The COVID-19 crisis will cause a dramatic fall in FDI. Global FDI flows are forecast to decrease by up to 40 per cent in 2020, from their 2019 value of $1.54 trillion (figure 1). This would bring FDI below $1 trillion for the first time since 2005. FDI is projected to decrease by a further 5–10 per cent in 2021 and to initiate a recovery in 2022. A rebound, with FDI reverting to the pre-COVID underlying trend in 2022, is possible, but only at the upper bound of expectations.
This outlook is highly uncertain. It will depend on the duration of the global crisis and on the effectiveness of policy interventions to mitigate the economic effects of the pandemic. Geopolitical and financial risks and continuing trade tensions add to the uncertainty.
The projected fall is significantly worse than the one experienced in the years following the global financial crisis. At their lowest level ($1.2 trillion) then, in 2009, global FDI flows were some $300 billion higher than the bottom of the 2020 forecast.
The downturn caused by COVID-19 follows several years of negative or stagnant growth; as such it compounds a longer-term declining trend. The expected level of global FDI flows in 2021 would represent a 60 per cent decline since 2015, from $2 trillion to less than $900 billion.
The pandemic is a supply, demand, and policy shock for FDI. It has short-, medium-, and long-term effects (figure 2). The lockdown measures are slowing down existing investment projects. The prospect of a deep global recession will lead MNEs to re-assess new projects. Policy measures taken during the crisis
include new investment restrictions. Longer term, investment flows will slowly recover starting 2022, led by GVC restructuring for resilience, replenishment of capital stock and recovery of the global economy.
Over the two critical years of 2020 and 2021, the demand shock will be the biggest factor pushing down FDI. Although in general the trend in FDI reacts to changes in GDP growth with a delay, the exceptional combination of the lockdown measures and the demand shock will cause a much faster feedback loop on investment decisions. The demand contraction will hit FDI in the first half of 2020 and then fully unfold in the second half and 2021.
Early indicators confirm the immediacy of the impact. Both new greenfield investment project announcements and cross-border M&As dropped by more than 50 per cent in the first months of 2020.
MNE profit alerts are an early warning sign. The top 5’000 MNEs worldwide, which account for most of global FDI, have seen expected earnings for the year revised down by 40 per cent on average, with some industries plunging into losses. Lower profits will hurt reinvested earnings, which account for more than 50 per cent of FDI on average.
In terms of the severity of the earnings revisions, services industries directly affected by the lockdown are among the most severely hit, particularly travel and leisure sectors. Commodity-related industries suffer from the combined effect of the pandemic and plummeting oil prices. In manufacturing, some industries that are global value chain (GVC) intensive, such as automotive and textiles, were hit hard by supply chain disruptions. Because of their cyclical nature and global spread, they are vulnerable to both supply and demand shocks. Overall, industries that are projected to lose 30 per cent or more of earnings together account for almost 70 per cent of FDI projects.
The impact, although severe everywhere, varies by region. Developing economies are expected to see the biggest fall in FDI because they rely more on investment in GVC-intensive and extractive industries and because they are not able to put in place the same economic support measures as developed economies.
In 2019, global FDI flows still increased marginally, by 3 per cent, to $1.54 trillion. Inward FDI flows to developed economies rose by 5 per cent, to $800 billion. It was concentrated in Europe (up 18 per cent to $429), but mainly because of jumps in a few economies, such as Ireland and Switzerland, after sharply negative inflows in 2018. However, FDI to some of the larger economies in the region declined. FDI in the United States, the largest recipient economy (figure 3), declined by 3 per cent to $246 billion.
FDI flows to developing economies declined marginally, by 2 per cent, to $685 billion. Since 2010, flows to developing economies have been relatively stable, hovering within a much narrower range than those to developed countries, at an average of $675 billion. The 2019 uptick in global FDI flows also hides differences between groups of economies clustered by income level. On average, FDI to all the higher and middle-income level groups was stable or marginally increased. Only least developed countries (LDCs) saw a fall in FDI flows, by 5.7 per cent.
Outward investment by MNEs based in developed economies increased significantly in 2019. Tax-reform driven repatriations of accumulated foreign earnings by United States MNEs that had caused large negative outflows in 2018 slowed down. MNEs from developed economies invested $917 billion abroad – a 72 per cent increase from the abnormally low 2018 values. Japan was again the largest overseas investor (figure 4), with a jump in outflows to $227 billion, with much of the increase accounted for by one large megadeal.
In 2019, the internationalization rates of the top 100 MNEs remained flat. The average Transnationality Index (TNI) of the top 100 – the relative shares of their foreign assets, sales and employees – has plateaued in the last decade at about 65 per cent. This is caused in part by changes in the composition of the list, with new emerging-market entrants starting out at lower levels of internationalization. However, established top 100 MNEs may have reached a “glass ceiling” of transnationality that only a few can break through.
After reaching a peak of 15 companies in 2017, the number of tech and digital companies in the top 100 decreased to 13 in 2019. However, the share of tech and digital MNEs in total foreign sales and foreign assets of the top 100 still increased over the same period. The trend towards a stronger role for tech and digital firms in the top 100 thus continues. Large tech MNEs have been consolidating their position by buying successful start-ups. They are also pursuing vertical integration, engaging in the creation of content for their platforms or expanding into retailing and other services. The pandemic could reinforce the position of tech and digital companies with the growth of e-commerce solutions.