Global foreign direct investment (FDI) dropped in 2020 owing to the Covid-19 pandemic, falling 42 per cent from $1.5 trillion in 2019 to an estimated $859 billion, according to the latest report published by UNCTAD Investment Trends Monitor.
Despite projections for the global economy to recover in 2021, the report noted that FDI flows are expected to remain weak, citing uncertainty over the evolution of the Covid-19 pandemic.
"The effects of the pandemic on investment will linger. Investors are likely to remain cautious in committing capital to new overseas productive assets,” stated James Zhan, Director of UNCTAD’s Investment Division.
According to the report, the decline in FDI was concentrated in developed countries, where flows plummeted by 69 per cent to an estimated $229 billion.
For instance, the report pointed out that flows to Europe fell by two-thirds to -$4 billion. In the United Kingdom, FDI fell to zero, and declines were recorded in other major recipients.
"Among other developed economies, flows to Australia fell (46% to $22 billion) but increased for Israel (from $18 billion to $26 billion),” the report reads in part.
Developing economies account for highest share of FDI
Although FDI flows to developing economies decreased by 12 per cent to an estimated $616 billion, they accounted for 72 per cent of global FDI, which the report described as the highest share on record.
"The fall was highly uneven across developing regions with Africa accounting for -18 per cent and -4 per cent in developing countries in Asia.”
FDI to transition economies declined by 77 per cent to $13 billion.
"In terms of individual nations, China was the world’s largest FDI recipient, with flows to the Asian giant rising by 4 per cent to $163 billion. High-tech industries saw an increase of 11 per cent in 2020, and cross-border M&A s rose by 54 per cent, mostly in ICT and pharmaceutical industries,” the report says.
The government of India also recorded positive growth (13%), particularly boosted by investments in the digital sector.
An exception for healthcare and technology
The report says that data on an announcement basis – on M&As, greenfield investments and project finance – provides a mixed picture on forward trends and confirms the weak outlook for 2021.
"Greenfield project announcements in 2020, 35 per cent lower than in 2019, do not bode well for new investment in industrial sectors in 2021,” the report says.
The decline in announced international project finance deals, important for investment in infrastructure, was more contained at -2 per cent, but the uptick in the last part of the year was largely concentrated in developed countries.
"These investment types are crucial for productive capacity and infrastructure development and thus for sustainable recovery prospects,” Zhan added.
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 any increases in global FDI flows in 2021 to come not from new investment in productive assets but from cross-border M&As, especially in technology and healthcare – two industries affected differently by the pandemic.
"Although their investment activity slowed down initially in 2020, they are now set to take advantage of low interest rates and increasing market values to acquire assets in overseas markets for expansion, as well as rivals and smaller innovative companies affected by the crisis.”
European companies are set to attract more than 60 per cent of the technology deals in value terms, but several developing economies are also seeing an increase.
Consequently, South African investors plan to acquire stakes in healthcare providers across Africa and Asia. And Indian IT companies have announced a 30 per cent increase in acquisitions, targeting European and other markets for information technology services.