Resilient cities: how FDI acts as a shock absorber in a volatile world

Cities are central to the global economic engine, generating more than 80% of the world’s GDP and housing about 55% of its population. With 68% of the world’s population and 2.5 billion more people projected to live in urban areas by 2050, any disasters, shocks and their potential implications to these cities is likely to be amplified. 

Indeed, the UN Office for Disaster Risk Reduction says that without significant investment, natural disasters could cost cities worldwide $415bn a year by 2030. An increased frequency of natural loss events over recent decades – from 249 events in 1980 to 850 in 2018, according to reinsurance group Munich Re – indicates the growing urgency of the problem.

The capacity of cities to absorb, recover and prepare for future shocks has thus become increasingly important in the face of rapid urbanisation, climate change and economic headwinds. As a driver of economic development through job creation and technological advances, FDI could play a crucial role in strengthening the resilience of cities for the future. 

However, two consecutive years of falling headline flows since 2016 and the risks to future growth, including weaker global economic activity and ongoing trade tensions, could mean FDI's capacity to help on this score could be dwindling. So where can FDI make a difference, and how can cities attract it in order to protect themselves against prospective risks?

Resilience explained

The concept of urban resilience has grown in prominence in recent years with the inception of dedicated organisations, such as 100 Resilient Cities. 

In an increasingly interconnected and complicated world, resilient cities must be able to respond to a variety of shocks and adverse events that span across several areas but can broadly be considered as relating to either the economy or the environment. 

A city that is economically resilient can respond to and recover from unexpected, negative events including financial crises, downturns in particular sectors and a slowdown in global economic growth. A city that is environmentally resilient can respond to and recover from adverse natural hazards such as droughts, floods, tsunamis, hurricanes and earthquakes. 

FDI could be key in bolstering a city in terms of its economy, and the environment and “is considered a very important, influential determinant that can drive, maintain and help urban resilience,” says Xiaoling Zhang, associate professor at the City University of Hong Kong.

Private investment needs

Maintaining, retrofitting and improving existing infrastructure as well as building new infrastructure is a key area for building urban resilience, and one in which FDI could play a key role. From 2015 to 2030, the global demand for low-emission climate-resilient urban infrastructure is estimated to be $4500bn to $5400bn annually, according to the UN State of City Climate Finance Report, with developing countries facing an even greater need due to a relative lack of government tax revenue and domestic savings to tap into.

“FDI is particularly important in financing infrastructure because in many countries, domestic saving levels are insufficient for financing this gap,” says Sameh Wahba, global director for the urban, disaster risk management, resilience and land global practice at the World Bank Group.

Beyond filling the financing gap, FDI is an essential source of funds for urban infrastructure due to the private sector approach it brings to such projects. Typically there is much better discipline on “project preparation and viability, efficiency of investments and also on factoring in operation and maintenance”, according to Mr Wahba.

Beyond project discipline, FDI can also provide indirect dividends as cities that are active in attracting FDI often adapt their own governance to be attractive to foreign companies. “Once a city sees how important it is to be attractive to FDI there is often a change of mindset,” says Max Bouchet, a research analyst at the Brookings Institute, a Washington, DC-based think tank. “FDI attraction can influence how a city organises its strategy by requiring a more collaborative and co-operative environment at the regional scale,” he adds.

Virtuous cycle

There is also a virtuous cycle with FDI and resilience. Once a city is resilient, it tends to attract more FDI. A recent World Trade Centers Association (WTCA) report found that economically resilient cities attract twice the rate of FDI than non-resilient cities as a share of GDP. FDI is also essential to build resilience through diversification of cities’ economies.

The WTCA report says that among “cities that faced national economic slowdowns over the past five years, the 25% most diversified on average slowed down 11% less than their respective countries, while those in the bottom 25% slowed down 4% more”. A survey of global business leaders included in the report showed the three most significant factors for building the economic resilience of a city are a diversified economy (42%), incentives and local support to attract FDI (16%) and a skilled workforce (16%). 

“It is about cultivating an ecosystem that attracts and retains investment… cities that have an attractive fiscal and tax environment and business-friendly policies have demonstrated success,” says Allison Carlson, managing director of FP Analytics, the independent research division of the Foreign Policy Group, which produced the WTCA report.

However, coherent FDI attraction strategies are only part of the picture, as “transparent public planning and decision making, clear channels for ongoing dialogue between the private sector, local authorities and civil society are also essential factors in attracting increasingly competitive FDI”, she adds.

Work by the 100 Resilient Cities network, a Rockefeller Foundation-funded project that has helped cities globally with their resilience strategies, is attempting to help bolster these key dialogue channels between different stakeholders. 

“The main barriers that investors face in addressing challenges at the sub-national and city level pertain to not being able to identify the right partner for urban resilience in a city. You need an institutional capacity in place and a single point of contact. We’ve invested in chief resilience officers in cities across the world to create an enabling environment to deliver at scale,” says Lauren Sorkin, acting executive director at 100 Resilient Cities.

Investment barriers

Despite the benefits of a city having maximum resilience, some question whether it is a defining factor in companies' investment decisions. “It is very hard to create a business pitch [solely on] the question of sustainability or resilience, [even though] it is becoming critically important and should be factored in,” says Mr Bouchet at the Brookings Institute.

Creating a one-size-fits-all policy is also difficult as cities all have their own specific challenges, needs and goals. “A city's global identity matters for FDI attraction as it projects its value proposition and signals the location as a prime destination for business and investment," says Mr Bouchet.

Also, some of the most urgently needed investment spans multiple sectors, while typically foreign investors are interested in “infrastructure investments that are income generating and that they can operate on a commercial basis, such as telecoms, ports, airports and power generation”, says Mr Wahba. “These often pertain to single sectors and have a cleaner institutional framework. [Yet] urban resilience is multisectoral, often messy and would imply infrastructure that does not generate a direct revenue,” he adds. 

An example of a pure resilience investment is flood protection infrastructure, which can reduce flooding risk on land and thereby improve its value. This can create investment opportunities and real estate developments, but investors in real estate have a very different modus operandi to urban resilience-type investors, according to Mr Wahba. “Foreign investors are definitely cognisant of the need to invest in infrastructure in general in the developing world, and are increasingly investing there, but the leap forward to urban resilience is a bit more complicated,” he adds.

Despite these barriers and the main impetus for building urban resilience coming from the public sector, FDI and the private sector could nevertheless play a key role in assisting cities to become resilient for the future. After all, the UN has highlighted it as essential to sustainable development and poverty reduction, with goal 11 of 2015's Sustainable Development Goals to “make cities and human settlements inclusive, safe, resilient and sustainable”.