The United Nations Conference on Trade and Development (UNCTAD) issued its thirtieth annual report on direct investment in the world for the year 2020 which predicts investment trends and expectations after the Corona pandemic and predicts a decrease in foreign direct investment because global foreign direct investment flows are expected to decrease by up to 40% in 2020 versus its 2019 value of US$ 1.54 trillion. This would make foreign direct investment less than one trillion dollars for the first time since 2005. FDI is expected to decrease by 5% to 10% in 2021 and that recovery will begin in 2022 with the return of FDI to the pre-pandemic state. The forecast depends on the long-term health crisis and on the efficacy of political interventions to mitigate its economic impacts. There is also uncertainty about the increase in geopolitical and financial risks and the persistence of trade tensions. The pandemic represents a shock in the supply and demand policy concerning FDI as a result of the closure procedures of the existing investment projects.
The largest 5,000 companies worldwide, which account for most of the global FDI, have witnessed a drop in their profits by an average of about 40%. This drop-in profits will affect the reinvested profits which represent on average more than 50% of the FDI. Indicators confirm the fast impact as new investment project announcements and mergers and acquisitions decreased by more than 50% in the early months of 2020 compared to last year. New deals in financing global projects have retreated by more than 40% though they are an important source of investment in infrastructure projects. Developing economies are expected to witness the biggest drop in foreign direct investment because they are more dependent on investment in global industries as they are unable to provide the same economic support compared with the advanced economies.
Among developed countries, FDI inflows to Europe are expected to drop by 30% to 45%, i.e. much more than North America and other advanced economies because the European Alliance has been affected more by the crisis due to their economies’ fragility. FDI inflows to Africa are expected to decrease by 25% to 40% in 2020. The negative trend will aggravate due to lower basic commodities’ prices. FDI inflows to Africa have indeed decreased by 10% and scored US$ 45 billion in 2019.
Inflows to developing Asia are expected to be severely affected due to its weakness in the supply chain. As such, FDI is expected to drop by 30% to 45%. In 2019 FDI inflows to developing Asian countries decreased by 5% and scored US$ 474 billion despite gains achieved by emerging economies in Southeast Asia, China and India.
FDI is expected to decrease by about 50% in 2020 in Latin America and the Caribbean due to increased political disturbances which negatively affect their economies. Besides, features of the FDI industry in the region also make it vulnerable to danger. Contrary to 2019 when foreign direct investment in Latin America and the Caribbean region grew by 10% and scored US$164 billion.
FDI inflows to the economies-in-transition are expected to decrease by 30% to 45% as the decline will largely nullify the FDI recovery noting that FDI grew by 59% in 2019 and scored US$55 billion after several years of low flows. Expectations for FDI in structurally weak and fragile economies is very negative. Many of the least developed countries depend on FDI in the extractive industries; many states of the developing small island geography depend on investment in tourism. Land-locked developing countries are disproportionately affected by the supply chain obstacles. In 2019, FDI inflows to the least developed countries decreased by 6% (US$ 21 billion). This represents 1.4% only of global FDI.
Despite the significant decline in global FDI inflows during the crisis, the international production system will continue to play an important role in economic growth and development. Global foreign direct investment inflows will remain positive and will continue to add to the existing FDI stock which scored US$ 36 trillion at the end of 2019.