Security concerns have prompted about 25 countries, including members of the European Union, to implement screening mechanisms for foreign direct investment (FDI) amid COVID-19, says UNCTAD’s World Investment Report 2021.
It highlights that the COVID-19 pandemic has deteriorated FDI in structurally weak and vulnerable economies. Although inflows in least developed countries (LDCs) remained stable, greenfield announcements fell by half and international project finance deals by one third. Foreign Direct Investment flows to small island developing states (SIDS) fell by 40%, and those to landlocked developing countries (LLDCs) by 31%.
As a comparison, in 2020, the FDI trends varied significantly by region; wherein in developing regions and transition economies, they were relatively more affected by the impact of the pandemic on investment in global value chain-intensive and resource-based activities. Asymmetries in fiscal space for the roll-out of economic support measures also drove regional differences. FDI flows to Europe declined by 80%, while those to North America fell less sharply (-40%). The decline across developing regions was uneven with 45% in Latin America and the Caribbean, and 16% in Africa.
In respect to 2021, the report says FDI flows are expected to bottom out and recover some lost ground with an increase of 10% to 15%. James Zhan, UNCTAD’s director of investment and enterprise, said this would still leave FDI some 25% below the 2019 level. “Current forecasts show a further increase in 2022 which at the upper bound of projections bring FDI back to the 2019 level,” he said. “Prospects are highly uncertain and will depend on, among other factors, the pace of economic recovery and the possibility of pandemic relapses, the potential impact of recovery spending packages on FDI and policy pressures.”
Zhan said increased expenditure on both fixed assets and intangibles will not translate directly into a rapid FDI rebound, as confirmed by the sharp contrast between rosy forecasts for capex and still-depressed greenfield project announcements.”
Security screening of investment proposals adopted by countries, such as Australia, Korea, Japan, UK, US and Canada, as well as India are meant to target Chinese companies after COVID-19 was first detected in Wuhan. The report stated that the trend towards more investment regulations and restrictions related to national security intensified in 2020 and in the first quarter of 2021, including in reaction to the pandemic.