Global FDI Increases By 15% Despite Uncertainty
Global foreign direct investment (FDI) flows are expected to bottom out in 2021 and recover some lost ground with an increase of 10 to 15 per cent, according to UNCTAD’s World Investment Report 2021.
It showed that FDI flows plunged globally by 35 per cent in 2020, to $1 trillion from $1.5 trillion the previous year.
Lockdowns caused by the COVID-19 pandemic around the world slowed down existing investment projects, and the prospects of a recession led multinational enterprises (MNEs) to reassess new projects.
The fall was heavily skewed towards developed economies, where FDI fell by 58 per cent, in part due to corporate restructuring and intra-firm financial flows.
It stated that FDI in developing economies was relatively resilient, declining by eight per cent, mainly because of robust flows in Asia.
As a result, developing economies accounted for two thirds of global FDI, up from just under half in 2019.
Furthermore, it stated that FDI patterns contrasted sharply with those in new project activity, where developing countries were bearing the brunt of the investment downturn.
In developing countries, the number of newly announced Greenfield projects fell by 42 per cent and international project finance deals – important for infrastructure – by 14 per cent, it added.
“These investment types are crucial for productive capacity and infrastructure development and thus for sustainable recovery prospects,” Acting UNCTAD Secretary-General Isabelle Durant said.
“COVID-19 has also caused a collapse in investment flows to sectors relevant for the Sustainable Development Goals (SDGs) in developing countries,” it added.
According to the report, all but one SDG investment sectors registered a double-digit decline from pre-COVID-19 levels.
The shock exacerbated declines in sectors that were already weak before the pandemic – such as power, food and agriculture, and health, it added.
“The drop in foreign investment in SDG-related sectors may reverse the progress achieved in SDG investment in recent years, posing a risk to delivering the 2030 Agenda for Sustainable Development and to sustained post-pandemic recovery,” Durant said.
“FDI trends in 2020 varied significantly by region. In developing regions and transition economies they were relatively more affected by the impact of the pandemic on investment in global value chain-intensive and resource-based activities. Asymmetries in fiscal space for the roll-out of economic support measures also drove regional differences.
“FDI flows to Europe declined by 80 per cent while those to North America fell less sharply (-40%). The fall in FDI flows across developing regions was uneven, with 45 per cent in Latin America and the Caribbean, and 16 per cent in Africa,” it stated.
In contrast, flows to Asia rose by four per cent, with East Asia being the largest host region, accounting for half of global FDI in 2020. FDI to transition economies declined by 58 per cent.
The report stated that the pandemic further deteriorated FDI in structurally weak and vulnerable economies.
Although inflows in least developed countries (LDCs) remained stable, greenfield announcements fell by half and international project finance deals by one third.
FDI flows to small island developing states (SIDS) fell by 40 per cent and those to landlocked developing countries (LLDCs) by 31 per cent.
“MNEs, the key actors in global FDI, are weathering the storm. Despite the 2020 fall in earnings, the top 100 MNEs significantly increased cash holdings, attesting to the resilience of the largest companies. The number of state-owned MNEs, at about 1,600 worldwide, increased by seven per cent in 2020, with some new entrants resulting from equity participations as part of rescue programmes,” it added.
Looking ahead, global FDI flows are expected to bottom out in 2021 and recover some lost ground with an increase of 10 to 15 per cent, it predicted.
“This would still leave FDI some 25% below the 2019 level. Current forecasts show a further increase in 2022 which, at the upper bound of projections, bring FDI back to the 2019 level,” UNCTAD’s director of investment and enterprise, James Zhan said.
“Prospects are highly uncertain and will depend on, among other factors, the pace of economic recovery and the possibility of pandemic relapses, the potential impact of recovery spending packages on FDI, and policy pressures,” he added.
