Covid-19: Foreign direct investment (FDI) drops around the world. The coronavirus crisis is expected to plunge foreign direct investment (FDI) from -30% to -40% this year, according to estimates by UN economists. A recovery is expected only for 2022.
Covid-19: Foreign direct investment (FDI) drops around the world
The confinements and the prospect of a deep global recession have considerably reduced foreign direct investment (FDI). This is explained by the United Nations Conference for Trade and Development (Unctad) in a report on Tuesday, October 27. FDI are investments whereby a company resident in one country acquires a lasting interest in an entity resident in another country. This notion of lasting interest makes it possible to distinguish FDI from purely financial and more fluctuating flows.
According to Unctad, these cross-border investments fell by -49% in the first half of 2020 compared to the same period last year. From infrastructure finance to mergers and acquisitions, all major forms of foreign investment have been affected. “The drop has been quite drastic,” said the director of the Investment and Business Division at Unctad, James Zhan, at a press conference.
The fall in FDI is expected to slow in the second half of the year, giving rise to an annual drop of -30% to -40% over the year as a whole, in line with previous forecasts by Unctad. However, as James Zhan pointed out: “The outlook remains very uncertain, and depends on the duration of the health crisis and the effectiveness of policy interventions aimed at mitigating the economic effects of the pandemic”. Geopolitical risks also increase uncertainty, he explained.
Rich countries hit hardest
During the first half of the year, developed economies recorded the largest drop in FDI, collapsing by -75% in rich countries to $ 98 billion, a level not seen since 1994. FDI flows to Europe have for the first time fallen into the red. FDI inflows to North America fell by -56% during the same period.
FDI flows to developing economies, on the other hand, fell less than expected (-16%), UNCTAD said. By region, they fell by -28% to Africa, -25% to Latin America and the Caribbean and -12% to Asia, mainly due to the resistance of investments to China. FDI flows to the so-called transition economies fell by -81%, weighed down by Russia.
“Very uncertain” outlook
According to Unctad, the outlook remains poor as projects for new installations abroad (known as “Greenfield investments”, one of the main components of FDI) fell by -37% during the first eight months of the year. These investments, widely highlighted by host countries as job creators but also a source of technology and know-how transfer, fell by -49% in developing countries, and -17% in developed economies.