COVID-19 and Digital FDI: An Opportunity for Resilient Recovery

by | Jul 14, 2020

The Futures Project volunteer Joy Priya wrote this piece on the need for investment in the digital economy during the COVID-19 crisis and after.
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The economic ramifications of the COVID-19 pandemic have been negative on a global scale. The United Nations Conference on Trade and Development (UNCTAD) has projected a 40% plunge in foreign direct investment (FDI) projects due to the recession caused by COVID-19 pandemic. The World Trade Organisation (WTO) has released similarly bleak international trade predictions with world trade expected to fall between 13 and 32% in 2020 due to COVID-19 disruptions to trade activities.

While communities around the world are adapting their investment attraction and promotion strategies to keep pace with the pandemic’s adverse impact on firms, some industries have stayed afloat despite the pandemic. Knowledge-seeking industries like information and communications technologies and other digital technology sectors have performed well and the drive towards digitalization that existed before the pandemic has accelerated rapidly.

The Digital Economy in COVID-19
The World Economic Forum and the Group of Twenty define the digital economy as a broad range of economic activities that use digitized information and knowledge as key factors of production, modern information networks as an important activity space, as well as information and communications technology to drive productivity growth. Numerous firms operating across diverse sectors including retail, logistics, education and manufacturing have all benefited from the spread of digitization.

During COVID-19 specifically, firms operating within the digital economy have provided the global community with sustainable ways of working through virtual meetings and allowed for flexible work-from-home arrangements to the point that some firms are looking to make remote work a long-term option for their employees. In addition, digitalization has allowed firms to transcend and penetrate new markets through online platforms, integrated logistics services and automated manufacturing facilities – reaching a far larger audience than they would have been able to without digital tools.

Encouraging Digital FDI Attraction & Investment Readiness
Investment promotion agencies around the world have updated their strategies to include an element of attraction operating in digital industries, in the hope that those firms will enrich local economies and the local workforce with opportunities to grow the local digital economy. Attracting investment in digital sectors, however, requires a toolkit that is different from that of attracting traditional brick-and-mortar firms due  to digital technology firms’ reliance on non-traditional assets, data and the presence of a workforce with tech-savvy skills.

To target digital technology investment, communities should strive to develop a digital-friendly investment climate where digital business models can thrive. In addition to the availability of basic infrastructural requirements that most digital tech firms require, like high internet speeds and competitive utilities and rental costs, a conducive regulatory framework that removes barriers to entry in the industry, and encourages local innovation will be a crucial investment enabler.

Beyond that, governments will need to provide sufficient support to domestic firms wishing to adopt digital and future-focused business practices into their business model to remain competitive in the economy. It is important that communities do not just seek to draw digital investments from abroad, but also attempt to develop a local ecosystem that allows digital projects to develop from a domestic context. Governments have supported local companies through the provision of grants or research and development incentives to firms that innovate or operate in key digital sectors.  In addition, connecting firms to innovation or development clusters will allow firms to gain necessary knowledge on how to incorporate more technology-driven processes into their existing business model.

Finally, the digital economy will need a workforce equipped to support it. While large firms are investing in digital skills training for current staff, the transition to a digital economy must be managed well to ensure that traditional economic activities are not displaced faster than upskilling takes place.

While the digital economy has tremendous potential to encourage resilient recovery, it has also brought about disruption across various industries. There was already significant concern surrounding digitalization and its impact on job security through displacing workers. The accelerated move to develop digital economies must be managed to ensure that communities are ready to handle technology-induced shifts and are not simply hopping on a trend that their labour force and investment climate are not ready for.