FDI in a post-COVID-19 world

September 2021  |  FEATURE | FINANCE & INVESTMENT

Financier Worldwide Magazine

September 2021 Issue

Foreign direct investment (FDI) is an integral part of an open and effective international economic system and a major catalyst for development. It plays a crucial role in the development of both emerging and mature economies.

Not surprisingly, the coronavirus (COVID-19) pandemic has dramatically impacted FDI flows in many regions. According to the UN Conference on Trade and Development (UNCTAD), global FDI flows for 2020 were $998.89bn, a fall of 35 percent from around $1.53 trillion in 2019 — the lowest level since 2005.

Developed countries have been most adversely affected by COVID-19, with FDI flows falling by 69 percent to an estimated $229bn, the lowest level in almost 25 years. Approximately 80 percent of the global decline can be attributed to developed countries.

FDI into developing economies also dropped but, at 12 percent, not as dramatically. In fact, they accounted for 72 percent of overall global FDI, the highest share ever recorded.

Meanwhile, FDI flows to transition economies sank by 77 percent to their lowest amount since 2002.

According to the International Monetary Fund (IMF), the global economy fell by 4.4 percent in 2020, leaving many countries experiencing recession and rising unemployment. There is a clear desire for FDI to help boost suffering economies, but a rebound in flows may not be on the cards just yet.

As we move into the next phase of the crisis, FDI flows are not expected to recover, notes Julien Chaisse, professor of law at City University of Hong Kong and president of the Asia Pacific FDI network. “FDI flows will remain low in 2021 as the global economy remains subject to strong pressures and uncertainties from the COVID-19 pandemic,” he suggests.

“The risks associated with the latest wave of the pandemic, the pace of deployment of immunisation programmes and economic support measures, the fragility of macroeconomic situations in key emerging markets and the uncertainty over the global policy environment for investment will all continue to affect FDI flows throughout 2021,” he adds.

Other issues are set to influence global FDI flows, not least the wave of countries tightening their merger screening mechanisms. 2020 saw changes to the control of foreign investments across a number of jurisdictions, including China, India, Canada, France, the US and the UK.

“The health crisis has helped to increase the use of screening mechanisms to oppose, sometimes publicly, transactions involving the sale of companies considered to be strategic,” says Dr Chaisse. “In Europe, for example, the common goal of all these mechanisms is to avoid massive divestitures of European companies and industries. Thus, for states which did not have complete filtering mechanisms, their governments have tried to put these in place, while in the meantime considering all the options to deal with situations where a foreign direct investment would create a risk to health, safety, security or public order in the EU.”

FDI creates employment while strengthening diplomatic and commercial relations among countries, however the prevailing sense of economic nationalism is likely to impact FDI flows. The design and implementation of FDI review mechanisms can increase cost, uncertainty and delay for transactions, and in extreme cases may put foreign buyers off entirely.

The decline in global FDI is expected to bottom out in 2021, and the real recovery will start in 2022, according to Dr Chaisse. “We will have to see if the epidemic resumes in Europe and the UK in the autumn,” he says. “On the bright side, strong transaction activity in the technology and pharmaceutical industries should support investment flows linked to mergers and acquisitions.”

The United Nations Conference on Trade and Development (UNCTAD) also expects 2021 to be a fallow year for FDI, with any recovery not expected to start until 2022.

With a good portion of FDI flows reliant on cross-border M&A for the foreseeable future, one counterpoint will be the need for acquirers to assess whether a merger review is necessary, and what the prospects for approval or otherwise may be. Much will depend on screening measures as governments seek to protect national companies from perceived predatory takeovers.

The rate of recovery will vary by location and sector, while regionalisation and the reshoring of FDI in certain industries is set to accelerate. The way individual governments handle the pandemic and the nature of domestic economic rebound will be contributing factors for inbound FDI.

Another hurdle for FDI recovery is the fact that the security and reliability of global supply chains has been put in doubt during the pandemic, leading more companies to consider localising their suppliers, rather than expanding their geographic reach. Questions about whether extended supply chains are too risky, expensive and inflexible may hold back cross-border investments.

Ideally, the private sector will play a key role in the post-COVID-19 recovery. As such, it is up to policymakers and political leaders to position their countries as attractive destinations for FDI in the months and years ahead.

© Financier Worldwide

BY

Richard Summerfield