Uncertainty over the pandemic’s evolution and the global investment policy environment will continue to affect foreign direct investment (FDI) flows in 2021, according to the United Nations Conference on Trade and Development (UNCTAD), which recently said the prospects for 2021 are a major concern for developing countries. Global FDI collapsed in 2020, falling by 42 per cent from $1.5 trillion in 2019 to an estimated $859 billion.
India recorded a positive FDI growth (13 per cent), boosted by investments in the digital sector.
According to the UNCTAD Investment Trends Monitor published this month, the decline in FDI was concentrated in developed countries, where flows plummeted by 69 per cent to an estimated $229 billion.
Such a low level was last seen in the 1990s and is more than 30% below the investment trough that followed the 2008-2009 global financial crisis.
Despite projections for the global economy to recover in 2021—albeit hesitant and uneven—UNCTAD expects FDI flows to remain weak due to uncertainty over the evolution of the COVID-19 pandemic.
The organisation had projected a 5-10 per cent FDI slide in 2021 in last year’s World Investment Report.
“The effects of the pandemic on investment will linger,” said James Zhan, director of UNCTAD’s investment division. “Investors are likely to remain cautious in committing capital to new overseas productive assets.”
Flows to North America declined by 46 per cent to $166 billion, with cross-border mergers and acquisitions (M&As) dropping by 43 per cent. Announced greenfield investment projects also fell by 29 per cent and project finance deals tumbled by 2 per cent.
The United States recorded a 49 per cent drop in FDI, falling to an estimated $134 billion. The decline took place in wholesale trade, financial services and manufacturing. Cross-border M&A sales of US assets to foreign investors fell by 41 per cent, mostly in the primary sector.
Investment to Europe fell by two-thirds to minus $4 billion. In the United Kingdom, FDI fell to zero, and declines were recorded in other major recipients.
But Europe’s overall FDI performance masks a few regional bright spots. Sweden, for example, saw flows double from $12 billion to $29 billion. FDI to Spain also rose 52 per cent, thanks to several acquisitions, such as private equities from the United States Cinven, KKR and Providence acquiring 86 per cent of Masmovil.
Among other developed economies, flows to Australia fell (by minus 46 per cent to $22 billion) but increased for Israel (from $18 billion to $26 billion) and Japan (from $15 billion to $17 billion).
Although FDI flows to developing economies decreased by 12 per cent to an estimated $616 billion, they accounted for 72 per cent of global FDI—the highest share on record.
The fall was highly uneven across developing regions: minus 37 per cent in Latin America and the Caribbean, minus 18 per cent in Africa and minus 4 per cent in developing countries in Asia. FDI to transition economies declined by 77 per cent to $13 billion.
While developing countries in Asia weathered the storm well as a group, attracting an estimated $476 billion in FDI in 2020, flows to members of the Association of Southeast Asian Nations (ASEAN) contracted by 31 per cent to $107 billion, due to a decline in investment to the largest recipients in the sub-region.
In terms of individual nations, China was the world’s largest FDI recipient, with flows to the Asian giant rising by 4 per cent to $163 billion. High-tech industries saw an increase of 11 per cent in 2020, and cross-border M&As rose by 54 per cent, mostly in information and communication technology and pharmaceutical industries.
The report says that data on an announcement basis—on M&As, greenfield investments and project finance—provides a mixed picture on forward trends and confirms the weak outlook for 2021.
“Greenfield project announcements in 2020, 35 per cent lower than in 2019, do not bode well for new investment in industrial sectors in 2021,” the report says.
Although, FDI flows in developing economies appear relatively resilient in 2020, greenfield announcements fell by 46 per cent and international project finance by 7 per cent, according to the report.
The report cautions that “the far more limited capacity of developing countries to roll out economic support packages to stimulate investment in infrastructure will result in an asymmetric recovery of project-finance-driven FDI.”
UNCTAD expects any increases in global FDI flows in 2021 to come not from new investment in productive assets but from cross-border M&As, especially in technology and healthcare – two industries affected differently by the pandemic.
European companies are set to attract more than 60 per cent of the technology deals in value terms, but several developing economies are also seeing an increase.
India and Turkey are attracting record numbers of deals in IT consulting and digital sectors, including e-commerce platforms, data processing services and digital payments.
Some 80 per cent of the acquiring firms are based in developed economies, primarily in Europe, but a few multinational enterprises from developing countries are active buyers.
South African investors, for example, plan to acquire stakes in healthcare providers across Africa and Asia. And Indian IT companies have announced a 30 per cent increase in acquisitions, targeting European and other markets for information technology services.