by Joseph Joyce
The Return of FDI
Last year’s collapse in foreign direct investment was seen by many as the first stage of a period of retrenchment. Political pressure to “reshore” production, particularly of goods of national importance such as medical equipment, would cause multinational firms to rearrange their global supply chains to minimize foreign exposure. The data released for FDI in the first half of this year shows that in fact, foreign investment has rebounded from last year’s decline. But the largest growth rates were recorded for the upper-income countries, where FDI had fallen precipitously in 2020, and China. FDI also rose in middle-income countries where it had not fallen as sharply in 2020. Low-income countries, on the other hand, did not see any increase in foreign investment.
The October issue of the Organization of Economic Cooperation and Development’s FDI In Figures reports that global FDI flows rose to $870 billion in the first half of 2021. These flows were more than double those of the last half of 2020 and even higher than pre-pandemic flows. The largest increase was recorded in China, the world’s major recipient of FDI. But the second and third largest inward flows were recorded in the U.S. and the U.K. FDI inflows to the Group of 20 economies increased by 42% in the first half of this year as compared to the previous half-year. They were up in 83% in the OECD G20 countries, and 12% in the non-OECD G20, reflecting a split by income level.
Earnings on inward OECD FDI increased by about 30% in the first half of the year, from the previous half-year. About half of this amount was distributed to affiliates and the remaining funds reinvested. Earnings on outward FDI increased by 28%, and a larger share of these payments was reinvested rather than distributed. Compared to pre-pandemic levels, these earnings were 14% higher. Growth in the earnings of outward FDI was particularly noticeable in the U.S., France, Germany, Japan, and the Netherlands, all home countries of multinational firms.
Much of the FDI activity in the OECD economies consisted of mergers and acquisitions (M&As), as both M&A deal values and the number of acquisitions rose in the advanced economies. Many of these deals were made in the healthcare and technology sectors. M&A activity in the emerging market and developing economies, however, was much less.
Investment in greenfield projects was relatively low compared to pre-pandemic levels. Announced greenfield projects increase by 9% in advanced economies but fell by 6% in the emerging market and development economies. Corporations are holding back from building new production facilities in those countries that saw large amounts of investment in the 1990s and early 2000s.
The difference in FDI activity amongst countries also appears in the October issue of UNCTAD’s Investment Trends Monitor. It reports that FDI recorded growth rates of 117% in the high-income countries, 30% in the middle-income countries but a decline of 9% in the low-income group. The report cites “the duration of the health crisis and the pace of vaccinations, especially in developing countries” as “factors of uncertainty.” This report also noted the decline in greenfield projects.
A similar discrepancy in national growth prospects was noted by the IMF in the latest issue of the World Economic Report. The report stated:
Advanced economy output is forecast to exceed pre-pandemic medium-term projections—largely reflecting sizable anticipated further policy support in the United States that includes measures to increase potential. By contrast, persistent output losses are anticipated for the emerging market and developing economy group due to slower vaccine rollouts and generally less policy support compared to advanced economies.
As noted above, China is a conspicuous exception to the FDI trends for emerging market and developing economies. Megan Greene of Harvard’s Kennedy School, in a column “Don’t Believe the Deglobalisation Narrative” in the Financial Times, interpreted the data on the inflows of FDI and other financial flows as showing that there isn’t any evidence of a corporate retreat from China. The country continues to offer modern infrastructure for the movement of parts and goods, domestic supplier networks and a large labor force. Moreover, China’s own markets represent potential sources of profits if consumption expenditures increase.
FDI may have rebounded from its downturn in 2020, but the increase in investment flows has been distributed unevenly. Part of the unequal allocation is due to the virus, with a new mutation appearing in some African countries. As long as the virus evolves into more virulent strains, there will always be the threat of another outbreak. Only a truly global effort that includes the delivery of vaccines to those nations most in need can stop the cycle and reorient foreign investment.