FDI is one of the key factors for a country’s economic development. It is also significant for the developing economies and emerging markets where businesses need capital and skills to extend their foreign revenues. The Covid-19 pandemic has impacted economies all over the globe, triggering major economic downturns. To understand the FDI impact, I have come across the World Investment Report by UNCTAD , which explains global and national FDI patterns to the context of Covid-19. This article will give you an overview of the report and also illustrates the pattern of FDI in India in the backdrop of pandemic.
What is Foreign Direct Investments
As defined by RBI- A foreign direct investment is the investment through capital instruments by a person resident outside India (a) in an unlisted Indian company; or (b) in 10% or more of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company. In simple words, it is an investment made by a firm or individual in a particular country in the form of controlling ownership in a business in another country.
FDI and COVID-19 Crisis
The COVID-19 crisis is projected to trigger a drastic fall in foreign direct investment (FDI) with an immediate adverse effect in 2020 and more worsening in 2021. Global FDI flows are expected to fall by up to 40% in 2020 from USD 1.54 trillion in 2019. This would bring FDI below USD 1 trillion for the first time since 2005. FDI is projected to decrease by a further 5 to 10% in 2021.
In relative terms the projected downturn is anticipated to be higher than that seen in the two years after the global financial crisis. During its lowest level (USD 1.2 trillion) then, in 2009, global FDI flows were some USD 300 billion higher than the bottom of the 2020 forecast. The downturn caused by the pandemic is accompanied by many years of negative or stagnant growth; as such it compounds a longer-term declining trend. The expected level of global FDI flows in 2021 will mark a 60% decline since 2015, from USD 2 trillion to less than USD 900 billion.
All regions and economic groupings will see negative FDI growth rates in 2020. Developed economies as a group are expected to see a decline of between -25% and -40%. FDI in Europe will fall most (-30% to -45% relative to 2019), as the vehemence of the virus adds to economic fragility in several large economies. Due to the economic integration of investment and trade within the EU, shocks in individual countries will easily propagate within the region. Developing economies appear more vulnerable to this crisis expected to see a larger decrease in the range of 30% to 45%. Their productive and investment footprints are less diversified and thus more exposed to systemic risks.
Talking about the 2019 trend, global FDI flows rose modestly in 2019, following the sizable declines registered in 2017 and 2018. At USD 1.54 trillion, inflows were 3% and remained below the average of the last 10 years and some 25% off the peak value of 2015. The rise in FDI was mainly the result of higher flows to developed economies, as the impact of the 2017 tax reforms in the United States waned. Flows to transition economies also increased, while those to developing economies declined marginally. FDI stock increased by 11%, reaching USD 36 trillion, on the back of rising valuations in global capital markets and higher Multinational Enterprise (MNE) profitability in 2019.
Impact on Asia and India
FDI inflows to Asia in 2020 are expected to fall by between 30% and 45% as a result of the COVID-19 pandemic. All sub-regions and the five largest recipients (China,India,Hong Kong,Indonesia,China), which accounted for about 80% of FDI inflows in Asia in 2019, will see a decline in investment across a wide range of industries, primarily in manufacturing and services.
The number of announced greenfield investment projects in the first quarter of 2020 dropped by 37%. The number of M&As fell by 35% in April 2020. Many MNEs have warned of earnings shortfalls and postponed their investment plans for 2020 as they concentrate on rebuilding or consolidating their business operations. The pandemic will precipitate a fall in reinvested earnings of foreign affiliates based in the region. Outward FDI is also expected to fall because of the growing liquidity challenges faced by companies from the region. A global economic recession will further weigh on inflows and outflows. Economic growth in Asia is expected to stall at 0%.
India is the biggest FDI host in the sub-region with more than 70% of the inward stock, the number of greenfield investment announcements declined by 4% in the first quarter of 2020, and M&As contracted by 58%. However, the country’s economy could prove the most resilient in the region. FDI to India has been on a long-term growth trend. Positive, albeit lower, economic growth in the post-pandemic period and India’s large market will continue to attract market-seeking investments to the country.
The magnitude of the logistical challenges during both the lockdown and the recovery remain a big downside risk for FDI in the medium term. The digital economy and real estate and property development, two industries that attracted growing FDI before the pandemic, could evolve in different directions. Whereas the digital economy will likely see continued investments, real estate and property development will face significant pressures from slowing demand and financing constraints. India’s most sought-after industries, which include professional services and the digital economy, could see a faster rebound as global venture capital firms and technology companies continue to show interest in India’s market through acquisitions. Investors concluded deals worth over USD 650 million in the first quarter of 2020, mostly in the digital sector. 12 Large deals in energy were also concluded, such as the acquisition by Total (France) of Adani Gas (India), valued at USD 800 million.
Source: World Investment Report 2020 (UNCTAD)