Back in June, Geneva-headquartered United Nations Conference on Trade and Development (UNCTAD), in its World Investment report for 2020, had forecasted that global foreign direct investment (FDI) flows could decline up to 40% in 2020, from their 2019 value of $1.54 trillion.
However, as per the UNCTAD’s investment trends monitor for October 2020, the dip is way more severe than anticipated, as global FDI flows fell 49% in the first half of 2020 compared to last year. The reason behind this decline: Covid-19.
As per the UN body's report, pandemic-induced lockdowns around the world slowed existing investment projects, and the prospects of a deep recession led multinational enterprises to reassess new projects. The biggest drops occurred in developed countries, cutting across all major forms of foreign direct investment.
“The FDI decline is more drastic than we expected, particularly in developed economies. Developing economies weathered the storm relatively better for the first half of the year,” says James Zhan, UNCTAD’s investment and enterprise director. “The outlook remains highly uncertain.”
According to the report, developed economies saw the biggest fall, with FDI reaching an estimated $98 billion in the six-month period—a decline of 75% compared to 2019. The trend was aggravated by sharply negative inflows in European economies, mainly in the Netherlands and Switzerland. FDI flows to North America, on the other hand, saw a fall of 56% to $68 billion.
However, amongst developing economies, Asia, overall, seems to have done relatively better. Flows in Asia decreased by just 12%, primarily owing to resilient investment climate in China. Africa suffered a decline of 28%, while Latin America and the Caribbean saw a fall of 25%. In the six months to June 2020, developing countries in Asia accounted for more than half of global FDI flows.
The report also highlighted that the decline in flows has cut across all major forms of FDI, as cross-border M&A values reached $319 billion in the first three quarters of 2020. The 21% decline in developed countries, which account for about 80% of global transactions, was checked by the continuation of M&A activity in digital industries.
Also, the value of greenfield investment project announcements— which works as an indicator of future FDI trends—was $358 billion in the first eight months of 2020. Here, developing economies saw a much bigger fall (-49%), than developed economies (-17%), reflecting their more limited capacity to roll out economic support packages.
While the UNCTAD report does not capture the FDI data specifically for India, official numbers indicate that FDI flows witnessed a 28% decline in the first six months of 2020 at $19.77 billion, compared to $$27.48 billion in the same period last year.
At the global level, despite the steep decline in the first half of the year, UNCTAD's prospects for the full year hasn't changed. It remains in line with its earlier projections of a 30% to 40% decrease in FDI flows. While the outlook remains negative, the rate of decline in developed economies is likely to flatten, as some investment activity appeared to be picking up in the third quarter.
Going forward, the FDI flows will depend a lot on the duration of the Covid-19-induced health crisis, and the effectiveness of policy interventions to mitigate the economic effects of the pandemic. Along with it, geopolitical risks will continue to add to the uncertainty.