The crisis caused by the Covid-19 pandemic exacerbated pre-existing challenges to the system of international production. The decade to 2030 is likely to prove a period of transformation for global value chains (GVCs), which will have significant implications for the global trade and investment landscape and multinational enterprises’ (MNEs) modes of operation.

Five major forces will drive the GVC transformation and reshape the global trade and investment landscape in the upcoming decade. These forces impact on the locational determinants and MNEs’ strategic choices for international operations, and subsequently reshape the global investment landscape. All this will present daunting challenges and ample opportunities for companies and states alike, leading to an investment-development paradigm shift.

1. Economic governance realignment

International economic policymaking and especially trade and investment policies are shifting away from multilateral cooperation towards regional and bilateral solutions. This is compounded by a general shift in national economic policymaking through new industrial policies, including protectionism in numerous countries. The aggravated systemic competition (trade, investment, technology, etc) between economic powers may lead to a widespread global economic governance divide.

2. The new industrial revolution

The application of new technologies in international production of global MNEs will have far-reaching consequences for the configuration of GVCs. The key technology trends include robotics-enabled automation and AI-enhanced systems, supply chain digitalisation (including platforms, cloud, the internet of things, blockchain and additive manufacturing and mass customisation). Each of these technologies will have distinct effects on the length, geographical distribution and governance of GVCs. Each technology, depending on industry-specific deployment, will flatten, squeeze or bend the ‘smile curve’ of GVCs in its own way. All this will reshape the global trade and investment landscape and exert long-term social and economic impacts in different parts of the world.

3. Sustainability endeavour

The big push for the green and blue agenda by markets and governments is changing products and processes along the value chains in the direction of sustainability. According to the UN Conference on Trade and Development’s (UNCTAD) latest estimates, the global sustainability-dedicated funds are now at the level of between $1.2trn and $1.3trn, including $260bn of green bonds, $105bn of social bonds, and more than $900bn of sustainability-themed equity funds. The global effort to mobilise and channel investment to realise the Sustainable Development Goals (SDGs) will also change the future pattern of foreign direct investment (FDI), including the sources of financing, sectoral distribution and geographical location. UNCTAD’s recent review has shown that six out of ten SDG groupings saw an increase in investment over the past six years. Investment in SDGs is expected to grow to trillions of dollars in the coming years.

4. Corporate accountability

International cooperation to fight corruption, illicit payments, tax evasion and anti-competitive practices will have important implications for the modes of operation of MNEs. The environmental, social and governance (ESG) standards and disclosure requirements will add to trade and investment policy pressures from both host and home states. Differences in approach between countries and regions on emission targets will impact the GVC governance choices. This author envisages the transformation of ESG standards in three dimensions in the coming years: a shift from icing-on-the-cake to integration into business models; from proliferation to a harmonisation of standards; and from voluntary to mandatory compliance. The transformation is gathering new momentum as governments and regulators are gearing up their efforts to integrate ESG into regulatory frameworks for FDI and capital markets, while MNEs worldwide are shifting their business value from shareholder-based to stakeholder-based.

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5. Resilience-oriented restructuring

The global crises, as well as growing geopolitical conflicts, will drive MNEs to make their global value chains more resistant to new types of shocks, and governments to reduce reliance on foreign sources for critical supplies. Admittedly, it will not be so easy for many MNEs to restructure their GVCs, and the reshoring and nearshoring have not been significant for some countries during the pandemic. Nevertheless, the trend is emerging and likely to continue beyond the pandemic. MNEs will adopt new modes of business operations to enhance agility and flexibility, and to cope with increasing volatility, uncertainty, complexity and ambiguity of the global business environment. All of this will exert a significant impact on the future pattern of global investment flows, including through diversification, redundancy and, to a certain extent, reshoring and nearshoring.

The effects on global investment of the five driving forces are multifaceted. They are sometimes mutually reinforcing, and sometimes push in opposite directions. They play out differently across industries and geographies. Combined, these driving forces will impact three sets of locational determinants of the host countries: the policies and regulatory framework for international investment, the characteristics and dynamics of the host economy, and the investment facilitation and infrastructure.

The driving forces will also fundamentally alter the way companies across industries will design and operate their GVCs. They will influence MNEs’ strategic choices for international operations (modes of governance: arm’s length transactions [trade], FDI or non-equity modes). They will affect where MNEs choose to locate which type of activities, how they distribute value-added, tangible and intangible assets over their networks, and how they transmit practices, including ESG, to actors along their value chains. Global patterns of trade and investment will change consequently, as will their potential impact on economic growth, employment creation and sustainable development.

This article is an extract of GVC transformation and a new investment landscape in the 2020s: Driving forces, directions, and a forward-looking research and policy agenda published in the Journal of International Business Policy (2021)