Foreign direct investment on recovery path amid uncertainties
01 July 2021
By Susanna Gevorgyan
Global foreign direct investment (FDI) has been significantly affected by the pandemic, dropping by 35% last year, that is, from US$1.5 trillion in 2019 to US$1 trillion. While FDI is expected to grow by 10-15% in 2021, this will still be 25% lower than the level recorded in 2019, according to an annual report published by the United Nations Conference on Trade and Development (UNCTAD).
According to the “World Investment Report 2021”, developed countries experienced a sharper decline in FDI than developing countries although the latter did not escape lightly.
While in developed countries FDI decreased by 58%, partially as a result of the fluctuations caused by commercial transactions and inter-company monetary flows, developing countries experienced an 8% reduction mostly due to resilient flows in Asia.
Latin America and the Caribbean were the most affected, witnessing a 45% decrease in FDI with the figure tumbling to US$88 billion, a hard blow to a region that is largely dependent on funding for its natural resources and tourism sectors. Africa came second with a 16% decrease in FDI to US$40 billion – the lowest in the last 15 years. According to the UNCTAD forecasts, Africa and Latin America are expected to experience the weakest recovery in FDI.
Asia was the least affected with the region actually enjoying a 4% increase in FDI to US$535 billion, the only increase at the global level in 2020. China and Hong Kong were the main drivers of this increase, registering a hike of US$46 billion.
UNCTAD warns that the pandemic has damaged FDI in areas that are critical for developing economies. In 2020, pledged investments in the water and sanitation sector dropped by 67%, the health, transport, and energy infrastructure sectors saw the figure falling by 54% while in the agricultural and education sectors FDI declined by 49% and 35% respectively.
The list of the largest recipients of money inflow in the world, according to UNCTAD, is topped by the United States which, despite the registered 40% decrease, benefitted from US$156 billion in FDI. It is closely followed by China with US$149 billion. Cumulative FDI in Europe crashed by 80% to US$73 billion. Large economies, such as the United Kingdom, France, and Germany also recorded a serious decline. The UK documented a 57% drop while France and Germany experienced 47% and 34% respectively. The list of the top 20 host economies of FDI inflows is presented below.
Last year, as a result of strong instability in conduit flows, multinational organizations from developed countries decreased their overseas investment by 56%. Their share in the total outward FDI declined to an extreme of 47%. Multinationals from Europe decreased their international investment by 80% to a record level not seen since 1987. The reduction was mainly due to severe drops in outflows from the Netherlands, Germany, Ireland, and the United Kingdom. One of the largest source countries, the Netherlands, decreased outflow by US$246 billion to US$161 billion. The list of the top 20 home economies of FDI outflows is presented below.
UNCTAD has forecast a 10% to 15% increase in global FDI flows in 2021, noting that this figure may reach the 2019 level in 2022. “Prospects are highly uncertain and will depend on, among other factors, the pace of economic recovery and the possibility of pandemic relapses, the potential impact on FDI of recovery spending packages, and policy pressures,” UNCTAD’s report concluded.