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Foreign Direct Investment Falls 49% in First Half

Global foreign direct investment (FDI) fell 49 percent in the first half of 2020 compared to 2019 due to the economic fallout from Covid-19, the latest “Global Investment Trends Monitor” from the United Nations Conference on Trade and Development (UNCTAD) revealed.

In the wake of the pandemic, lockdowns around the world slowed existing investment projects, and the prospects of a deep recession led multinational enterprises to reassess new projects, the report said.

“The FDI decline is more drastic than we expected, particularly in developed economies,” said James Zhan, UNCTAD’s investment and enterprise director. “Developing economies weathered the storm relatively better for the first half of the year. The outlook remains highly uncertain.”

According to the report, developed economies saw the biggest fall, with FDI reaching an estimated $98 billion in the six-month period, a decline of 75 percent compared to 2019. The trend was punctuated by sharply negative inflows in European economies, mainly in the Netherlands and Switzerland. FDI flows to North America fell 56 percent to $68 billion.

On a somewhat positive note, the 16 percent decrease in FDI flows to developing economies was less than expected, due mainly to resilient investment in China. Flows decreased 12 percent in Asia, but were 28 percent lower than in 2019 in Africa and 25 percent lower in Latin America and the Caribbean.

In the six months through June, developing countries in Asia accounted for more than half of global FDI. Flows to economies in transition were down 81 percent due to a strong decline in the Russian Federation.

The report shows that cross-border M&A values reached $319 billion in the first three quarters of 2020. The 21 percent decline in developed countries, which account for about 80 percent 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. The number of announced cross-border project finance deals declined 25 percent, with the biggest drops in the third quarter, suggesting that the slide is still accelerating, UNCTAD noted.

Prospects for the full year remain in line with UNCTAD’s earlier projections of a 30 percent to 40 percent decrease in FDI flows, the report indicated. The rate of decline in developed economies is likely to flatten as some investment activity appeared to be picking up in the third quarter. Flows to developing economies are expected to stabilize, with east Asia showing signs of an impending recovery.

The report said the FDI will hinge on the duration of the health crisis and the effectiveness of policy interventions to mitigate the economic effects of the pandemic. Geopolitical risks continue to add to the uncertainty.

Despite the 2020 drop, FDI remains the most important source of external finance for developing countries, according to UNCTAD. Global FDI stock stood at $37 trillion at the end of 2019.

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