Top five trends in FDI to look out for in 2021
Foreign direct investment has been hard hit in 2020, with levels plummeting by 40–50%. Investment Monitor has identified five key trends to keep an eye on in 2021.
1. FDI will continue to struggle in 2021
The UN Conference on Trade and Development (UNCTAD) stated in June 2020 that it is expecting FDI volumes to decline by 5–10% in 2021. Investment will be highly dependent on Covid-19 recovery. The news in December 2020 of new nodes of the virus has dampened hopes that progress in the development of vaccines will lead to a quicker turnaround of a return to ‘normal’. If countries go back into lockdown status, investors will continue to delay or cancel projects.
A more positive scenario – particularly for the business community – would be that the vaccinations become widespread, although many working in the industry will be towards the bottom of the vaccine priority lists. If this is the case, we would expect the number of FDI projects may actually stabilise in 2021.
In terms of capital investment and jobs, the global pandemic should exacerbate an already developing trend of smaller project sizes. Technological advancements have been the primary reason for lower project sizes in recent years (in terms of job creation), and given the developments in working from home capabilities, the societal weariness around travel and the likely continuation of social distancing recommendations, we expect many larger-scale projects to be put on hold until Covid-19 restrictions are eased or reduced in size.
2. New directions in FDI
The pandemic has provided companies with time to reassess their strategies and we expect a renewed focus of companies incorporating sustainable development and environmental, social and governance goals into their FDI plans.
We also envisage that companies will demand less office space compared with previous years. Many large companies moving offices will consider buildings at up to 80% of their workforce capacity. We predict a new normal of people working up to half of their working week from home (where possible). This may play into the favour of tier two and tier three cities. We expect companies to consider locations outside of the main business cities as they will not only offer lower costs, but less congestion to attract the best talent.
One of the main discussion points in 2020 has been the impact Covid-19 has had on the need for companies (namely manufacturers) to shorten their supply chain risk. In 2021, we should see further evidence of companies looking to reshore or nearshore their activities to reduce this risk. Pressures could therefore be placed on developing economies – which were highly attractive in the supply chain principally for cost effectiveness – if companies from developed economies are given domestic support packages.
Countries that recover from Covid-19 the quickest are likely to see increased flows of FDI. Although the top FDI destinations are unlikely to change, we may see some reordering. For example, China has seen an upturn in FDI flows in 2020 linked to its handling of the pandemic and its GDP growth.
3. Recovery will differ by sector
The impact of Covid-19 has been felt across all FDI sectors. However, we expect certain sectors to recover quicker than others. Software and IT (including AI, cybersecurity, fintech, gaming, machine learning and software as a service), life sciences (biotech, e-health and medtech) and renewable energy are three sectors to watch in terms of quicker recovery/growth. Some subsectors may have actually grown in 2020 due to consumer demand switching to online. Communication platforms (such as Zoom) and e-commerce (Amazon) have seen a surge in demand for their products.
In contrast, tourism FDI (hotels and leisure) is expected to continue to struggle. Additionally, manufacturing FDI (in particular aerospace and automotive) is predicted to have a much slower recovery.
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