Rise in foreign direct investment (FDI) inflows to countries such as India, Hong Kong and China helped fuel a 4 per cent increase in flows into developing Asia to $520 billion in 2020, defying the Covid-19 pandemic that shrank global FDI flows by 35 per cent to $1 trillion from $1.5 trillion in 2019, according to a UN report.

Global FDI flows are expected to bottom out in 2021 and recover some lost ground with an increase of 10-15 per cent that would still leave FDI at about 25 per cent below the 2019 level, according to UNCTAD’s World Investment Report 2021, released on Monday.

“Developing Asia is the only region recording FDI growth, accounting for more than half of global inward and outward FDI flows,” said UNCTAD’s Director of investment and enterprise, James Zhan.

Growth in Asia

India posted a 27 per cent growth in FDI in 2020 to $64 billion that resulted in FDI in South Asia rising by 20 per cent to $71 billion, the report said.

“In India, robust investment in information and communications technology (ICT) and construction bolstered FDI inflows. Cross-border M&As surged 83 per cent to $27 billion, with major deals involving ICT, health, infrastructure and energy,” it said.

FDI fell in other South Asian economies such as Bangladesh (11 per cent decline) that rely on export-oriented garment manufacturing. Inflows in Sri Lanka contracted by 11 per cent while Pakistan posted a 6 per cent decline.

A recovery in FDI flows to Hong Kong, which increased by 62 per cent in 2020 to $119 billion, and a 6 per cent increase in flows to China to $149 billion resulted in an overall 21 per cent increase in flows to East Asia to $292 billion. China’s growth was driven by technology-related industries, e-commerce and research and development and reflected the country’s success in containing the pandemic and its rapid GDP growth recovery, the report said. In South Korea, however, FDI declined by 4 per cent to $9 billion.

“FDI inflows to Asia will remain resilient as the region has stood out as an attractive destination for international investment throughout the pandemic,” it said.

There was, however, a sharp dip in investments in new project activity. In developing countries, the number of newly announced greenfield projects fell by 42 per cent and international project finance deals, that are important for infrastructure development, declined by 14 per cent.

“These investment types are crucial for productive capacity and infrastructure development and thus for sustainable recovery prospects,” said the acting UNCTAD Secretary-General Isabelle Durant.

Developed nations

The developed world accounted for a large part of the fall in global flows in 2020 with FDI flows to Europe declining by 80 per cent and North America by 40 per cent. The fall in FDI flows across developing regions, with the exception of Asia where flows rose by 4 per cent, was uneven.

There was a 45 per cent fall in Latin America and the Caribbean and a 16 per cent decline in Africa, the report stated.

“The pandemic further deteriorated FDI in structurally weak and vulnerable economies. Although inflows in LDCs remained stable, greenfield announcements fell by half and international project finance deals by a third. FDI flows to small island developing states fell by 40 per cent, and those to landlocked developing countries by 31 per cent,” the report said.

Multi national enterprises (MNEs), the key actors in global FDI, are, however, not doing too badly. Despite the 2020 fall in earnings, the top 100 MNEs significantly increased cash holdings, attesting to the resilience of the largest companies.

“The number of state-owned MNEs, at about 1,600 worldwide, increased by 7 per cent in 2020, with some new entrants resulting from equity participations as part of rescue programmes,” the report stated.

 

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