarbonize their of the pandemic? products and services. The focus on sustainability was particularly prevalent in manufacturing (83 percent, E-commerce and customer 91% compared to 63 percent among respondents in services). engagement solutions 94% This suggests an acceleration of climate change awareness Digital management tools for 90% among firms in sectors that are often carbon intensive supply chain and remote working 77% (Figure 10). Increased sustainability and 74% Forty-five percent of firms reported an increase in the decarbonization of products and 67% services deployment of automation and robotics, a smaller share than the other strategies surveyed. However, considering Automation and robotics 48% the deployment of automation and robotics is capital- 27% intensive and requires longer-term planning than strategies 0% 20% 40% 60% 80% 100% such as e-commerce, having almost half of respondents increasing their investment remains quite significant. Developed Developing There is some evidence that affiliates of MNEs A narrower gap is also observed for deployment of digital headquartered in developed countries may be more likely management tools for supply chain and remote working. to deploy advanced technologies. Around half of MNE These differences highlight the potential for foreign affiliates with headquarters in developed countries investment to facilitate technology transfer from developed increased the deployment of automation and robotics, to developing countries. compared to just 27 percent of respondents whose headquarters are in developing countries (Figure 11). 9|Page THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S : Q4 2020 Changes to Investment and Supply Chains in Response to COVID-19 Improving economic conditions have translated into a less The overall improved outlook is also conditioned by the negative outlook for future investment by MNEs, with current climate of uncertainty. Only 23 percent of MNE limited plans for a significant reorganization of investment affiliates were very confident in their forecasts, while nearly locations and supply chains. Most firms reported that they 72 percent were still only somewhat certain about their expect their parent company to maintain its current level of parent company’s investment plans (Figure 13). investment in their host country over the next 1-3 years, and few reported major changes to suppliers or business models. The effect of uncertainty surrounding global trade could be hindering investment, with export-oriented firms 11 Changes to investment plans percentage points less likely than market-oriented firms to expect an increase investment in the near term (Figure 14). Survey data from the most recent survey round suggest that Expectations for increased investment were most common the near-term outlook for foreign investment is stabilizing in Latin America and the Caribbean, Europe and Central and gradually turning more optimistic, as compared to the Asia, and Sub-Saharan Africa (Figure 15). investment outlook observed in the previous survey round. In the previous survey round (third quarter of 2020), Figure 13: Share of firms that were certain about parent 39 percent of respondents indicated that their parent company's investment plans for host country (N=329) company planned to invest less. In the current round this share dropped to about 1 percent (Figure 12), suggesting How certain are you about your parent company's investment firms’ negative outlook may have been driven by short-term plans for your country of operation? investment plans. Very uncertain 4% Nonetheless, relatively few MNC affiliates reported plans 23% to aggressively expand investment. Three quarters of Somewhat uncertain respondents reported that investment levels were expected Somewhat certain to remain the same (up from 46 percent in the third quarter), while 17 percent expected investment to increase (up Very certain 72% slightly from 13 percent in the third quarter). Figure 12: Share of firms reporting expected change in Figure 14: Share of firms reporting expected change in investment (Q3 N=305; Q4 N=329) investment, by business model (N=329) Are you aware of any plans by your company's foreign Are you aware of any plans by your company's foreign parent to parent to change the amount that it invests in your host change the amount that it invests in your country of operation in country in the next 1-3 years? the next 1-3 years? Market- Q4 2020 1% 75% 17% 7% oriented 71% 20% 7% (N = 230) Export- Q3 2020 39% 46% 13% 2% oriented 85% 9% 6% (N = 99) 0% 20% 40% 60% 80% 100% 0% 20% 40% 60% 80% 100% Yes, it plans to invest less No, no change is expected Yes, it plans to invest less No, no change is expected Yes, it plans to invest more Don't know Yes, it plans to invest more Don't know 10 | P a g e THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S : Q4 2020 Figure 15: Share of firms reporting expected change in Figure 16: Share of firms citing drivers of changes in investment, by region (N=329) investment plans (among respondents expecting investment to increase) (N=56) Are you aware of any plans by your company's foreign parent to change the amount that it invests in your host country in the next 1-3 years? Why is the amount of investment expected to change? Latin America and the Expected or actual change in the 51% 35% 11% regulatory environment 86% Caribbean Shifting to larger or faster-growing Europe and Central Asia 65% 25% 9% markets 77% Total global investment by parent is Sub-Saharan Africa 71% 25% 4% changing 64% Middle East and North Shifting to lower-cost countries 55% 92% 4% 4% Africa South Asia 79% 9%13% Diversifying locations 45% Insourcing or outsourcing East Asia and Pacific 96% 2% 2% production 36% Nearshoring operations to be closer 0% 50% 100% to final consumers 32% Reshoring operations to the same Yes, it plans to invest less No, no change is expected country as final consumers 27% Yes, it plans to invest more Don't know 0% 50% 100% Drivers of increased investment Among firms expecting to increase investment, changes in Change in the parent company’s total global investment was the regulatory and policy environment in the host country also a factor for 64 percent of firms (down somewhat from was a key driver, with 86 percent of the respondents citing 75 percent in the prior survey round). Factors that might this as one of the reasons why their parent company’s imply a significant reorganization of global supply chains in investment will increase (Figure 16).7 response to the Covid-19 crisis—nearshoring and relocation of operations—play a relatively smaller role in comparison, Growth potential and cost competitiveness of destination cited by 32 percent and 27 percent of respondents markets are important considerations for foreign investors. respectively (among those investing more). A large majority of firms cite shifting operations to larger or faster-growth countries (77 percent) and shifting operations Sourcing and business model changes to lower cost countries (55 percent) as drivers of investment change. Both factors have become more prominent since Survey results cast doubt on expectations of significant the prior survey round, suggesting that with more changes to supply chains in response to the pandemic. Only experience and understanding of the effects of Covid-19 on 2 percent of respondents reported they are changing the operations, MNEs are clearer about investment location countries from which they source their inputs. This is a strategies. notable reduction from the prior survey round, in which 37 percent of respondents reported changes in the sourcing of their inputs. 7 This response option was introduced during this survey round, following a correlation observed between investment plans and changes in the regulatory environment in the results of the previous survey round. 11 | P a g e THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S : Q4 2020 This suggests that after a period of change at the height of Figure 17: Share of firms reporting expected business the pandemic, sourcing arrangements may have settled. model evolution over the next few years (N = 329) Alternatively, firms may have abandoned plans for sourcing changes as supply chain impacts have eased. This remains Do you expect the role that operations in your host country play in your company's overall value chain to change over an area to watch in future rounds of the surcey. the next few years? In addition, the majority of respondents indicated that the Greater vertical integration role that operations in their host countries play in their within host country 67% 27% company’s overall value chain is unlikely to change over the Shift to more advanced next few years (Figure 17). Twenty-seven percent of MNE activities that had previously 82% 13% affiliates reported that they expect operations in their host been handled by other countries countries to play a greater role in their parent company’s 0% 50% 100% value chain through vertical integration, while only 13 percent expect any shifts to more advanced activities that No Yes Don't know had previously be handled by other countries. 12 | P a g e THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S : Q4 2020 Government Support and the Policy Environment for Foreign Investors Public institutions have played a crucial role in protecting restrictions and alongside wider efforts to restart the businesses from the pandemic and in supporting the economy. economic recovery. At the same time, MNEs have faced a constantly shifting policy environment, including changes to Comparison with results from the previous survey round show a reduction in reports of new restrictions, as the share foreign investment rules and regulations. The most recent survey results suggest that such changes have been of “less business-friendly measures” was significantly higher increasingly business friendly. Countries will need to in the previous survey. The number of companies describing a status quo situation has also decreased. Results continue to focus on providing the right enabling conditions for investment to support the recovery. for the two survey rounds were drawn from two different samples – including a slightly different distribution of Policy environment for foreign investors countries – but the improvement is considerable nonetheless. For all indicators surveyed, more respondents declared that the rules and regulations for foreign investors have become Increased restrictions still remain prevalent in several areas more business friendly than less so (Figure 18). A majority of regulation. In particular, 22 percent of respondents reported positive developments with respect to restrictions reported that local investment approvals have become less for expatriate staff, joint venture requirements, local input business friendly. Likewise, 16 percent reported adverse requirements, and price and technology restrictions, likely changes to restrictions on price and technology and joint reflecting that countries have begun to lift health-related venture requirements. Figure 18: Share of firms reporting changes to the rules and regulations for foreign investors triggered by the COVID-19 pandemic (N=329) Because of COVID-19, how have potential barriers to operations and investment projects for foreign-owned companies such as your changed in your country? Investment approvals to start and operate a foreign-owned 22% 50% 29% business Restrictions on the prices, technology, or format of products 16% 33% 50% Joint venture requirements with a local company in your sector 16% 29% 56% Limit on amount of permissible foreign investment in your 13% 51% 36% sector(s) Requirements for foreign-owned companies to invest in R&D 11% 47% 41% Minimum investment requirements 5% 57% 38% Restrictions on hiring and bringing in expatriate staff 5% 35% 60% Requirements for foreign-owned companies to use locally 5% 45% 50% produced inputs or local staff 0% 20% 40% 60% 80% 100% Less business-friendly No change More business-friendly Don't know 13 | P a g e THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S : Q4 2020 Figure 19: Share of firms citing areas of government support as important to deal with COVID-19 in 2021 (N-329) In 2021, how important will the following areas of government support be for your company to deal with COVID-19 in your country of operation? Information about COVID 84% 13% 2% Tax relief 82% 16% 2% Trade finance 67% 28% 4% Financial support 59% 37% 4% Support from IPAs* 53% 42% 6% Relax regulations 52% 44% 4% Restructuring or postponing debt 33% 60% 7% 0% 20% 40% 60% 80% 100% Critically important Somewhat important Not important Don't know *Investment Promotion Agencies (IPAs) Importance of future government support Figure 20: Share of firms citing areas of government support perceived as "Critically important", by level of Government policies and programs have an important role adverse impact (N=329) to play in helping MNEs restart investment and production, and survey results suggest that the importance of policy responses such as information about COVID-19 and tax Tax relief 90% 81% relief has only grown. Information about COVID- 85% In a marked increase from the previous survey round, 19 84% 82 percent of MNEs consider support from the government Government trade finance 73% in the form of tax relief will be critically important in 2021 66% (up from 53 percent) (Figure 19). Similarly, 84 percent Financial support 71% 56% consider information about COVID-19 will be critical (up from 30 percent). Support from IPAs 71% 49% Relaxed regulations and policies, support from IPAs, and Relax regulations 65% the availability of financial support and trade finance all 50% register as critically important for a majority of respondents. Debt restructuring or 56% postponing 29% Government assistance in restructuring or postponing debt was cited as critical by a smaller share (33 percent). 0% 20% 40% 60% 80% 100% Comparing respondents that reported more severe impacts Most affected MNE affiliates Least affected MNE affiliates in the fourth quarter of 2020 against those that were less Note: “Most affected MNE affiliates” refer to respondents having severely affected, the ranking of government support experienced a decline >=40% on at least one business dimension over identified as critically important remains similar (Figure 20). the Q4 (N = 171). “Least affected MNE affiliates” refer to respondents However, companies that were more affected by the only having experienced declines <40% over the Q4 (N = 158). economic crisis were much more likely to view government support on debt restructuring (56 percent compared to 29 percent), support from IPAs (71 percent compared to 49 percent) and direct financial support (71 percent compared to 51 percent) as critical. 14 | P a g e THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S : Q4 2020 Appendix A: About the Survey The data for this study comes from the third quarterly pulse survey conducted between February 5 and March 5, 2021. Like the earlier three rounds, the fourth-round pulse survey’s 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 resilience and learning 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 329 MNEs that responded to the survey represented the six regions (about 50 respondents from each region) and the manufacturing and service sectors (about 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 fourth quarter of 2020, including the company’s performance on various dimensions compared to the same period in 2019 and adverse impacts on aspects of the supply chain. 3. The resilience and learning of MNE affiliates in the face of COVID-19 in 2020, including the changes of the company’s financial and operational performance throughout 2020, the drivers of those changes, and changes in the deployment of strategies. 4. Investment plans, including the parent company’s investment plans and changes in the supply chain. 5. Support from the government, including MNE affiliates’ perceptions of the importance of several types of government supports. 6. Policy environment change, including whether potential barriers to investment and operations of foreign-owned companies have changed and in what ways. Survey Administration The World Bank Group commissioned EY Advisory (EY) and Euromoney PLC (Euromoney, as EY’s subcontractor) to conduct the third 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 February 5, 2020 and the fieldwork was completed on March 4, 2020. Data Collection and Data Summary The survey data set contains 329 responses from MNEs operating in 37 developing countries. The figures below present the distributions of respondents by region and country of operation ( Figure 21), foreign parent company location ( Figure 22), business size separately by number of employees (Figure 23) and total assets (Figure 24), the respondent’s position (Figure 25) and the sector/subsector (Figure 26). 15 | P a g e THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S : Q4 2020 Figure 21: Sample distribution by region and country Figure 22: Sample distribution by location of foreign of operation parent Region/Host Country Count Percent Region/Source Country Count Percent East Asia & Pacific 52 16% East Asia & Pacific 41 12% Australia 4 1% Cambodia 3 1% China 6 2% China 21 6% Hong Kong SAR, China 3 1% Indonesia 6 2% Indonesia 1 0% Malaysia 8 2% Japan 8 2% Korea, Rep 4 1% Philippines 6 2% Singapore 10 3% Thailand 2 1% Taiwan, China 5 2% Vietnam 6 2% Europe & Central Asia 121 37% Europe & Central Asia 55 17% Austria 2 1% Bulgaria 9 3% Belgium 2 1% Denmark 7 2% Georgia 10 3% Finland 2 1% Russia 16 5% France 17 5% Turkey 12 4% Germany 23 7% Ukraine 8 2% Greece 1 0% Latin America & the 57 17% Ireland 4 1% Italy 5 2% Caribbean Luxembourg 3 1% Argentina 8 2% Netherlands 6 2% Brazil 19 6% Norway 1 0% Cuba 4 1% Spain 2 1% Ecuador 4 1% Sweden 6 2% Switzerland 16 5% Jamaica 2 1% United Kingdom 24 7% Mexico 15 5% Latin America & Caribbean 3 1% Peru 5 1% Chile 1 0% Middle East & North 52 16% Colombia 1 0% Africa Uruguay 1 0% Middle East & North Africa 10 3% Algeria 5 1% Israel 1 0% Egypt 12 4% Jordan 1 0% Iran 10 3% Kuwait 1 0% Jordan 10 3% Qatar 1 0% Lebanon 7 2% Saudi Arabia 1 0% Tunisia 1 0% Morocco 8 3% United Arab Emirates 4 1% South Asia 56 17% North America 115 35% Bangladesh 19 6% Bermuda 3 1% India 21 7% Canada 3 1% United States 109 33% Maldives 4 1% South Asia 26 8% Pakistan 4 1% Bangladesh 1 0% Sri Lanka 8 2% India 23 7% Sub-Saharan Africa 56 17% Pakistan 2 1% Cameroon 1 0% Sub-Saharan Africa 13 4% Kenya 4 1% Cote d’Ivoire 4 1% Mauritius 2 1% Kenya 6 2% Nigeria 2 1% Namibia 6 2% South Africa 3 1% Nigeria 11 3% Tanzania 1 0% South Africa 18 6% Zambia 1 0% Total 329 100% Tanzania 11 3% Total 329 100% 16 | P a g e THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S : Q4 2020 Figure 23: Sample distribution by size (number of Figure 25: Sample distribution by respondent’s employees) position Size Count Percent Respondent’s Count Percent position Smaller (<250 employees) 193 59% Country General 103 31% Larger (>=250 136 41% Manager employees) Country Finance 48 15% Total 329 100% Head Country Strategy 12 4% Figure 24: Sample distribution by assets in host Head country Country Sales 99 30% Assets Count Percent Manager Less than 2 million 30 9% Country Operations 61 19% Manager USD 2-5 million 89 27% Other 6 2% USD 5-10 million 34 10% Total 329 100% USD 10-50 million 81 25% >USD 50 million 93 28% Do not know 2 1% Total 329 100% 17 | P a g e THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S : Q4 2020 Figure 26: Sample distribution by sector and subsector (ISIC 4.0) Sector/subsector Count Percent Manufacturing 160 49% Basic metals 2 1% Basic pharmaceutical products and pharmaceutical preparations 18 5% Beverages 7 2% Chemicals and chemical products 14 4% Computer, electronic and optical products 11 3% Electrical equipment 14 4% Fabricated metal products, except machinery and equipment 2 1% Food products 13 4% Machinery and equipment not elsewhere classified 27 8% Motor vehicles, trailers, and semi-trailers 22 7% Non-metallic minerals products 2 1% Other manufacturing 13 4% Other transport equipment 1 0% Paper and paper products 1 0% Rubber and plastics products 1 0% Textiles 1 0% Tobacco 4 1% Wearing apparel 7 2% Services 169 51% Accommodation and food services 5 2% Administrative and support services 12 4% Electricity and gas supply 6 2% Financial services (including insurance) 28 9% Health and social services 14 4% Information and communication 34 10% Other services 2 1% Professional, scientific and technic activities 27 8% Transportation and storage 27 8% Water and waste services 2 1% Wholesale and retail trade 12 4% Total 329 100% 18 | P a g e THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S : Q4 2020 Table of Figures Figure 1: Share of MNE affiliates reporting adverse impacts during Q3 and Q4 2020, and average impact during Q4 2020 (N = 329) ................................................................................................................ 3 Figure 2: Share of MNE affiliates reporting specific supply chain effects during Q4 2020 (among those experiencing adverse supply chain effects) (N=102) ....................................................................... 4 Figure 3: Share of MNE affiliates affected on at least one business dimension (e.g. output, employment, etc.) during Q4 2020 (N=329) ............................................................................................... 4 Figure 4: Share of MNE affiliates reporting adverse effects of COVID-19 pandemic in Q4 2020 by sector, region, business model, and size ..................................................................................................... 5 Figure 5: Share of firms reporting change in financial performance between the first half and the second half of 2020 (N = 329) ...................................................................................................................... 6 Figure 6: Share of firms reporting change in operational performance between the first half and the second half of 2020 (N=329) ........................................................................................................................ 6 Figure 7: Share of firms citing drivers of improved financial performance in the second half of 2020 (N=284) ......................................................................................................................................................... 7 Figure 8: Share of firms citing drivers of improved financial performance in the second half of 2020, by sector, region, business model and headquarters location (1st rank).................................................. 8 Figure 9: Share of firms reporting changes in the deployment of technologies (N=329) ....................... 9 Figure 10: Share of firms reporting changes in the deployment of technologies, by sector (N = 329) .. 9 Figure 11: Share of firms reporting changes in deployment of technologies, by HQ location (N=329) 9 Figure 12: Share of firms reporting expected change in investment (Q3 N=305; Q4 N=329) ..............10 Figure 13: Share of firms that were certain about parent company's investment plans for host country (N=329) ........................................................................................................................................................10 Figure 14: Share of firms reporting expected change in investment, by business model (N=329) .......10 Figure 15: Share of firms reporting expected change in investment, by region (N=329) ...................... 11 Figure 16: Share of firms citing drivers of changes in investment plans (among respondents expecting investment to increase) (N=56) .................................................................................................................. 11 Figure 17: Share of firms reporting expected business model evolution over the next few years (N = 329) ................................................................................................................................................................12 Figure 18: Share of firms reporting changes to the rules and regulations for foreign investors triggered by the COVID-19 pandemic (N=329)........................................................................................13 Figure 19: Share of firms citing areas of government support as important to deal with COVID-19 in 2021 (N-329) .................................................................................................................................................14 Figure 20: Share of firms citing areas of government support perceived as "Critically important", by level of adverse impact (N=329) .................................................................................................................14 Figure 21: Sample distribution by region and country of operation ........................................................16 Figure 22: Sample distribution by location of foreign parent ...................................................................16 Figure 23: Sample distribution by size (number of employees) ...............................................................17 Figure 24: Sample distribution by assets in host country .........................................................................17 Figure 25: Sample distribution by respondent’s position .........................................................................17 Figure 26: Sample distribution by sector and subsector (ISIC 4.0) .........................................................18 19 | P a g e THE IMPACT OF COVID -19 ON FOR EI GN INVESTOR S : Q4 2020 20 | P a g e