The COVID-19 pandemic is a demand, supply and policy shock for Foreign Direct Investment (FDI).
According to the World Investment Report 2020 by UNCTAD,
” It has short-, medium-, and long-term effects. 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 in 2022, led by GVC restructuring for resilience, replenishment of capital stock and recovery of the global economy.”
The demand shock will be the greatest factor to push Global FDI down over 2020 and 2021. Although FDI trends is mostly reactive to changes in GDP growth with a delay, the exceptional combination of the lockdown measure and the demand shock will lead to a much quicker feedback loop in investment decisions. The demand contraction is anticipated to hit the first half of 2020 and then fully unfold in the second half of 2020 and in the year 2021.
We find several early indicators that confirm the immediacy of the impact. For example, new greenfield investment project announcements and cross-border M&As went down by more than 50% in the first quarter of 2020. The report further elaborates that the top 5’000 MNEs worldwide which make up for most of the global FDI have witnessed expected earnings for the year revised down by 40% on average, with some industries drowning in losses. The lower profits will negatively affect reinvested earnings, accounting for more than 50% of FDI on average.
As for the severity of the earnings revisions, various industries, particularly the travel and leisure industry have been directly hit by the lockdowns. Industry dealing with the commodity market have suffered from a combined effect of the pandemic and plummeting oil prices. In manufacturing, , some industries that are global value chain (GVC) intensive such as textiles and automotive, were severely hit by the supply chain disruptions and because of their global spread and cyclical nature, they are vulnerable to both supply and demand shocks. In sum, the report suggests that industries that are forecasted to lose 30% or more of earnings altogether account for almost 70% of FDI projects.
The report also states that although the global impact is severe, it does vary from regions to regions. Developing economies are expected to witness the biggest decrease in FDI as they mostly rely on investment in GVC intensive and extractive industries. In addition, these developing countries are not able to put in place the same economic support measure as developed economies.