The COVID-19 pandemic wreaked havoc and hit the economies of almost all the countries in the world. This impact is clearly visible in the global FDI inflows in 2020, which reached a record low and declined by 35% compared to 2019. The FDI inflows in 2020 were the lowest since 2005.
UNCTAD (United Nations Conference on Trade and Development) has recently released its annual World Investment Report (WIR) on 21 June 2021. The Annual World Investment Report monitors the global & regional investment trends along with the national & international policy developments that influence these trends. The theme for the ‘World Investments Report -2021’ is ‘Investing in Sustainable Recovery’.
This edition of WIR assumes prominence in the context of the COVID-19 pandemic in 2020, which has wreaked havoc and hit the economies of most countries. With most of the countries either still struggling with the pandemic or its aftereffects, the role of investment is key in the recovery process and building the future. The latest report reviews investment in the Sustainable Development Goals (SDGs) and the influence of investment policies on public health & economic recovery from the pandemic.
Our recent story looks at the role of ‘Research & Development’ in meeting the SDG targets based on the latest UNESCO Science Report. The WIR-2021 looks at the role of Investment in meeting SDG targets. In this story, we focus on the trends in ‘Foreign Direct Investment (FDI)’ in countries across the world.
Global FDI inflow down by 35 % in 2020
Foreign Direct Investment (FDI) plays a key role in the developing and poorer regions of the world. Many of these investments are made in various projects that help these countries in meeting the SDG targets. Apart from various projects, these investments include ‘Green-field Investments’ i.e., FDIs by a parent company by creating a subsidiary in other country by building the operations from ground. Such investments have a large impact on the community.
For the year 2020, the Global FDI inflows were $998.89 billion. This is 35% less the Global FDI inflows in 2019, which was around $1.53 trillion. The report observes that this is the lowest since 2005.
Even during the Global Financial crisis in 2009, the global FDI inflows were $1.18 trillion i.e., around 18% more than the FDI inflows in 2020. As per the WIR-2021 report, lockdowns around the world due to the COVID-19 pandemic have slowed down the existing investment projects. The prospects of a recession have resulted in many of the multi-national enterprises to re-assess new projects.
While the volume of decline in FDI inflows was stark in 2020, there has been a general declining trend in the last few years. The increase in global FDI inflows in 2019 followed a two-year decline post-2016.
If the trends from 2005 are analysed, it is observed that the volume of Global FDI inflows has been inconsistent year-on-year, with years of higher investments followed by a decline and then an increase. Since 2005, the greatest FDI inflows were in 2016 with $2.06 trillion. Along with the declining trend in FDI inflows, the volume of global FDI outflows has also reduced in 2020.
Developed Countries have a higher decline in both FDI Inflows & Outflows
The major reason for the overall fall in the Global FDI inflows in 2020 is because of the considerable decline observed in both the Developed Economies and the Transition Economies, where-in it fell by 58% compared to the 2019 figures.
- In 2019, the FDI inflows for Developed economies for $749 billion, which fell to $312 billion in 2020.
- While the volume is much lesser in Transition economies, the proportion of decline is on par with the Developed economies. FDI inflows in these economies fell to $24 billion in 2020, compared to $57 billion the previous year. Transition economies refer to those economies which are changing from Central planning to a Free market economy.
- Comparatively, FDI inflows in developing economies fell by only around 8%.
The higher decline observed in the Developed Economies and the comparatively better performance by the developing economies is due to the trends in few specific countries.
- A major portion of the decline in the FDI inflows of the developed economies can be attributed to the Netherlands, which experienced liquidation of several large holding companies, corporate reconfiguration, and intra-firm financial flows.
- The comparatively lesser decline in the FDI inflows of developing economies is mainly due to the increase in the FDI inflows of Asian countries especially Hong Kong. China & India also reported an increase in their FDI inflows which compensated for the decline in FDI inflows during 2020 for most of the other developing economies.
Because of the decline in FDI inflows for 2020, the share of Developed Economies in the Global FDI inflows has reduced from 49% in 2019 to 31% in 2020. Meanwhile, the share of Developing Economies increased from 47% in 2019 to 66% in 2020.
Even in the case of FDI outflows, there is a decline reported in the Developed economies. The FDI outflow was $347 billion in 2020 in these economies, compared to $780 billion in 2019 i.e. a decline of 55.5 %. This is contributed majorly by the Netherlands along with Germany & Japan.
The FDI outflow of transition economies, which was a lowly $23 billion in 2019 further fell to $5 billion in 2020. As is the case of FDI inflows, the decline for FDI outflows of Developing economies was comparatively lower. In 2020, the FDI outflows for Developing economies were $387 billion, only around 7% less than the $417 billion in 2019.
India along with China & Hong Kong among the developing economies that have reported an increase in FDI inflows
As indicated earlier, the Global trend in FDI inflows & outflows is largely influenced by a select group of countries. Apart from the Netherlands, which has a single major influence on the fall in inflows among the Developed countries, the general trend for most of the countries, irrespective of the economies has been of a decline in 2020 compared to 2019.
Countries across continents & regions have reported a decline in the FDI inflows, even though the level of decline is varied.
- Europe, especially the European Union countries which have the highest number of Developed economies had a major decline in the FDI inflows. Apart from the Netherlands, Germany, Ireland & United Kingdom are among those with a higher value of FDI inflows, all of whom reported a decline in 2020. This contributed to the overall decline seen in both Developed Economies (type of economy) as well as European countries (region).
- As noted earlier, the better performance in FDI inflows of Developing countries is due to the Asian countries. Hong Kong has reported a significant increase in its FDI inflows in 2020. China, which has a large volume of FDI inflows, after the USA also reported an increase in FDI inflows by $8 billion.
- India’s FDI inflows increased by 25% during 2020 compared to 2019. FDI inflows to India reached $64 billion in 2020, up from $51 billion in 2019.
- The FDI inflows to the USA fell by around 40% while that of Canada, another developed country in North America fell by 51%
- Brazil’s FDI inflows fell by 62% and are largely reflective of the trend in Central & South American countries
The Netherlands also reported a major fall in its FDI outflows. It fell to -$161 billion from $85 billion in 2019.
- The already low FDI outflows of Ireland & the U.K fell further, while the FDI outflows of Germany fell from $135 billion to $35 billion.
- USA, China, India, etc. have reported only a marginal change in the FDI outflow.
- As in the case of Inflows, the FDI outflows of Hong Kong have nearly doubled from $53 billion in 2019 to $102 billion in 2020.
Barring a few exceptions, the overwhelming trend in FDI flows for 2020 is that the COVID-19 pandemic & the resultant measures by countries across the world had a negative impact resulting in a decline in FDI inflows and outflows.
Though the trends point out the direction, they do not provide a complete picture of the impact of COVID-19. Analysis of the type of FDI along with the trends of FDI in various sectors could present a more holistic picture of the impact of the COVID-19 pandemic on the FDI flows. We would explore this in detail in the next story.
Featured Image: Global FDI inflows