256 views | Akanimo Sampson | October 29, 2020
In the first half of this year, Global foreign direct investment (FDI) flows were down 49% compared to 2019 as lockdowns around the world slowed existing investment projects and the prospects of a deep recession led multinational enterprises (MNEs) to re-assess new projects.
The decline, according to the United Nations Conference on Trade and Development (UNCTAD), cuts across all major forms of FDI.
New greenfield investment project announcements dropped by 37%, cross-border mergers and acquisitions (M&As) fell by 15% and newly announced cross-border project finance deals, an important source of investment in infrastructure, declined by 25%.
Developed economies saw the biggest fall, with FDI reaching an estimated $98 billion in 2020 H1 – a decline of 75% compared to 2019. The trend was exacerbated by sharply negative inflows in European economies with significant conduit flows. FDI flows to North America fell by 56% to $68 billion.
FDI flows to developing economies decreased by 16% ‒ less than expected. Flows were 28% lower in Africa, 25% in Latin America and the Caribbean and 12% in Asia, mainly due to resilient investment in China. In the first half of 2020, developing Asia accounted for more than half of global FDI. FDI flows to transition economies were down 81% due to a strong decline in the Russian Federation.
Cross-border M&A values reached $319 billion in the first three quarters of 2020. The 21% decline in developed countries, which account for about 80% of global transactions, was checked by the continuation of M&A activity in digital industries.
The value of greenfield investment project announcements – an indicator of future FDI trends – was $358 billion in the first eight months of 2020. Developing economies saw a much bigger fall (-49%) than developed economies (-17%), reflecting their more limited capacity to roll out economic support packages.
The number of announced cross-border project finance deals declined by 25%, with the biggest drops in Q3, suggesting that the slide is still accelerating.
Prospects for the full year remain in line with earlier projections of a 30-40% decrease. The rate of decline in developed economies is likely to flatten as some investment activity appears to be picking up in Q3.
Flows to developing economies are expected to stabilize, with East Asia showing signs of an impending recovery.
The outlook remains highly uncertain, depending on the duration of the health crisis and on the effectiveness of policy interventions to mitigate the economic effects of the pandemic. Geopolitical risks also continue to add to the uncertainty.
Despite the 2020 drop, FDI remains the most important source of external finance for developing countries.
Other sources, including remittances and official development assistance – relatively more important for LDCs – are also falling. The overall decline can add to external payments problems in developing countries.