Economy News

HOW FDI FLOWS ARE AFFECTED IN THE WORLD DUE TO AUTOMATION?

Written by Talent KAS

Related Topic in KAS Prelims Syllabus:

Economy [Paper-II]: Foreign investment and competition policy

Context

Across the world, the rise of automation has raised concerns over its impact on employment, especially in poor countries.

World Bank Study

  • In a World Bank study, Mary Hallward-Driemeier and Gaurav Nayyar used data sets on greenfield foreign direct investments (FDI) and industrial robot usage between 2004 and 2015 to investigate the relationship between automation and FDI flows.
  • The study measured automation in terms of the intensity of robot use (robots per 1,000 employees).

Key Findings

  • During the period (2004-2015), because of outsourcing, high-income countries (HICs) such as the European nations and the US, witnessed the largest FDI outflows, measured in terms of project announcements, into low- and middle-income countries (LMICs).
  • Leading sectors in HICs witnessed a huge rise in automation.
  • Electronic and automobile sectors were the most automated while Textiles was the least automated.
  • The study finds that as automation increases, FDI flows from HICs to LMICs fall.
  • However, this relationship is non-linear. A 10% increase in the intensity of robots in HICs is associated with a 5.5% increase in the growth rate of FDI flows to LMICs.
  • But above a certain threshold of automation in HICs, FDI inflows into LMICs grow at a diminishing rate and lead to reshoring with HICs investing in their own countries.
  • For the poorest countries, automation actually leads to greater FDI inflows, but from a smaller pool of countries.
  • Because of this, the researchers argue that fears of technological advancement displacing labour may be overstated.

Conclusion

  • The World Bank study concluded that automation will certainly disrupt the flow of capital from high-income countries (HICs) to into low- and middle-income countries (LMICs).
  • It also suggests that poor countries can gain from automation if adopted at the right time.
[Source: Livemint]

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