Global foreign direct investment (FDI) flows fell by 35 per cent in 2020 to $1 trillion from $1.5 trillion the previous year, according to the World Investment Report 2021 by the United Nations Conference on Trade and Development (UNCTAD), which recently said pandemic-induced lockdowns around the world slowed down existing investment projects, and the prospects of a recession led multinational firms to re-assess fresh projects.
The fall was heavily skewed towards developed economies, where FDI fell by 58 per cent, in part due to corporate restructuring and intrafirm financial flows. FDI in developing economies decreased by 8 per cent, primarily because of resilient flows in Asia. As a result, developing economies accounted for two thirds of global FDI, up from just under half in 2019.Global FDI flows fell by 35 per cent in 2020 to $1 trillion from $1.5 trillion in 2019, according to the World Investment Report 2021 by the UN Conference on Trade and Development, which said pandemic-induced lockdowns around the world slowed down existing investment projects, and the prospects of a recession led multinational firms to re-assess fresh ones.#
FDI patterns contrasted sharply with those in new project activity, where developing countries are bearing the brunt of the investment downturn. In those countries, the number of newly announced greenfield projects fell by 42 per cent and the number of international project finance deals–important for infrastructure–by 14 per cent.
This compares to a 19 per cent decline in greenfield investment and an 8 per cent increase in international project finance in developed economies. Greenfield and project finance investments are crucial for productive capacity and infrastructure development, and thus for sustainable recovery prospects, the UNCTAD report said.
All components of FDI were down. The overall contraction in new project activity, combined with a slowdown in cross-border mergers and acquisitions (M&As), led to a drop in equity investment flows of more than 50 per cent. With profits of multinational corporations down by 36 per cent on an average, reinvested earnings of foreign affiliates–an important part of FDI in normal years–were also down.
The impact of the pandemic on global FDI was concentrated in the first half of 2020. In the second half, cross-border M&As and international project finance deals largely recovered. But greenfield investment–more important for developing countries–continued its negative trend throughout 2020 and into the first quarter of 2021.
Developing economies weathered the storm better than developed ones. However, in developing regions and transition economies, FDI inflows were relatively more affected by the impact of the pandemic on investment in tourism and resource-based activities.
Asymmetries in fiscal space available for the rollout of economic support measures also drove regional differences, the UNCTAD report said.
The fall in FDI flows across developing regions was uneven, at minus 45 per cent in Latin America and the Caribbean, and minus 16 per cent in Africa. In contrast, flows to Asia rose by 4 per cent, leaving the region accounting for half of global FDI in 2020. FDI to the transition economies plunged by 58 per cent.
The pandemic further deteriorated FDI in structurally weak and vulnerable economies. Although inflows in the 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) also fell, by 40 per cent, as did those to landlocked developing countries (LLDCs), by 31 per cent. FDI flows to Europe dropped by 80 per cent while those to North America fell less sharply (minus 42 per cent).
The United States remained the largest host country for FDI, followed by China.
Fibre2Fashion News Desk (DS)
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