G20 trade and investment ministers meeting
22 September 2020
The COVID-19 crisis will cause a dramatic fall in FDI. Global FDI flows are forecast to decrease 40% in 2020, down from their 2019 value of $1.54 trillion. This would bring FDI below $1 trillion for the first time since 2005. We project FDI will decrease by a further 5-10% in 2021 only initiating a recovery in 2022, led by GVC restructuring for resilience and replenishment of capital stock.
This outlook is 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. Geopolitical and financial risks and continuing trade tensions add to this uncertainty.
The pandemic is a supply, demand, and policy shock for FDI. Lockdowns have slowed down existing investment projects and prospects of a deep recession are leading MNEs to re-assess new projects and affecting policy measures.
Developing economies are expected to see the biggest fall in FDI. They rely more on investment in GVC-intensive and extractive industries, which have been severely hit. They are also not able to put in place the same economic support measures as developed economies. FDI flows to G20 countries are also expected to fall strongly. Reinvested earnings – which play an increasingly important role in FDI flows in those countries – will drop substantially in the short term. Equity capital flows will also decline as many new investments, both mergers and acquisitions (M&As) and greenfield investments, have been put on hold.
Preliminary data for the first 6 months on FDI, greenfield investment, project finance and M&As largely confirm our earlier projections. Greenfield investment – the most important type from a development perspective, is down by more than 1/3rd at global level and for G20 countries.
Despite the drastic decline, global FDI flows will remain positive and continue to add to the existing FDI stock, which stood at $36 trillion at the end of 2019.
COVID-19 is not the only gamechanger for FDI and international production. The new industrial revolution, the policy shift towards more economic nationalism, and sustainability trends will all have far-reaching consequences for the configuration of international production in the decade to 2030. The directional trend identified in UNCTAD’s World Investment Report published in June 2020, points towards shorter value chains, higher concentration of value added and declining international investment in physical productive assets. This implies huge challenges for development going forward. But there are opportunities for development as well, such as promoting resilience-seeking investment, building regional value chains and growing new digital markets.
Confronting the challenges and capturing the opportunities requires a change in the investment-development paradigm. First, a shift is underway from a focus on export-oriented efficiency-seeking investment in narrowly specialized value chain segments, to an “export-plus-plus” focus, promoting investment in production for regional markets as well as in a broader industrial base. Second, we observe a shift from cost-based competition for single-location investors to competition for diversified investments based on flexibility and resilience. And finally, we see a transition underway from prioritizing large-scale industrial investors with “Big infrastructure” making room for small-scale manufacturing and services with “Lean infrastructure”.
Finally, a shift in investment promotion strategies towards infrastructure and services is necessary. For the past three decades international production and the promotion of export-oriented manufacturing investment have been the pillars of development and industrialization strategies of most developing countries. Investment geared towards exploiting factors of production, resources and low-cost labor will remain important, but the pool of such investment is shrinking. This calls for a degree of rebalancing towards growth based on domestic and regional demand and on services. Investing in green and blue economy, as well as in infrastructure and domestic services, for example, offer potential for contributing to achieve the Sustainable Development Goals (SDGs).
