Investment flows plunged globally by 35% in 2020 due to the COVID-19 crisis. The fall was heavily skewed towards developed economies.
Global foreign direct investment (FDI) flows are expected to bottom out in 2021 and recover some lost ground with an increase of 10% to 15%, according to UNCTAD’s World Investment Report 2021, published on 21 June.
FDI flows plunged globally by 35% in 2020, to $1 trillion from $1.5 trillion the previous year, the report says. Lockdowns caused by the COVID-19 pandemic around the world slowed down existing investment projects, and the prospects of a recession led multinational enterprises (MNEs) to reassess new projects.
The fall was heavily skewed towards developed economies, where FDI fell by 58%, in part due to corporate restructuring and intrafirm 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 under half in 2019 (Figure 1).
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.
FDI flows to Europe declined by 80% while those to North America fell less sharply (-40%). The fall in FDI flows across developing regions was uneven, with 45% in Latin America and the Caribbean, and 16% in Africa.
In contrast, flows to Asia rose by 4%, with East Asia being the largest host region, accounting for half of global FDI in 2020. FDI to transition economies declined by 58%.
The pandemic further deteriorated FDI in structurally weak and vulnerable economies.
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) fell by 40%, and those to landlocked developing countries (LLDCs) by 31%.
MNEs, the key actors in global FDI, are weathering the storm. Despite the 2020 fall in earnings, the top 100 MNEs significantly increased cash holdings, attesting to the resilience of the largest companies. The number of state-owned MNEs, at about 1,600 worldwide, increased by 7% in 2020, with some new entrants resulting from equity participations as part of rescue programmes.
Bottoming out likely in 2021
Looking ahead, global FDI flows are expected to bottom out in 2021 and recover some lost ground with an increase of 10% to 15% (Figure 2). “This would still leave FDI some 25% below the 2019 level. Current forecasts show a further increase in 2022 which, at the upper bound of projections, bring FDI back to the 2019 level,” said UNCTAD’s director of investment and enterprise, James Zhan.