The Global Pandemic left acute damage on the Foreign Direct Investment (FDI). It fell to $1 trillion, nearly 1/3rd of the previous year’s $1.5 trillion, and is even less than the lowest point of the global economic crisis of 2005.
The lockdown forced due to COVID-19 slowed down the investment activities leading to the possibility of economic recession once again. As a result, several multinational companies started reassessing their projects.
The developed economies felt the jolt more, wherein the FDI fell by a whopping 58%. At the same time, the developing economies showed some resistance and grew by 8%. These make up more than two-thirds of the world’s FDI in 2020.
In the World Investment Report 2021, UNCTAD states that the developing countries are presenting a poor picture. The new project activity has dropped drastically, with Greenfield projects falling by 42% and international project finance deals by 14%.
“The drop in foreign investment in SDG-related sectors may reverse the progress achieved in SDG investment in recent years, posing a risk to delivering the 2030 Agenda for Sustainable Development and to sustained post-pandemic recovery,” Isabelle Durant, acting secretary-general of UNCTAD stated.
So, what is the current projection for FDI increase in 2021?
FDI Trends Region-wise
The improvement in FDI growth in 2021 is expected to be driven by East and South-East Asia and developing countries. The odds are mixed in other parts of the world. This is mainly due to the high economic uncertainty and the limited availability of vaccines.
- In the African countries, FDI growth is expected to rise by 5% but still 15% lower than the level in 2019. The commodity prices have mostly recovered, but the monetary and fiscal buffers are limited, and vaccine supply is also low. If the investment scenario improves, the higher potential and investment requirements will speed up FDI inflow.
- Asia is the same market where we saw some resilience in 2020. In 2021, the growth is expected to continue its run. The Regional Comprehensive Economic Partnership, which was signed in November 2020, may help further. The economies driven by exports will be benefiting more from the increasing global demand and trade recovery.
- In West Asia, higher oil prices will be the driving factor. The region has managed to stay afloat during the tough times, but the uncertainty is still around. The second COVID-19 wave in India is proof. Unfortunately, if the virus resurges again, it could spell another bigger blow on the global FDI, given the amount of contribution this region makes.
- Another significant player from Asia is China. The country is expected to be the frontrunner in FDI influx to Asia. Primarily because the investors are already impressed with the world-class infrastructure, ever-increasing purchasing power, and supportive investment environment. The rising labor costs may drive away a few investors, but a significant inflow of FDI, specifically for the MNEs in the services and technology industries, displays light at the end of the tunnel.
- In the Caribbean islands and the Latin America, the growth is expected to stabilize at the 2020 level. It will be an achievement after the region underwent a massive economic setback with a contraction of almost 45%. The region was affected pretty severely by the pandemic. Experts are hoping that the financial measures in the USA may have a broader impact on the region with trade and remittances. Still, with elections just around the corner, there is an uncertainty of favorable new policies.
- In Europe and North America, the economic condition is already seeing an uphill trend. It is mainly due to the massive fiscal support and the vaccination drive. The FDI is slated for an increase of 15 to 20 in Europe after a gigantic downfall in 2020. The bad part is that it will still be 30% less than the levels in 2019. In North America, the FDI is projected to increase by 15%. The Fiscal stimulus measures and a rise in consumer demands may revive the domestic market.
A better investment outlook will be based on several factors such as the effective disposition of vaccines, higher demand for primary commodities, and relief from regional and international tensions wherever it is applicable. As per the expectations, the global FDI will see some upsurge; however, some prominent local and political improvements will also play a vital role besides COVID-19.