*Karl P. Sauvant, PhD*
*Resident Senior Fellow*
*Columbia Center on Sustainable Investment*
Columbia Law School - The Earth Institute, Columbia University
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Outward FDI Policy”, "China Moves the G20 toward an International
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*Columbia FDI Perspectives*
Perspectives on topical foreign direct investment issues
No. 230  July 16, 2018
Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Marion A. Creach ([log in to unmask])
*Foreign direct investment and “peak globalization”*
*** <#m_3321639626866159083__edn1>
Carlos A. Primo Braga** <#m_3321639626866159083__edn2>

Globalization is characterized by the growing economic interdependence
across countries, fostered by international trade, migration, knowledge,
and capital flows. Attitudes toward this process vary significantly. More
recently, they have been impacted by the global financial crisis and the
rise of populist leaderships that blame globalization for job destruction
and rising income inequality. Financial globalization has slowed down
significantly since 2008. By 2016, global cross-border capital flows had
declined roughly 65% vis-à-vis the peak (of US$12.4 trillion) reached in
2007.[1] <#m_3321639626866159083__edn3> Most of this adjustment was
associated with the reduction of foreign exposure by Eurozone banks amid
the Eurozone crisis.[2] <#m_3321639626866159083__edn4> But FDI flows also
fluctuated significantly over the past few years, and they only recovered
to levels similar to those reached at the eve of the crisis by 2016.

Merchandise trade had been growing on average 7% per year before the onset
of the global financial crisis. Since 2008, however, trade growth has been
anemic and in some years below the expansion of world output (e.g., 2.3% at
market exchange rates for global GDP versus 1.8% for global trade volume in
2016).[3] <#m_3321639626866159083__edn5> All of these trends raise the
question of whether globalization has reached its peak and is it now
retreating. What are the implications for FDI decisions and policies?

There are cyclical factors that help explain the slowdown in trade. Weak
aggregate demand and political uncertainty (dragging down business
investment that tends to be trade-intensive) are often identified as the
main culprits in this context. But there seem to be more structural forces
at work. The shortening of supply chains to cope with environmental and
geopolitical risks, trade protectionism, increased local content in Chinese
exports, and the evolving shift toward services in the world economy are
some of the usual suspects identified in this context.

There is evidence that discrimination against foreign commercial interests
has increased significantly in the post-crisis era.[4]
<#m_3321639626866159083__edn6> Subsidies, localization requirements and
trade finance have been playing an important role in this new wave of
discriminatory actions that often evade multilateral disciplines. It is
difficult to quantify their exact impact on global trade flows, but there
is no doubt that they are contributing to the trade slowdown. Moreover,
recent technological developments (as illustrated by the impact of advanced
robotics on re-shoring decisions by MNEs) have also impacted globalization

Concerning FDI flows, it seems that efficiency-seeking investments
(typically export-oriented) are being affected not only by protectionist
policies, but also by the retrenchment of global value chains (as the
incentives for process fragmentation decline) and by technology, to the
extent that labor costs are becoming less influential in localization
decisions.[5] <#m_3321639626866159083__edn7> All these factors are
generating incentives for localization in smaller, flexible production
facilities closer to end-markets. As a consequence, MNEs are rethinking
their localization strategies to adapt to the increased adoption of local
content requirement policies and to explore industry 4.0 manufacturing.

It may be too early to announce that we have reached “peak globalization”.
One could even argue that we are in a moment of resetting global production
structures, and that digital flows associated with e-commerce, social
networks and entertainment are today the main drivers of globalization. As
the global economy regains strength (as illustrated by the latest IMF
forecasts for 2018) and demand for consumer and capital goods recovers, one
should also expect a recovery of traditional trade flows. The elasticity of
trade with respect to income has already rebounded closer to its historical
average (1.5) in 2017.[6] <#m_3321639626866159083__edn8>

However, the specter of a less integrated world economy is real.[7]
<#m_3321639626866159083__edn9> Recent developments (e.g., Brexit, the
adoption of protectionist measures by the Trump administration and
reactions from trade partners) underscore the potential for economic
disintegration. The volume and composition of FDI flows are bound to be
affected by these developments that tend to create incentives for
market-seeking investment while feeding doubts about the benefits of
export-oriented FDI.

Policy-makers need to resist the temptation to adopt policies that further
advance these trends, such as restrictions of FDI flows designed to force
technology transfers.  More attention should be given also to the rules of
the game and the infrastructure required to promote digital globalization.
For example, rules on local data storage/processing and cross-border data
transfer should be carefully evaluated since they may threaten the business
models of digital firms and hamper FDI flows in this new era of

* <#m_3321639626866159083__ednref1> *The Columbia FDI Perspectives are a
forum for public debate. The views expressed by the author(s) do not
reflect the opinions of CCSI or Columbia University or our partners and
supporters. Columbia FDI Perspectives (ISSN 2158-3579) is a peer-reviewed
** <#m_3321639626866159083__ednref2> Carlos A. Primo Braga (
[log in to unmask]; [log in to unmask]) is Associate
Professor, Fundação Dom Cabral, Brazil, and Visiting Professor, IMD,
Switzerland. The author is grateful to Manuel Agosin, Helge Hveem and
Patrick Low for their helpful peer reviews.
[1] <#m_3321639626866159083__ednref3> Susan Lund, et al., “The new dynamics
of financial globalization,” *McKinsey Global Institute Report* (2017).
[2] <#m_3321639626866159083__ednref4> Bank for International Settlements, *87th
Annual Report* (Basel: BIS, 2017).
[3] <#m_3321639626866159083__ednref5> WTO, “Strong trade growth in 2018
rests on policy choices,” Press/820.
[4] <#m_3321639626866159083__ednref6> See,
[5] <#m_3321639626866159083__ednref7> See M.P. Timmer et al., “An anatomy
of the global trade slowdown based on the WIOD 2016 release,” *GGDC
Research Memorandum*, 162 (University of Groningen, 2016).
[6] <#m_3321639626866159083__ednref8> WTO, “Strong trade growth in 2018
rests on policy choices,” Press release 820 (April 12, 2018)
[7] <#m_3321639626866159083__ednref9> For a detailed discussion, see Carlos
A. Primo Braga, “The threat of economic disintegration,” in Carlos A. Primo
Braga and Bernard Hoekman, eds., *Future of Global Trade Order* (EUI, IMD
and FDC, 2017), pp. 29-47.
*The material in this Perspective may be reprinted if accompanied by the
following acknowledgment: “Carlos A. Primo Braga, ‘Foreign direct
investment and “peak globalization”,’ Columbia FDI Perspectives, No. 230,
July 16, 2018. Reprinted with permission from the Columbia Center on
Sustainable Investment (**
<>**).” A copy should kindly be sent to the
Columbia Center on Sustainable Investment at **[log in to unmask]*
<[log in to unmask]>*.*

For further information, including information regarding submission to the
*Perspectives*, please contact: Columbia Center on Sustainable Investment,
Marion A. Creach, [log in to unmask]

*Most recent Columbia FDI Perspectives*

   - No. 229, John Gaffney, “Could BITs and BATs be combined to ensure
   access to human rights remedies?” July 2, 2018
   - No. 228, Felipe Hees and Pedro Barreto da Rocha Paranhos, “Investment
   facilitation: moving beyond investment promotion,” June 18, 2018
   - No. 227, Rob van Tulder and Jan Anton van Zanten, “MNEs and the
   Sustainable Development Goals: what do first steps reveal?” June 4, 2018.

*All previous FDI Perspectives are available at
<>**. *

*Other relevant CCSI news and announcements*

   - *On September 26, 2018*, CCSI and the UN Sustainable Development
   Solutions Network (SDSN), under the guidance of Prof. Jeffrey Sachs,
   Special Advisor to the UN Secretary-General on the SDGs, and
   Laurent Fabius, President of the Constitutional Council of the French
   Republic, will host a conference to discuss the Global Pact for the
   The Global Pact for the Environment aims to unify international
   environmental governance and codify a human right to the environment in
   international law. *For more information, and to register, please see
   our website here
   - *On September 26, 2018*, CCSI and the Sabin Center for Climate Change
   Law will host a conference on "Climate Change, the Courts, and the Paris
   Agreement." In recent years citizens, sub-national governments and NGOs
   have turned to litigation to hold governments and corporations accountable
   for their contributions to climate change. *For more information about
   this event, including registration, please see our website here
   - *On September 27-28, 2018*, CCSI will hold its Annual Columbia
   International Investment Conference (CIIC) on “Multinationals in the Age of
   Sustainable Development: New Thinking on the Role of International
   Investment Agreements.” The Conference, taking place alongside the 73rd
   Session of the UN General Assembly in New York, will build on a multi-year
   effort to identify guiding principles and practical approaches for aligning
   international investment treaties with the Sustainable Development Goals
   (SDGs).* Additional information will be posted shortly on our
   website here

Karl P. Sauvant, Ph.D.
Resident Senior Fellow
Columbia Center on Sustainable Investment
Columbia Law School - Earth Institute
Ph: (212) 854-0689
Fax: (212) 854-7946
*Copyright © 2018 Columbia Center on Sustainable Investment (CCSI), All
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