Uncertainty about the ongoing COVID-19 pandemic and the global investment policy environment will continue to affect foreign direct investment in 2021 as “further weakness” is expected in the new year, “risking sustainable recovery.”
Global FDI collapsed in 2020, plummeting 42% from $1.5 trillion in 2019 to an estimated $859 billion, according to the intergovernmental agency.
Last year’s low level of FDI hasn’t been seen since the 1990s and is more than 30% below the investment dip that followed the 2008-2009 global financial crisis. Despite economic projections that the global economy will recover in 2021, UNCTAD forecasts FDI flow to remain “weak” due to the uncertainty surrounding the ongoing pandemic.
In UNCTAD’s 2020 World Investment Report, the organization had projected a 5 to 10% FDI slide for 2021. In January’s Investment Trends Monitor, UNCLAD says the FDI decline was concentrated in developed countries, where flows fell by 69% to an estimated $229 billion. Flows to Europe dried up completely to -4 billion, and a “sharp decrease” was recorded in the United States (-49% to $134 billion.) FDI in China ended the year with a small increase at 4%.
“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.”
Developed countries hit hard by COVID-19
Flows to North America declined by 46% to $166 billion, with cross-border mergers and acquisitions (M&As) dropping by 43%. Greenfield investment projects also fell by 29% and project finance deals tumbled by 2%.
The US’ 49% drop in FDI took place in wholesale trade, financial services and manufacturing and UNCTAD says cross-border M&A sales of US assets to foreign investors fell by 41%, mostly in the primary sector.
On the other side of the pond, investment in Europe dried up. Flows fell by two-thirds to -$4 billion. In the United Kingdom, FDI fell to zero.
However, Europe’s overall FDI performance did have a few regional bright spots. Sweden’s flows more than doubled — from $12 billion to $29 billion. FDI to Spain also rose by more than 50% (due to several acquisitions such as private equities from the United States).
Among other developed economies, flows to Australia fell (-46% 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% to an estimated $616 billion, they accounted for 72% of global FDI – the highest share on record, says UNCTAD.
While developing Asian countries did well collectively — attracting an estimated $476 billion in FDI in 2020— flows to members of the Association of Southeast Asian Nations (ASEAN) contracted by 31% to $107 billion, due to a decline in investment to the largest recipients in the subregion.
When it comes to individual nations, China was the world’s largest FDI recipient last year, with flows rising by 4% to $163 billion. High-tech industries saw an increase of 11% in 2020, and cross-border M&As rose by 54%, mostly in ICT and pharmaceutical industries.
India also recorded positive growth (13%), boosted by investments in the digital sector.
“A return to positive GDP growth (+2.3%) and the government’s targeted investment facilitation programme helped stabilize investment after the early lockdown,” the report says.
Weak outlook for 2021 except for technology and healthcare
UNCTAD says that data on an announcement basis (M&As, greenfield investments, and project finance) provides a “mixed picture” on forward trends and confirms a “weak outlook for 2021.”
“Greenfield project announcements in 2020, 35% lower than in 2019, do not bode well for new investment in industrial sectors in 2021,” the report says.
“For developing countries, the prospects for 2021 are a major concern,” says Zhan. “These investment types are crucial for productive capacity and infrastructure development and thus for sustainable recovery prospects.”
The report warns 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 increases in global FDI flows in 2021 to come not from new investments in productive assets but from cross-border M&As, especially in technology and healthcare. European companies are set to attract more than 60% 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,” says UNCTAD — including e-commerce platforms, data processing services, and digital payments.
Some 80% 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% increase in acquisitions, targeting European and other markets for information technology services.
The full UNCTAD Invest Trend Monitor from January 2021 can be found online.