The come and go of the geography of investments

Over the last few decades, we have witnessed an intense ebb and flow of the geographic location of investments at a global level. In the wake of the liberal order that was established in the post-war period, there was a growing movement of transferring industrial plants to Asia around the 1980s to produce and export based on the low cost of labor available there. The fragmentation of production, or globalization, as we know it, was then born.

On this journey, China would accumulate critical industrial mass and business expertise and become the top destination for foreign direct investment and the “factory of the world”. This would expand giving rise to a growing economic, trade and investment interdependence, whose benefits would be shared by many in the form of consumer goods at low prices. But the rapid increase in income combined with demographic changes would lead China to promote the relocation of its own industrial plants to countries in the Asian region with even cheaper labor, while redirecting the attention of its industrial parks to more sophisticated stages of value chains.

But the move of manufacturing plants towards Asia would not be painless. The economic stagnation of former industrial regions in the United States and Europe would give rise to growing polemics about the benefits of globalization, which would reverberate in political campaigns and even in Brexit. The supply crisis of medicines and other imported inputs from China and the collapse of logistics during the pandemic would provide even more ammunition for critics of globalization. It was in this environment, watered by the growing geopolitical dispute between the United States and China, that concepts such as nearshoring and reshoring would be forged, which preach the supposed virtues of bringing back home American industrial plants operating in Asia. It is unlikely, however, that those concepts will have the intended social effects, and the main reason is that the commoditization of technologies encourages the automation of new plants.

The next step in this reversal of investment would come from the American and European policies of capital and export controls and from the generous programs of subsidies and protectionism to the industry, which would alter the global order of trade and the geography of investments. Unfortunately, globalization as we know it is coming to an end, and with it many of its benefits, such as middle and lower-class consumption.

The liberal principles that guided the destination of investments are losing space and geopolitics and interventions in markets are entering the scene. But capital is fungible and always sniffs out business. To mitigate the possible deleterious effects of “Made in China” protectionism, Chinese companies are moving plants to Mexico to gain access to the American and Canadian markets from there, benefiting from logistics and the USMCA trade agreement.

The wandering of the geography of investments would not rest there either, as there are different forces on the table influencing its destiny, some of them even with switched signals, in a complex board full of interests and interventions. An example is the war in Ukraine, which, combined with the pandemic and geopolitical agendas, would lead the energy market to unprecedented instability and supply uncertainties. Prices, especially in Europe, would reach record levels, something unsustainable for many sectors and businesses. Certainly, considerable variations in electricity costs have implications for the competitiveness and even survival of companies, notably those most exposed to international trade, which is already leading to relocation.

The increasing implementation of environmental regulations is also influencing the geography of investment. Companies under pressure to decarbonize are already moving plants to regions that are abundant in green and secure energy, and with falling marginal prices, and that, whenever possible, are less exposed to intense geopolitical issues. It's all about powershoring. Extreme weather events, which are becoming more and more frequent, are also already influencing location strategies.

Resilience is, therefore, becoming a central element of the geography of investments, while efficiency and costs give way. However, cost elements, such as green energy, will continue to exert an important influence on decision-making, especially in energy-intensive sectors. After all, there is no way to ignore, for example, that the costs of producing hydrogen from renewable electricity can be USD 3-4/kg in China and the United States and USD 5-7/kg in Japan and Europe, while in Brazil and other countries in the Latin America region they can be around USD 1/kg or less. Everything indicates that the deconcentration and diversification of the geographical location of the plants will become critical themes for corporate strategies for productive and market security, especially for companies with a global presence.

Preliminary figures indicate that Brazil and Mexico, countries facing varied challenges, attracted USD 91 billion and USD 37 billion, respectively, in foreign direct investment in 2022, high levels by historical standards. For 2023, the prospects are even better. This is evidence in favor of geographic diversification of production, which points to new avenues of opportunity for emerging economies.

It is likely that the geography of investments will remain volatile, but it is also likely that companies will look for ways to continue mitigating risks based on adaptable strategies. For Latin America and the Caribbean, which has so many solutions to offer investors, it is time to work on an agenda of enabling factors that make the region an even more attractive option for foreign direct investment.