The UN Conference on Trade and Development (Unctad) anticipates global foreign direct investment (FDI) levels will fall by up to 40% in 2020, according to its World Investment Report 2020. This comes as the Covid-19 pandemic causes upheaval in economies across the world, on top of other factors such as disruption caused by the new industrial revolution.

The impact of the pandemic on FDI flows is threefold, explains Unctad’s director of investment and enterprise James Zhan.

First, from a supply perspective, the measures taken to contain the virus have prevented existing investment projects from reaching their performance goals. Second, what looks set to be the worst global recession since the 1930s could lead multinational enterprises to reassess new projects. And third, on the policy side, governments are increasingly introducing investment restrictions.

The downward revisions of profit earnings forecasts among leading global companies are also an early warning sign that FDI levels are set to suffer, according to Zhan.

“We surveyed the profit earnings forecasts of the top 5,000 companies in the world that carry out an overwhelming proportion of international investment,” says Zhan. “They have downward revisions of profit earnings by an average of 37%, and according to our statistics, over the past few years the reinvestment of earnings accounted for more than 50% of [investment in global] FDI. This means that a lot of companies that reinvest won’t be doing so.”

A V-shaped or U-shaped recovery?

The Unctad report shows that the effects of Covid-19 can already be seen on FDI markets. Compared with the same period in 2019, global announcements of new greenfield investment projects and of cross-border mergers and acquisitions (M&A) fell by more than 50% in the first quarter of 2020. Project finance in new deals fell by more than 40%.

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FDI flows are expected to recuperate towards the beginning of 2022, after an anticipated further decline of 5–10% in 2021.

“This sounds quite pessimistic compared with predictions by the World Bank and the World Trade Organisation that expect a V-shape recovery to take place at the end of this year or early on in 2021 for global investment and trade,” says Zhan.

A lag of 6–12 months between trade and investment recovery, along with increases in investment restrictions, are the main reasons behind this difference in recuperation times, with the Unctad predictions showing a U-shaped recovery.

Challenges and transformation ahead

The Covid-19 pandemic has accelerated a process of transformation in the international production system and global value chains, explains Zhan, on the 30th year of Unctad’s Global Investment Report.

“There were two decades of rapid and steady growth for global value chains and the international production system, and then the past decade has been a decade of stagnation in FDI, with an average annual rate of expansion of about 0.8%,” he says. “This stagnation was the quiet before the storm; globalisation reached an inflection point and Covid-19 has been a catalyser that marks the new era of the international production system and for global value chains.”


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He adds that this era of transformation will be shaped by ‘the new industrial revolution’, with international production marked by three main technologies: automation powered by robotics; the digitalisation of supply chains; and additive manufacturing, such as 3D printing.

These challenges will run alongside those of increasing protectionism and a push towards regionalisation, as well as the imperative to meet the UN’s Sustainable Development Goals, explains Zhan.

Four transformation trajectories

The Unctad report highlights that the changes brought by new technology, policy and sustainability trends can be classified in four different trajectories: reshoring, diversification, regionalisation and replication.

Reshoring will lead to shorter and less fragmented value chains and a higher geographical concentration of value added, which will impact economies that depend on export-led growth and global value chain participation, the report states.

The push for diversification and digitalisation will widen the distribution of economic activity and will bring with it a challenge to capture the value in global value chains. However, the report points out that this will in turn bring new opportunities to participate in these chains.

Regionalisation will entail a decrease in the physical length of supply chains but not to their fragmentations. It will also heighten the importance of cooperation between neighbouring countries in industrial development, trade and investment.

Replication will change the model of investment promotion focused solely on large-scale industrial activities, the report concludes.

Additional factors

 The febrile political climate in many key countries for FDI adds to the already challenging environment brought about by the Covid-19 pandemic, says chief economist at NS Media Group Glenn Barklie.

“The dreary outlook for FDI is unsurprising, given how the coronavirus pandemic has swept across the globe,” he says. “There are many additional political factors – such as the US elections and Brexit – that will also impact investor sentiment. Increased protectionism measures should prevent a spike of M&A deals. In terms of greenfield FDI, recovery in many sectors, such as aerospace, automotive and tourism, will be much slower. Growth will be spurred by ICT – particularly e-commerce and fintech – with likely increased activity in AI and machine learning functions.

“It will be interesting to see if project sizes – in terms of job creation and capital investment – begin to shrink as companies reassess their working practices,” he adds.

As the world starts to ease lockdown restrictions and welcome the so-called ‘new normal’, time will tell how the FDI universe tackles the challenges exposed in the Global Investment Report 2020, towards a decade of transformation within the scope of the new industrial revolution and towards sustainability.