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The changing landscape of international business post-COVID-19

The pandemic will have an uneven impact on international business potentially changing the landscape in which companies operate.

By Niccolò Pisani

Companies currently face heightened levels of uncertainty, especially in terms of their international operations. Geopolitical tensions are rising, and the U.S.-China trade war may only be at its beginning. Countries around the world are scrambling to put policies in place to counter the economic fallout from the COVID-19 pandemic and to secure growth in the post-COVID-19 era.

Globalization is also being increasingly scrutinized, and protectionist sentiment has been spreading, even in countries such as the U.S. and the United Kingdom, which have championed an open approach to markets and benefitted substantially from the world’s increased connectedness.

The changes caused by COVID-19 are likely to have a lasting impact that will challenge us far beyond the current pandemic. Recent data and the author’s ongoing research on the world’s largest multinationals suggest that the four following trends will be of particular relevance when formulating expectations on how the international business landscape might evolve in the aftermath of the pandemic.

COVID-19 will have an uneven impact on international business

According to the International Monetary Fund's latest estimates1, the world’s real GDP grew by 2.8 per cent in 2019, contracted by 3.3 per cent in 2020 as a result of the COVID-19 pandemic, and is expected to grow by 6 per cent in 2021. These figures may erroneously suggest that we can expect companies’ international operations to return to pre-pandemic levels by 2022.

A closer look at macro-economic indicators reveals that while it is true that the world’s GDP bounced back to its pre-COVID-19 level relatively quickly, the international business landscape will change significantly. Especially when we compare the pandemic-related effects on trade versus the impact it has had on the actual investments companies make to build, buy or reinvest in operations abroad. As far as trade is concerned, the WTO estimates2 that the world merchandise trade volume will increase by 8 per cent in 2021 after dropping by 5.3 per cent in 2020, a much lower decline than initially expected. Conversely, when looking at global foreign direct investment (FDI) flows, UNCTAD3 data indicate that FDI flows will take significantly longer to recover, as illustrated in the chart below.

The heightened levels of uncertainty and ongoing protectionist pressures are likely to further exacerbate the dynamics described above and limit the recovery of companies’ international investments for a protracted period.

Global FDI inflows

Note: Data for 2015–2020 and 2021–22 forecast.

Source: UNCTAD.

Companies’ international trade will largely depend on China’s role going forward

The last 20 years have witnessed China’s impressive rise in world trade. Since its inclusion in the WTO at the turn of the century, China’s share of global exports increased dramatically on a year-over-year basis. The 2020 UNCTAD data4 confirm that China accounted for nearly 15 per cent of global exports, with the U.S. and Germany representing roughly 8 per cent each, the only two other countries next to China with a share in global exports that is higher than 5 per cent (see chart below).

China’s current role as an export powerhouse implies that changes in its status and/or economic priorities will have major ripple effects on the international business landscape. Two factors must be carefully considered in this respect. First, China is increasingly focusing on its domestic market as a result of the growing maturity of its economy and, in turn, the country’s domestic consumption over the last few years has become a driving force. Second, recent geopolitical tensions, especially involving the U.S., have prompted the Chinese government5 to groom its economy for a future in which the U.S. no longer plays a key role in global demand and thus the Chinese government is investing even more heavily in bolstering its own economy.

China’s increasing focus on its own market will have major implications for multinationals that have been importing goods from the Asian giant and—in response to growing protectionist measures at home as well—may soon start looking for domestic or at least alternatives located in closer proximity to source their goods and establish long-term economic partnerships.

The rise of China as the world’s export powerhouse

Source: UNCTAD

The relevance of international mergers and acquisitions will rise

UNCTAD data6 show that already before the pandemic, cross-border mergers and acquisitions (M&As) were the dominant form of FDI in developed economies—accounting for roughly 42 per cent of FDI inflows to this group of countries in 2019, with greenfield investments representing 34 per cent and international project finance the remaining 24 per cent. While cross-border M&As registered a slowdown in the first half of 2020, they were able to largely recover in the second half. This trend is also reflected in the data collected by PwC relative to global M&A deal volumes and values from 2019 to 2021 (see chart below).

The same pattern is not observed for greenfield investments, however. Such investments have been of particular relevance for developing countries, accounting for over 50 per cent of total FDI inflows into this group of countries in 2019 compared to cross-border M&As, which made up only 9 per cent. Contrary to cross-border M&As, the negative trend of greenfield investments continued throughout 2020 (falling by over 40 per cent in developing countries vis-à-vis 2019) and well into 2021.

On the one hand, the greater sensitivity of greenfield investments to geopolitical factors such as protectionism and enhanced regulatory accountability is bound to continue to play a role in coming years, in view also of the high level of uncertainty surrounding international markets. On the other hand, the abundance of capital in advanced economies and the growth of alternative types of buyers prepared to invest in international markets—from private equity firms to new special purpose acquisition companies (SPACs)—are expected to further accelerate international investors’ search for new deals around the world, especially in developed economies. 

Global M&A deal volumes and values (2019–2021)

Source: PWC

The regionalization trend will intensify

Intraregional trade was already on the rise before the outbreak of the COVID-19 pandemic. The author’s ongoing research7 on the world’s largest multinationals included in the Fortune Global 500 list finds that these companies have displayed a strong home-region orientation over the last decade, locating approximately 70 per cent of their equity subsidiaries within their home regions. It is worth noting that this percentage increases to nearly 80 per cent when restricting the focus to Fortune Global 500 companies headquartered in emerging and developing economies.

In view of the rising tensions and stronger localization pressures from national governments, we can expect a further escalation in the regionalization trend in the near future. Companies are expected to look more closely at ways to benefit from cross-country differences in their regional neighbourhood, as a result also of stakeholders’ increased scrutiny at home.

  • Niccolò Pisani is Professor of Strategy and International Business at IMD Business School.

Disclaimer: The views expressed in this article are those of the authors based on their experience and on prior research and do not necessarily reflect the views of UNIDO (read more).

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