Article by James Zhan, Director of Investment and Enterprise, UNCTAD courtesy of FDI Intelligence.
The Covid-19 pandemic caused a triple economic shock — it hit supply, demand and policy-making at the same time. Foreign direct investment (FDI) paid the highest price as its drop in 2020 was significantly sharper than the drop in global gross domestic product (GDP) and trade.
Looking ahead, I am cautiously optimistic about global FDI prospects in 2021, and more optimistic for 2022. Flows will bottom out this year, with a modest increase of up to 15%, regaining part of the 35% lost in 2020. Global FDI is likely to increase further by 20–30% in 2022. Our most optimistic scenario is that global FDI will approach the pre-pandemic level of 2019.
Nevertheless, global FDI prospects are highly uncertain. They 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, including geopolitical tensions and reshoring.
How will FDI recover?
The FDI recovery is likely to be a gradual one, trailing the global economic recovery in GDP and trade. According to the IMF’s latest World Economic Outlook, global economic output is now expected to grow by 5.8% in 2021, from –3.3% last year, and global trade by 8.4% from –8.5%. Both are expected to fully recover by the end of 2021.
There are two dichotomies here. First, the current FDI recovery differs in modes of investment. Cross-border mergers and acquisitions (M&As) are leading, while the actual greenfield investment is lagging. M&As are led by corporate restructuring and capex for inventory replenishment, whereas large-scale new investment projects take time to be prepared and implemented. The pace of actual greenfield investment growth appears slower than that of M&As in 2021. The announced greenfield investment has increased significantly, according to fDi, indicating a much stronger recovery in 2022.
Second, the pace of FDI recovery differs geographically. Developed economies, such as the US and the EU, are leading the global FDI recovery, while developing economies may trail behind.
African and Latin American economies will continue to suffer from the impact of the pandemic on FDI. Their FDI rebound will be very modest and the full recovery is likely to take much longer.
FDI flows to Asia will remain relatively stable at a high level. Flows into the 10 Association of Southeast Asian Nations countries will recover from the heavy loss in 2020. FDI into South Asia, led by India, will decline significantly.
In terms of the distribution of FDI growth, sectors such as ICT, consumer goods, manufacturing, retail, business services and infrastructure are leading the FDI recovery, while hotels and airlines, and extractives for fossil fuels, are lagging behind the overall trends.
Furthermore, the protective policies of many governments will be less enabling for cross-border technological cooperation, particularly through FDI modes. More than 80% of the technological cooperation has been through the FDI mode over the past decade.
