Global foreign direct investment (FDI) flows fell by 35 per cent in 2020, to $1 trillion from $1.5 trillion the previous year. The lockdowns around the world in response to the COVID-19 pandemic slowed down existing investment projects, and the prospects of a recession led multinational enterprises (MNEs) to re-assess new projects. The fall was heavily skewed towards developed economies, where FDI fell by 58 per cent, in part due to corporate restructuring and intrafirm financial flows. FDI in developing economies decreased by a more moderate 8 per cent, mainly because of resilient flows in Asia. As a result, developing economies accounted for two thirds of global FDI, up from just under half in 2019 (figure 1).
FDI patterns contrasted sharply with those in new project activity, where developing countries are bearing the brunt of the investment downturn. In those countries, the number of newly announced greenfield projects fell by 42 per cent and the number of international project finance deals – important for infrastructure – by 14 per cent. This compares to a 19 per cent decline in greenfield investment and an 8 per cent increase in international project finance in developed economies. Greenfield and project finance investments are crucial for productive capacity and infrastructure development, and thus for sustainable recovery prospects.
All components of FDI were down. The overall contraction in new project activity, combined with a slowdown in cross-border mergers and acquisitions (M&As), led to a drop in equity investment flows of more than 50 per cent. With profits of MNEs down 36 per cent on average, reinvested earnings of foreign affiliates – an important part of FDI in normal years – were also down.
The impact of the pandemic on global FDI was concentrated in the first half of 2020. In the second half, cross-border M&As and international project finance deals largely recovered. But greenfield investment – more important for developing countries – continued its negative trend throughout 2020 and into the first quarter of 2021.
Developing economies weathered the storm better than developed ones. However, in developing regions and transition economies, FDI inflows were relatively more affected by the impact of the pandemic on investment in GVC intensive, tourism and resource-based activities. Asymmetries in fiscal space available for the rollout of economic support measures also drove regional differences.
The fall in FDI flows across developing regions was uneven, at -45 per cent in Latin America and the Caribbean, and -16 per cent in Africa. In contrast, flows to Asia rose by 4 per cent, leaving the region accounting for half of global FDI in 2020. FDI to the transition economies plunged by 58 per cent.
The pandemic further deteriorated FDI in structurally weak and vulnerable economies. Although inflows in the least developed countries (LDCs) remained stable, greenfield announcements fell by half and international project finance deals by one third. FDI flows to small island developing States (SIDS) also fell, by 40 per cent, as did those to landlocked developing countries (LLDCs), by 31 per cent.
FDI flows to Europe dropped by 80 per cent while those to North America fell less sharply (-42 per cent). The United States remained the largest host country for FDI, followed by China (figure 2).
In 2020, MNEs from developed countries reduced their investment abroad by 56 per cent, to $347 billion – the lowest value since 1996. As a result, their share in global outward FDI dropped to a record low of 47 per cent. As with inflows, the decline in investment from major investor economies was exacerbated by high volatility in conduit flows. Aggregate outward investment by European MNEs fell by 80 per cent to $74 billion. The Netherlands, Germany, Ireland and the United Kingdom saw their outflows decline. Outflows from the United States remained flat at $93 billion. Investment by Japanese MNEs – the largest outward investors in the last two years – dropped by half, to $116 billion.
Outflows from transition economies, based largely on the activities of Russian natural-resource-based MNEs, also suffered, plummeting by three quarters.
The value of investment activity abroad by developing-economy MNEs declined by 7 per cent, reaching $387 billion. Outward investment by Latin American MNEs turned negative at $3.5 billion, due to negative outflows from Brazil and lower investments from Mexico and Colombia. FDI outflows from Asia, however, increased 7 per cent to $389 billion, making it the only region to record an expansion in outflows. Growth was driven by strong outflows from Hong Kong (China) and from Thailand. Outward FDI from China stabilized at $133 billion, making the country the world’s largest investor (figure 3). Continued expansion of Chinese MNEs and ongoing Belt and Road Initiative projects underpinned outflows in 2020.
Global FDI flows are expected to bottom out in 2021 and recover some lost ground with an increase of 10–15 per cent. This would still leave FDI some 25 per cent below the 2019 level and more than 40 per cent below the recent peak in 2016. Current forecasts show a further increase in 2022 which, at the upper bound of the projections, could bring FDI back to the 2019 level of $1.5 trillion.
The relatively modest recovery in global FDI projected for 2021 reflects lingering uncertainty about access to vaccines, the emergence of virus mutations and delays in the reopening of economic sectors. Increased expenditures on both fixed assets and intangibles will not translate directly into a rapid FDI rebound, as confirmed by the sharp contrast between rosy forecasts for capital expenditures and still depressed forecasts for greenfield project announcements.
The FDI recovery will be uneven. Developed economies are expected to drive global growth in FDI, with 2021 growth projected at 15 per cent (from a baseline excluding conduit flows), both because of strong cross-border M&A activity and large-scale public investment support. FDI inflows to Asia will remain resilient (8 per cent); the region has stood out as an attractive destination for international investment throughout the pandemic. A substantial recovery of FDI to Africa and to Latin America and the Caribbean is unlikely in the near term. These regions have more structural weaknesses, less fiscal space and greater reliance on greenfield investment, which is expected to remain at a low level in 2021.
Early indicators – FDI projects in the first months of 2021 – confirm diverging trajectories between cross-border M&As and greenfield projects. Cross-border M&A activity remained broadly stable in the first quarter of 2021 and the number of announced M&A deals is increasing, suggesting a potential surge later in the year. In contrast, announced greenfield investment remains weak.
Despite the continuation of the pandemic, 68 per cent of investment promotion agencies (IPAs) expect investment to rise in their countries in 2021, according to UNCTAD’s recently conducted IPA Survey. Close to half of the respondents expects a significant rise in global FDI in 2021. However, IPAs acknowledge the continued difficult global environment for investment promotion. IPAs rank food and agriculture, information and communication technologies (ICT) and pharmaceuticals as the three most important industries for attracting foreign investment in 2021. While food and agriculture has always been considered important for attracting FDI, especially by developing and transition economies, ICT and pharmaceuticals are seeing an increase in interest because of the pandemic.
Facing falling revenues, MNEs doubled corporate debt issuance in 2020. At the same time, acquisitions decreased and capital expenditures remained stable, leading to higher cash balances. In 2020 the top 5,000 non-financial listed MNEs increased their cash holdings by more than 25 per cent. MNEs are more and more adopting policies on diversity and inclusiveness. The attention of MNEs to gender equality, as proxied by the existence of a diversity policy, is growing – especially in emerging economies, where the number of such policies doubled in the last five years.
The number of State-owned MNEs (SO-MNEs) grew marginally in 2020, by 7 per cent, to about 1,600 worldwide. Several new ones resulted from new State equity participations as part of rescue programmes. Rescue packages involving the acquisition of equity stakes have focused on airlines and, with the exception of a few cases in emerging Asian economies, all took place in developed economies. In many cases, capital injections went to State-owned carriers, leaving the number of new SO-MNEs at about a dozen.
SO-MNEs from emerging markets reduced their international acquisitions in 2020, from $37 billion to $24 billion. The decrease followed a longer-term trend of a fall in overseas activity by such SO-MNEs.
The fall in cross-border flows affected investment in sectors relevant for the SDGs. SDG-relevant greenfield investment in developing regions is 33 per cent lower than before the pandemic and international project finance is down by 42 per cent.
All but one SDG investment sector registered a double-digit decline from pre pandemic levels (figure 4). The shock exacerbated declines in sectors that were already weak before the pandemic – such as power, food and agriculture, and health. The gains observed in investment in renewable energy and digital infrastructure in developed economies reflect the asymmetric effect that public support packages could have on global SDG investment trends. The sharp decline in foreign investment in SDG-related sectors may slow down the progress achieved in SDG investment promotion in recent years, posing a risk to delivering the 2030 agenda for sustainable development and to sustained post-pandemic recovery.
The momentum towards regional FDI is expected to grow over the coming years. Policy pressures for strategic autonomy, business resilience considerations and economic cooperation will strengthen regional production networks. A shift towards more intraregional FDI would represent much more of a break with the past than commonly expected; new data on direct and indirect regional FDI links show that, to date, investment links are still more global than regional in scope.
The total value of bilateral FDI stock between economies in the same region in 2019 was about $18 trillion, equivalent to 47 per cent of total FDI. However, looking through regional investment hubs and counting only links between ultimate owners and final destinations, the total falls to less than $11 trillion, or only 30 per cent of total FDI. At least one third of intraregional FDI. is either double counted or from outside the region.
The growth of intraregional FDI is also relatively slow. Intraregional FDI grew at an average annual rate of 4 per cent in the period 2009–2019, slower than global FDI stock (6 per cent annually). Consequently, the share of intraregional FDI in total FDI stock decreased from 56 per cent in 2009 to 47 per cent in 2019 – and the share of intraregional ultimate-ownership links from 34 per cent to 30 per cent.
Disentangling regional FDI networks also sheds new light on the magnitude of South-South investment. The value of such FDI as a share of total investment in developing economies is less than 20 per cent (instead of some 50 per cent) after removing conduit investment through developing-country investment hubs.