FDI in the I4.0 era – fortune favours the prepared

Marta A. Götz,
Associate Professor,
Vistula University,
Warsaw, Poland

Countries of the V4 region, including Poland, have established themselves as attractive locations for foreign direct investment (FDI). Since the transformation, they hosted numerous projects worth billions of euros. Despite that evident success, one must not ignore the approaching broader implications the ongoing digital transformation or Industry 4.0 (4th industrial revolution) would have on the international production patterns and hence the FDI location. Industry 4.0 is not only about the technology but above all, utterly new business models. I4.0 turns these old models “upside-down”. Hosting FDI implies these days being, in fact, part of the global value chains (GVC). New EU members have joined GVC thanks to offering a mix of low cost, high qualified labour force and general business-friendly, politically stable environment. For decades, offshoring has transformed a range of national manufacturing segments into global networks; nevertheless, also due to the recent digital advancement, the possibilities to re-shore some of the activities back home are frequently raised.

In the light of this upcoming or even already happening transformation and the profound changes it entails; we need to re-evaluate the attractiveness and readiness of countries or regions to host foreign investment. Classic factors which proved critical for defining attractiveness of host locations seem to recede in the background. Likewise, the traditional labilities on the side of foreign investors, such as that of smallness or outsidership, apparently lose their weight as “digital” compensate them. Internationalization can now happen almost overnight with more new-born global, whereas the host attractiveness seems to be defined more by the I4.0-readiness measured by technological, entrepreneurial or governance competencies.

The I4.0 would impact the FDI mainly by modifying the profile of MNEs, the strategies adopted by HQs in home countries and the autonomy granted to foreign subsidiaries; i.e. by reshaping the firm-specific advantages of MNEs. Yet, it is not only the production itself which will be affected by the robotization but the whole investment process selection and general inclinations to move abroad.

I4.0 would also affect the attractiveness of host locations and policies conducted towards FDI in host economies as it requires necessary adjustments. The new policies must be holistic and encompass digital macroeconomic context, as well as selected incentives.  Various initiatives are undoubtedly essential elements for successful transformation towards I4.0, but they have to be complemented with a healthy business ecosystem and strong local industry. As expressed by experts, firstly, it is necessary to adapt the offer to the stages of development. The critical start is to raise awareness; to make the entrepreneurs aware of their needs, which will trigger their invention. Secondly, it becomes necessary to offer real help in assessing digital maturity. Finally, it is essential to bolster local capabilities, to create soft and hard competencies.

Experts argue, there will be no shock from one day to another and firms will gradually search for new concepts, implementing incremental improvements. No bold strategic shifts of FDI should be expected overnight also due to the path dependency. Hence, in the short and medium-term, no dramatic changes should be anticipated. Though, in the long run, classic business models and GVC cooperation will be inevitably disrupted, causing the need to revisit the concept of FDI as the traditional factory disappears, being replaced by distributed service-oriented production. In V4 countries, there is a chance that Industry 4.0 will be implemented thanks to FDI, which will act a transformation vehicle. Digitization is necessary to avoid falling out of value-added chains. I4.0 for V4 could provide an opportunity to develop new competitive advantages and lead to emergence of own foreign investment – I4.0 can act as competitiveness booster and source of OFDI. For the countries of the Visegrad group I4.0 could be a chance to move from the league labelled “cheap labour” to a whole new level”.

Attractiveness will be determined by the sector of technologically strong start-ups and a new culture of innovation, offering a different perspective. It will be defined by its absorptive capabilities. The I.40 adaptation is time-consuming and requires a whole package of parallel accompanying changes. I4.0, as an “evolutionary revolution”, needs appropriate preparation and must be skilfully implemented. Path dependency and history of previous successes (reinvested profits) in attracting FDI suggest no considerable changes in the short run, though, “fortune favours the prepared”.

The expected lighter international footprint of digital MNEs, combined with profound transformation, even disruption of organization of value chains would have obvious consequences on the FDI worldwide. It would suggest more humble expectations for the future FDI hosting. As it seems, the days of increasing FDI flows with more and more jobs, and high assets commitments might be numbered at least concerning the category of digital MNEs, whose exact prevalence is yet to be assessed. The issue of attracting the right, valuable, sustainable, yet modern and technologically advanced investment which can be adequately embedded in the local economy would become a priority.

* Consideration presented in this essay draws on the research conducted within the project funded by Visegrad Fund – EFFECTS OF INDUSTRY 4.0 ON FDI IN THE VISEGRÁD COUNTRIES – ID#21920068.

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