Foreign direct investments (FDI) have plunged globally by 35% to $1 trillion in 2020 from $1.5 trillion in 2019 according to the UNCTAD World Investment Report 2021, being the lowest since 2005 and a little worse than the global financial crisis impact on world economy that plunged by 33%. FDI plummeted in developed and transition economies by 58% in both while showed a moderate decrease by 8% in developing economies due to resilient flows in Asia, up by 4%.
FDI comprises of equity flows, reinvested earnings and intra company loans across the countries. The slowdown in projects like green field investments, cross border M&A transactions and international project finance resulted in less equity flows in countries during pandemic. Intra-company loans were negative in many countries because of changes in response to Covid crisis in the financial position of multi-national enterprises (MNE) and their lower profits affected reinvestment earnings in 2020 YoY.
In chart I, Greenfield investments in developing countries fell by 44 per cent in value, and international project finance deals by 53 per cent compared with 16 per cent, 28 per cent in developed countries. The cross border M&A deals marginally rose by 2% in developing nations compared to a fall by 11% in developed nations. These different types of investments are important for expanding productive capacity and infrastructure in a country that would lead to sustainable recovery.
Chart I – UNCTAD (United Nations Conference on Trade and Development) World Investment Report 2021.
(UNCTAD is a permanent inter-governmental body, a part of UN Secretariat with goals to maximise the trade, investment and development opportunities of developing nations and assist them in their efforts to integrate into the world economy on an equitable basis. It was formed in 1964 headquartered in Geneva, Switzerland. The theme for UNCTAD 2021 was “Investing in Sustainable Recovery”).
According to the report, FDI’s inflows to developing economies have fallen less steeply by 8% to $663 billion in 2020 as against $723 billion in 2019. While the developed economies have fallen steeply by 58% to $312 billion in 2020 compared to $749 billion in 2019. Developing Asia, already the largest FDI recipient region accounting for more than half of global FDI registered a rise of 4 per cent to $535 billion in 2020.
China has been a catalyst in developing Asian region with rising FDI inflows at $149.3 bn surging by almost 6% in 2020 due to its rising purchasing power, well-developed infrastructure and favourable investment climate. The region has stood out as an attractive destination for international investment throughout the pandemic as seen in Chart II.
Chart II – UNCTAD World Investment Report 2021
Global fall in FDI outflows was witnessed in Hong Kong, Europe, US, Japan, France, Canada, UAE, South East Asia, Singapore and Latin America due to negative reinvested earnings, withdrawal of loans and corporate changes amidst pandemic. However, China had the most FDI outflows due to its Belt and Road initiative expansion in other countries, led to resilient outflows amid pandemic. FDI outflow from Thailand more than doubled to $17 billion, mostly in financial services and manufacturing in neighbouring countries. Thai companies actively pursued cross-border M&A purchases (for instance, Bangkok Bank acquired Bank Permata in Indonesia for $2.3 billion).
Lockdown measures, successive waves of COVID-19 infection, supply chain disruption, falling corporate earnings, economic uncertainties and delayed investment plans were key reasons for the contraction, not just in Bharat but across the globe. This has slowed down existing investment projects and prospects of a recession led MNE’s to reassess the projects.
Bharat’s FDI Trend
Bharat was one of the top 5 recipients of FDI at $64.1 billion in 2020 pushed up from its 8th rank in 2019, due to a $2.8 billion investment by Amazon in Information and communication technology (ICT) industry. Also, the Jaadhu (a subsidiary of Facebook) acquired Reliance Jio Platforms for $5.7 billion. Pandemic boosted demand for digital infrastructure that led to higher values of Greenfield FDI project announcements targeting the ICT industry, rising by more than 22%.
Bharat’s FDI equity inflows has grown by 19% (in $US) in FY 2020 YoY. The share of top investing countries contributing equity inflows in Bharat have been Mauritius, Singapore, USA, Netherlands, Japan, UK, Germany, UAE, Cyprus and Cayman Islands amounting to total of US $59,636 million as on March 2021.
Chart III – Department for Promotion of Industry and Internal Trade (DPIIT).
Top 3 sectors attracting most FDI inflows in Bharat are Services, Computer hardware and software and telecommunication. The Production Linked scheme designed to attract manufacturing and export-oriented investments for priority sectors shall drive a rebound of investment in manufacturing sector.
Chart IV – DPIIT. Gujarat, Maharashtra and Karnataka have fetched the most FDI inflows in Bharat.
The UNCTAD report says FDI inflows in Asia are expected to increase in 2021, outperforming other developing regions with a projected growth of 5–10 per cent. Investment in tourism-related industries and labour-intensive manufacturing might remain weak in 2021, whereas investment in the digital economy, data centres, ICT and health care will be robust.
World economy will continue to attract foreign investment in high-tech industries, given their market size and their advanced digital and technology ecosystem. FDI in renewables is expected to continue to grow as countries push for greener energy sources.
The report says 2021 prospects seem favourable with higher inflows expected, will have positive spill overs for trade in goods and for commodity prices, which are both increasing. The anticipated growth spurt will likely increase corporate earnings with positive effect on the reinvested earnings component of FDI.
With major repercussions of the pandemic, deployment of vaccines, excess savings by households and pent-up consumer demand will allow countries to drive their economic growth. Flows in developing Asia has remained resilient. The region accounted for half of global inward and outward FDI. The governments in developed countries and higher-income emerging markets have responded to the COVID-19 crisis with large fiscal stimulus programmes, mostly in the form of transfers to distressed households and firms.
Such measures will have a positive result on FDI, particularly in the infrastructure, green and digital economy sectors. In addition, low borrowing costs, sufficient liquidity and buoyant financial markets worldwide are pushing up cross-border M&A activity.
The governments and policy makers are building back better and working upon their investment priorities to achieve sustainable recoveries by making robust supply chains, reconfiguring and diversifying their production channels, planning for investment on physical, green and digital infrastructure and figuring out project finance outlays for energy transition.
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