by Joseph Joyce
The sharp contraction in economic activity in the first half of 2020 due to the COVID pandemic was followed by a slow and uneven recovery in the second half of the year. The decline slowed global trade and capital flows, although not as much as initially expected. The economc slowdown also lowered investment income and remittances, the two main forms of international factor income payments. (There is also rent received on property.) Will these also recover as economic growth resumes?
Net investment income appears in the current account of the balance of payments as part of net primary income. For most countries FDI income is the largest component of investment income, followed by portfolio (equity and debt) income and other (mainly bank) income. The largest net recipients of FDI income are the U.S., Japan, Germany and France, all home countries for multinationals. Emerging markets economies that attract FDI flows, such as India and China, are major net payers of FDI income. Ireland, which attracts multinationals with its low corporate tax rates and its proximity to continental Europe, also records large FDI income deficits.
The latest issue of the OECD’s FDI in Figures reports FDI income for 2020 for the OECD area. Total FDI receipts were $1.80 trillion and payments were $1.04 trillion, which result in net FDI income payments of $418 billion. Almost three-quarters of the OECD income earnings were paid out to the parent countries, with the remainder reinvested in the host countries.
As expected, the 2020 FDI income flows represented declines from those of 2019, which the OECD attributed to the pandemic. The percent changes—a drop in receipts of 16% and of 15% in payments—were similar to those recorded during the global financial crisis. Moreover, the 2019 earnings were below those of 2018 due to slowing economic growth.
A recovery in FDI income will depend in part on the future course of FDI flows. Global FDI flows decreased by 38% in 2020 to $846 billion, their lower level since 2005. When scaled by GDP, they represented 1% of world GDP, the lowest relative level since 1999. In the OECD area, much of this decline was driven by disinvestments from Switzerland and the Netherlands, which serve as financial centers for companies with headquarters in other countries. The OECD reports a rise in cross-border mergers and acquisitions in the second half of 2020 and the first quarter to 2021.