Global foreign direct investment (FDI) flows are expected to bounce back in 2021 with an increase of 10% to 15%, after plunging 35 percent, according to UNCTAD’s World Investment Report 2021.
Global FDI flows fell to US$1 trillion in 2020 from US$1.5 trillion in 2019, the report notes. Essentially, COVID-19 induced lockdowns around the world reduced existing investment projects, and the prospects of a recession led multinational enterprises (MNEs) to reassess new projects.
Meanwhile, the fall was heavily tilted towards developed economies, where FDI fell by 58%, in part due to corporate restructuring and within firm financial flows.
FDI in developing economies was relatively resilient, declining by 8%, mainly because of robust flows in Asia. As a result, developing economies accounted for two thirds of global FDI, up from just below half in 2019.
Also, FDI patterns contrasted sharply with those in new project activity, where developing countries are bearing the brunt of the investment downturn.
In developing countries, the number of newly announced greenfield projects fell by 42 percent and international project finance deals which are important for infrastructure also fell by 14 percent.
“These investment types are crucial for productive capacity and infrastructure development and thus for sustainable recovery prospects,” Acting UNCTAD Secretary-General Isabelle Durant noted.
COVID-19 slowed investments in SDGs
COVID-19 has regressed progress in GDGs by slowing down investment flows to sectors relevant for the Sustainable Development Goals (SDGs) in developing countries.
All but one SDG investment sectors registered a double-digit decline from pre-COVID-19 levels. The shock worsened declines in sectors that were already weak before the pandemic such as power, food and agriculture, and health.
“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,” Ms. Durant remarked.
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.
The pandemic further declined FDI in economies that suffer structural weaknesses and are also vulnerable. 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) declined by 40 percent, and those to landlocked developing countries (LLDCs) by 31 percent.
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.
While global FDI is projected to bounce back in 2021, it reflects lingering uncertainty about access to vaccines, the emergence of virus mutations and the reopening of economic sectors.
“Increased expenditures on both fixed assets and intangibles will not translate directly into a rapid FDI rebound, as confirmed by the sharp contrast between rosy forecasts for capex and still-depressed greenfield project announcements,” James Zhan, UNCTAD’s director of investment said.
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