The global financial crisis of 2008 slowed down foreign direct investment (FDI) flows remarkably, and the world has not yet fully recovered from its aftermath and the consequent economic downturn. An apparent retreat from globalization by some major countries has also had a negative effect. These countries seek to encourage investment at home but discourage investment outflow. They are guided by populist policies that propagate that gains from international trade and investment do not benefit all individuals and is a zero-sum equation.
The Covid-19 pandemic has reinforced this negative trend and compounded the decline of FDIs in the long run. In its 2020 World Investment Report, the United Nations Conference on Trade and Development (UNCTAD) projects a decrease in global FDI flows by up to 40 percent in 2020, from their 2019 value of $1.54 trillion. This would bring FDI below $1 trillion for the first time since 2005.
UNCTAD also expects a 5 to 10 percent decline in FDI in 2021. The drop will make the projected flow of global FDI in 2021 lower by 60 percent compared with their level in 2015, a decrease from $2 trillion to less than $900. The FDI flow post-2021 also seems to be highly uncertain. They will depend on what shape of recovery the global economy follows in its return to the “new” normal situation and the economic policies of major economies. If the economic slowdown continues for a relatively long time (that is if there is U-shaped recovery), international FDI flows will remain largely less than in 2019.
This paper evaluates the FDI situation under the Covid-19 pandemic. It examines the expected general trend of FDI flows regionally and internationally, and the factors affecting them. It analyzes the expected profits of international corporations and the FDI policies followed by major economies. It also looks at the main elements of these flows, including new investment, and mergers and acquisitions. Finally, the study presents some findings and recommendations regarding the future of FDI under Covid-19 and beyond.
1- Covid-19 and its impact on the global economy and investment
In June 2020, in the wake of the Covid-19 pandemic, the International Monetary Fund (IMF) revised its global economic growth forecasts downward to more pessimistic levels compared to the April 2020 World Economic Outlook initial forecasts. Following this revision, the global economy is now projected to contract by 4.9 percent in 2020 instead of 3 percent. In 2021, global growth is projected at 4.5 percent instead of 5.8 percent.
Source: World Economic Outlook Update, IMF, June 2020
Advanced economies are projected to contract by 8 percent in 2020 sharply while emerging and developing economies are expected to contract by 3 percent. Also, growth recovery in advanced economies in 2021 is expected to be slower (4.8 percent) than in emerging and developing economies (5.9 percent).
Source: World Economic Outlook Update, IMF, June 2020
The IMF expects global trade to suffer a deep contraction of 11.9 percent in 2020 but projects it to grow by 8 percent in 2021. This contraction will be deeper for advanced economies, reaching 13.4 percent in 2020 before trade bounces back to 7.2 percent in 2021. Meanwhile, emerging markets and developing economies will see a 9.4 percent contraction in 2020, followed by a growth of 9.4 percent in 2021. It seems that this huge contraction in global trade, as compared with global GDP contraction, is the outcome of economic policies supporting demand and local production at the expense of imports.
FDI inflows and projections under Covid-19, by groups of economies
(Billions of dollars)
|World||1700||1495||1540||920 to 1080|
|Developed economies||950||761||800||480 to 600|
|Developing economies||701||699||65||380 to 480|
|Transition economies||50||35||55||30 to 40|
Source: World Investment Report 2020, UNCTAD
As with global GDP and global trade, the pandemic has also caused a steep drop in global FDI flows. UNCTAD expects them to plunge by about 30 to 40 percent in 2020, from their 2019 value of $1.54 trillion, which would bring FDI below $1 trillion for the first time since 2005. FDI contraction is projected to be less severe for advanced countries (between 25 and 40 percent) in 2020 compared with transition economies (between 30 and 44.5 percent) and developing economies (between 27.3 and 44.5 percent).
The expected contraction in FDI flows is considerably larger than the anticipated contraction in both global GDP and world trade volume because the Covid-19 is a compound supply, demand, and policy shock for FDI, which is highly sensitive to such shocks.
On the supply side, the world’s 5,000 largest multinational enterprises (MNEs) have seen expected earnings for the year 2020 revised down by 40 percent on average, with some companies plunging into losses. This drop in earnings will severely affect the expected FDI flows for 2020. These companies are the main source of global FDI as they reinvest their earnings, which account for more than 50 percent of FDI. With the deep recession forecast for the global economy as a result of the Covid-19 pandemic, MNEs are expected to re-assess their new projects by closing or postponing many of them in light of the huge decline in their expected earnings.
On the demand side, the Covid-19-induced restrictions on government funding have led to a decline in infrastructure projects’ new investments by more than 40 percent. Infrastructure is usually among the top sectors benefiting from FDI. Another important factor behind the fall of FDI is that cross-border mergers and acquisitions (M&A) activities dropped by more than 50 percent in the first months of 2020 compared with last year, according to the UNCTAD report.
Several countries have reviewed their foreign investment policies and regulations to protect their domestic industries from foreign takeovers. Many countries have tightened their foreign investment screening processes to protect strategic sectors. For instance, in the healthcare sector, they have imposed export bans on medical equipment and a reduction of import tariffs for medical devices, which would disrupt FDI inflows to this vital sector.
According to UNCTAD, several countries have already introduced more a stringent screening of investment in strategic industries in 2019 based on national security considerations. As a result, at least 11 large cross-border M&As were withdrawn or blocked for regulatory or political reasons. Given the Covid-19 repercussions, this trend is expected to intensify in the future. For example, the European Union already issued guidance restricting investment from non-member economies to protect member states’ strategic assets. Also, Australia introduced investment reviews to shield national interests and local assets from an acquisition.
2- Impact of Covid-19 on the global FDI flows
The effects of the Covid-19 pandemic on global FDI flows vary depending on the time-frame of analysis. According to the UNCTAD report, FDI flows have suffered immediate impact due to global economic lockdowns and the stoppage of individuals and goods' movements, which caused delays in the implementation of investment projects and the suspension of many of them. The Covid-19 pandemic has also delayed the announcements of many new projects. Many M&A plans have been suspended due to the deterioration in the market value of shares of many companies that were subject to acquisition. Also, financial and economic turmoil has delayed the regulatory approvals of merger processes.
In the short term, according to the UNCTAD report, government measures to protect local companies, such as the tightening of margins for reinvestment and new investment restrictions in addition to exceptionally challenging operational, market and financial conditions facing foreign affiliates negatively, will affect FDI flows. The significant drop in MNE earnings projections for 2020 has shrunk their reinvested profits, which account for more than 50 percent of global FDI flows.
With regard to the medium-term effects of the Covid-19 pandemic on FDI flows, the global economic recession and the highly uncertain recovery and return to a “new” normal economic activity will drive MNEs to change their plans for new investments whether at home or abroad. Besides, due to financial liquidity distress and tightened restrictions imposed by governments on foreign investment to support local investment, the slowdown in FDI is expected to continue for a time longer than it takes for economic activity to return to its normal level.
As for the long-term effects of the pandemic, the change in regional and global economic orientations and the increasing importance of certain sectors, such as healthcare and information and communication technology, may lead to additional structural changes in business models, value chains and supply chains; and higher growth in regional than in global FDI. Meanwhile, FDI can play a vital role in supporting the economies in the post-pandemic recovery phase as MNEs are more resilient in times of crisis, thanks to the linkages between parent companies and their local subsidiaries, and highly capable of accessing financial resources
The Covid-19 pandemic is also expected to lead to tangible changes in the geographical spread of MNEs’ operations. These companies, with their resilience and resources necessary for R&D, are expected to review and adjust their cross-border value chains to protect their operations from any potential future turmoil in light of their experience under the Covid-19 pandemic.
3- FDI inflows to the Arab world
Many Arab countries receive considerable inflows of FDI. In 2019, the UAE ranked top among Arab countries, with inflows of $13.8 billion, according to the UNCTAD database. The UAE was followed by Egypt ($9 billion), Saudi Arabia ($4.6 billion), Oman ($3.1 billion), and Lebanon ($2,1 billion).
The inflows of FDI to the Arab world are largely linked with global developments in oil and natural gas markets, whether for major oil-exporting or non-oil countries. Many Arab countries, such as Egypt in recent years, receive FDI in the energy sector. There are other countries in which the recovery of the energy sector is the primary driver of FDI growth expectations and is considered an attractive factor for FDI. Finally, for some Arab countries, inter-Arab FDI inflows are critical. Hence any global developments in oil markets would indirectly affect FDI inflows to them as these developments affect income and economic activity in countries that supply them with FDI flows.
|FDI Inflows to Arab Countries (millions of dollars)|
Source: World Investment Report 2020 Database, UNCTAD
A recent study released by the Economic Research Forum (Chemingui and Ben Jelili, 2020) shows that the Covid-19 pandemic and the resulting developments in global oil markets will have drastic adverse effects on FDI inflows to the Arab world. The study estimates the total loss of FDI inflows for the Arab region to be between $7.1 and $17.2 billion soon. The report said this colossal drop in investment would incur a high economic and social cost for many Arab economies.
The study also shows that the sectoral distribution of the loss in FDI will be uneven in terms of size, expecting manufacturing and mining to be hit particularly hard, followed by construction and education. It concludes that the most affected country will be Iraq, followed by Egypt, Saudi Arabia, Mauritania, and Tunisia, while Kuwait and Lebanon are expected to be less affected.
The negative impact of Covid-19 on the regional and global flow of FDIs has been drastic and much more than its impact on global economic growth and trade. This expected severe impact on FDI flows is attributed to their sensitivity to supply and demand sides and investment policies adopted by some countries when the pandemic hit.
On the supply side, the decline in MNEs earnings has led to the collapse of reinvested earnings in investment recipient countries. Also, the collapse of financial markets and the fear that foreign companies would exploit the low values of local companies have led to revision and shelving of many M&A operations, forcing some governments to apply more stringent restrictions on such operations. Infrastructure projects have also been negatively affected, as FDI is the main financier of such projects.
The Arab world is no exception to this downward trend in FDI flows. Its situation may be more difficult given the developments in global oil markets and their direct or indirect impact on these investments. However, there are still windows of opportunities for new regional FDI to integrate value chains among Arab countries by enhancing inter-Arab integration. This will enable these countries to avoid future risks of supply chain disruptions under potential crises similar in their impact to Covid-19.
It is also possible to see a silver lining as FDI flow has been increasing in the region in healthcare, education, and information technology. This could lead to more regional integration between physical and human capital.