Global foreign direct investment (FDI) flows decreased by 49% year-on-year in the first half of this year as Covid-19-induced lockdowns around the world slowed existing investment projects and the prospects of a deep recession led multinational enterprises (MNEs) to reassess new projects.
In a statement on October 27, the United Nations Conference on Trade and Development (Unctad) said the decline cut across all major forms of FDI and that new greenfield investment project announcements had decreased by 37%, cross-border mergers and acquistions (M&As) by 15% and newly announced cross-border project finance deals by 25%.
Developed economies recorded the biggest drop, with FDI reaching an estimated $98-billion in the first half of the year, marking a 75% year-on-year decrease. Unctad said the trend was exacerbated by sharply negative inflows in European economies with significant conduit flows.
FDI flows to North America fell by 56% to $68-billion, while FDI flows to developing economies decreased by 16%, which was less than expected, Unctad said.
Flows were 28% lower in Africa, 25% lower in Latin America and the Caribbean and 12% lower in Asia, mainly owing to a resilient investment climate in China.
In the first half of this year, developing Asia accounted for more than half of global FDI.
FDI flows to transitioning economies were down 81% owing to a strong decline in the Russian Federation, and cross-border M&A values reached $319-billion in the first three quarters of this year.
The 21% decline in developed economies, which account for about 80% of global transactions, was checked by the continuation of M&A activity in digital industries, while the value of greenfield investment project announcements was $358-billion in the first eight months of this year.
Developing economies saw a much bigger fall of 49% than developed economies, at 17%, which Unctad said “reflects their more limited capacity to roll out economic support packages”.
The number of announced cross-border project finance deals declined by 25%, with the biggest drops in the third quarter, suggesting that the slide is still accelerating, Unctad noted.
Therefore, prospects for the full year remain in line with earlier projects of a between 30% and 40% decrease, with the rate of decline in developed economies likely to flatten as some investment activity appeared to be picking up in the third quarter.
According to Unctad, flows to developing economies are expected to stabilise, with East Asia showing signs of an impending recovery.
“The outlook remains highly uncertain, depending on the duration of the health crisis and on the effectiveness of policy interventions to mitigate the economic effects of the pandemic,” said Unctad, warning that geopolitical risks also added to the uncertainty.
However, despite the decrease experienced so far this year, FDI remains the most important source of external finance for developing countries, Unctad said, noting that other sources were also decreasing.
“The overall decline can add to external payments problems in developing countries.”