COVID-19 and the global contraction in foreign direct investment
By Adnan Seric, Research and Industrial Policy Officer at the Department of Policy Research and Statistics (PRS) at the United Nations Industrial Development Organisation (UNIDO), and Jostein Hauge, Research Fellow at the Centre for Science, Technology, and Innovation Policy (Institute for Manufacturing) at the University of Cambridge
This blog is part of a series on tackling COVID-19 in developing countries. Visit the OECD dedicated page to access the OECD’s data, analysis and recommendations on the health, economic, financial and societal impacts of COVID-19 worldwide.
COVID-19 is uprooting economic globalisation. As both supply and demand are experiencing simultaneous shocks due to lockdown measures, global production networks and international trade flows are being disrupted on a scale never seen before. Disruptions to flows of portfolio and foreign direct investments (FDI) — which are part and parcel of economic globalisation — are no exception. According to the International Monetary Fund, investors removed over US$100 billion of portfolio investment from developing countries since the beginning of the COVID-19 crisis, the largest capital outflows ever recorded. According to the UN Conference on Trade and Development (UNCTAD), global FDI flows are expected to contract by 40% during 2020/21.
The contraction in FDI is going to hit developing countries particularly hard, mainly for two reasons. First, FDI inflows to developing countries are expected to drop even more than the global average seeing that sectors that have been severely impacted by the pandemic account for a larger share of FDI inflows in developing countries. Second, developing countries have become more reliant on FDI over the last few decades — FDI inflows to developing countries increased from US$14 billion to US$706 billion (current prices) between 1985 and 2018, as seen from Figure 1. As a share of world FDI inflows, this represents an increase from 25% to 54%. Continue reading “COVID-19 and the global contraction in foreign direct investment”