The Covid-19 pandemic has triggered the world’s worst economic crisis since the Great Depression of the 1930s. The International Monetary Fund estimates that the global economy fell by 4.4.% in 2020, with many countries facing recession and soaring unemployment rates. It therefore comes as no surprise that global foreign direct investment (FDI) has also suffered dramatically.
According to figures from the UN Conference on Trade and Development (UNCTAD), global FDI flows shrank by 42% in 2020 to an estimated $859bn, from $1.5trn in 2019. This is more than 30% below the lowest level of investment recorded following the global financial crisis in 2009 and is back at a figure last seen in the 1990s.
The pandemic has affected all types of investment. Cross-border mergers and acquisitions (M&A) sales fell by 10% from $505bn in 2019 to $456bn in 2020. Greenfield project announcements dropped by 35% from $846bn to an estimated $547bn. International project finance deals emerged the least unscathed with a decline of 2% compared with 2019. Financing had been as badly affected as greenfield investment up to the third quarter of 2020, but an uptick in new project announcements towards the end of the year managed to soften the blow.
Disaster for developed economies as FDI plummets
Developed countries were the hardest hit, with FDI flows falling by 69% to an estimated $229bn, the lowest level in almost 25 years. Approximately 80% of the global decline of $630bn can be attributed to developed countries. FDI flows to developing economies also decreased but not as dramatically, dropping by 12% to an estimated $616bn. Developing economy FDI flows accounted for 72% of overall global FDI, the highest share ever recorded. Meanwhile, FDI flows to transition economies sank by 77% to an estimated $13bn, the lowest amount recorded since 2002.
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By GlobalDataChina passes the US as top FDI destination
China overtook the US to become the world’s top FDI destination for the first time in 2020. It was one of the few countries to record an increase in FDI flows following the onset of Covid, rising by 4% to $163bn. This can be attributed to strict lockdown measures, which were implemented early on to help largely contain the virus, as well as the country’s GDP growing by 2.3% despite many other major economies’ contracting. UNCTAD also cites the government’s targeted investment facilitation programme for helping to stabilise investment. In addition, FDI in China’s high-tech industries increased by 11%.
Another country that managed to buck the trend was India, which saw FDI rise by 13% to $57bn. This was largely due to investment in the country’s digital sector, particularly through acquisitions.
Inflows to other major economies were not as resilient. FDI to the US halved to an estimated $134bn, with a significant decline in investments by multinational enterprises from the UK, Germany and Japan. The wholesale trade, financial services and manufacturing sectors also suffered.
The UK and Italy both experienced major declines in FDI flows of more than 100%. Among the 27 EU member states, 17 saw their FDI fall. Inflows also plummeted by 96% in Russia, the world’s largest transition economy.
ICT and pharmaceuticals sectors show resilience
Most industries witnessed a decline in the value of greenfield projects in 2020. For instance, the construction; transportation and storage; and automotive industries saw a drop of 46%, 39% and 59%, respectively, in the first 11 months of 2020 in comparison with 2019. A notable exception was the information and communication technology (ICT) industry, which saw an 18% increase in the value of its greenfield investment from $66bn to $78bn.
This was also reflected in cross-border M&A sales with the value of ICT M&A growing by 216% from $25bn to $79bn. The number of cross-border M&A deals in the pharmaceutical sector also rose by 12%, reaching 206, the highest number ever recorded.
Looking ahead, global FDI flows are expected to remain low in 2021, with investors likely to remain cautious before committing to new international investments. As economies begin to rebuild following recession, UNCTAD predicts that an FDI recovery will not start until 2022. Cross-border M&A sales are expected to be responsible for any increase in future FDI flows rather than new greenfield investments. This is largely due to the rebound in cross-border M&A in the second half of 2020, powered by technology and healthcare deals.
