The Comings and Goings of Investment Geography

The last few decades have seen an intensive ebb and flow of the geographic location of global investments. Following the liberal order that was established globally around the 1980s, a growing number of industrial factories transferred to Asia for production and export, driven by the low cost of labor there. This was the beginning of fragmentation of production, or globalization, as we know it.

As part of this trend, China accumulated critical industrial mass and entrepreneurial experience and became the main target of foreign direct investment, as the “world’s factory.” This order continued to expand, giving rise to a growing economic, commercial and investment interdependence, the benefits of which were shared by many in the form of low-priced consumer goods. But rapid income growth combined with demographic changes subsequently prompted China to relocate its own factories to countries within the Asian region with even cheaper labor, while redirecting its industrial park’s focus to more sophisticated stages of value chains.

But this move of the industry towards Asia was not harmless. Economic stagnation in the former industrial regions of the United States and Europe led to growing controversies over the benefits of globalization, which would reverberate in political campaigns, and even Brexit. China’s supply crisis for imported medicines and other supplies and the collapse of logistics during the pandemic gave even more ammunition to globalization critics. Against this backdrop, and fueled by the growing geopolitical dispute between the United States and China, notions such as nearshoring and reshoring emerged, which extoll the supposed virtues of bringing back home the American industrial plants operating in Asia. However, these concepts are unlikely to have the intended effects on society, and the main reason is that the commoditization of technologies encourages the automation of new factories.

The next step in this investment reversal came from U.S. and European capital and export control policies, as well as generous programs of subsidies and protectionism to industry, which altered the order of trade and the geography of investment. Unfortunately, globalization as we know it is coming to an end, and with it many of its benefits, including consumption rates at the middle and lower classes. The liberal principles that guided the destination of investments lose ground, while geopolitics and market interventions make headway. But capital is fungible and it always detects business. To mitigate the potentially harmful effects of “Made in China” protectionism, Chinese firms are moving factories to Mexico to access the U.S. and Canadian markets from there, thus benefiting from logistics and the USMCA trade agreement.

The ever-changing geography of investments did not rest there either, as there are different forces that sway its direction, some of them even with switched signals, in a complex board full of interests and interventions. One example is the war in Ukraine, which, coupled with the pandemic and geopolitical agendas, drove the energy market into unprecedented instability and supply uncertainties. Prices, especially in Europe, reached record highs, which is unsustainable for many sectors and businesses. Certainly, considerable variations in electricity costs have implications for the competitiveness, and even survival, of companies, particularly those most exposed to international trade, which is already prompting relocations.

The increasingly active implementation of environmental regulations is also influencing investment geography. Companies under pressure to decarbonize are already moving factories to safe regions abundant in green energy with falling marginal prices, and, if possible, less exposed to intense geopolitical problems. This is powershoring. Increasingly frequent extreme weather events are also shaping location strategies.

Resilience, therefore, is becoming a core element of the geography of investments, while efficiency and costs are taking a back seat. However, cost elements, such as green energy, will continue to play a pivotal role on decision-making, especially in energy-intensive sectors. After all, we can’t ignore, for example, that the costs of producing hydrogen from renewable electricity can be 3–4 USD/kg in China and the United States and 5–7 USD/kg in Japan and Europe, while in Brazil and other countries in the region they can be around USD 1/kg or less. It all points at the deconcentration and diversification of the geographical location of the factories will become critical issues for corporate strategies of productive and market security, especially for companies with a global presence.

Preliminary figures show that Brazil and Mexico, which face various challenges, attracted USD 91 billion and USD 37 billion, respectively, in foreign direct investment in 2022, which are high numbers by historical standards. For 2023, the outlook is even better. This is evidence in favor of geographical diversification of production, which shows new opportunities for developing countries.

The geography of investment is likely to remain volatile, but firms are also likely to find ways to further mitigate risks based on adaptive strategies. For Latin America and the Caribbean, which offers investors so many solutions, it is time to work on an agenda of enabling factors that make the region an even more attractive option for FDI.