Investment Amid the Evolution of Industry Chain

In this chapter, we discuss the implications of the evolution of the industry chain for investments in the real economy and financial market. The evolution of the industry chain has had profound effects on international investment capital flow. In the era of globalization, China’s inbound foreign direct investment (IFDI) and outbound foreign direct investment (OFDI) have grown rapidly. However, as economies gradually shift their focus from efficiency to both security and efficiency in the development of industry chains, international capital flowing in and out of China may also change. In addition to traditional economic factors affecting China’s IFDI and OFDI, we also investigate changes in international relations to analyze the trends of international capital flows, and come to the following conclusions: The evolution of the industry chain also has important implications for financial market investment. The interregional relocation of industry chain hubs reflects changes in the comparative advantages of different economies, which affects the sustainability of investment. Based on historical data, we find that the relocation of industry chain hubs is often reflected by the distribution of each country’s share in the global market cap of said industry. Overseas investors prefer industries with comparative advantages, which ultimately leads to wider valuation premiums of such industries. Meanwhile, the position of an industry chain in its own life cycle affects the potential investment returns. Sectors that are in the growth stage or in the second growth stage present larger room for investment in our view. We assess investment opportunities in industry chains and look for those in the growth stage with competitive strength in the global market based on the following measures: technological intensity, structural complexity, and level of standardization. We believe these industry chains can offer high and sustainable investment returns. Watch effects of economies of scale and the trend of deglobalization. The effect of economies of scale have been fully tapped in the era of the digital economy, but deglobalization may lead to divergence in relative economies of scale among different countries and regions. As a large country, China is relatively better positioned during this process. However, the positive effect of economies of scale may ultimately come to an end, after which global economic growth will become harder, depend more on, and eventually converge to the pace of technological advances. Improving technological innovation capability will become more critical. Against the backdrop of deglobalization, the focus of global industry chain development has shifted from solely efficiency to both efficiency and security. The escalating protectionism may also intensify competition. Increased consideration for non-economic factors may dampen the risk appetite of companies and investors and raise the risk premium of the financial market. This is also a key issue in the industry chain investment.