FDI fell by 42% in 2020. What’s next in 2021?

Global foreign direct investments (FDI) collapsed in 2020, with a decrease of 42% from $1.5 trillion in 2019 to an estimated $859 billion, according to an UNCTAD Investment Trends Monitor, as the coronavirus pandemic and lockdown influenced economic activity.

By Claudiu Vrinceanu

Such a low level was last seen in the 1990s and is more than 30% below the investment trough that followed the 2008-2009 global financial crisis.

UNCTAD says uncertainty about the COVID-19 pandemic’s evolution and the global investment policy environment will continue to affect FDI flows in 2021. For developing countries, the prospects for 2021 are a major concern.

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In Romania, based on the most recent date, foreign direct investments decreased by 60% in 2020.

Despite projections for the global economy to recover in 2021 – albeit hesitant and uneven – UNCTAD expects FDI flows to remain weak due to uncertainty over the evolution of the COVID-19 pandemic.

The organization had projected a 5-10% FDI slide in 2021 in last year’s World Investment Report.

“The effects of the pandemic on investment will linger,” said James Zhan, director of UNCTAD’s investment division. “Investors are likely to remain cautious in committing capital to new overseas productive assets.”

Investment to Europe dried up and flows fell by two-thirds to -$4 billion. In the United Kingdom, FDI fell to zero, and declines were recorded in other major recipients. Sweden saw flows double from $12 billion to $29 billion. FDI to Spain also rose 52%, because of several acquisitions, such as private equities from the United States Cinven, KKR and Providence acquiring 86% of Masmovil.

Among other developed economies, flows to Australia fell (-46% to $22 billion) but increased for Israel (from $18 billion to $26 billion) and Japan (from $15 billion to $17 billion).

According to another report from the Vienna Institute for International Economic Studies (wiiw), foreign direct investment inflows to countries in Central, Eastern and Southeast Europe deacresed by 58% year-on-year in the first half of 2020.

Solutions for more FDI in Romania

Romania currently has two state aid schemes that contribute to the attraction of FDI. The first is the scheme for new (greenfield) investments which has the role of attracting new investments with a major economic impact of at least EUR 1 million, while the second scheme is designed to support investments that lead to the creation of new jobs.

Internationally, specialists are discussing how states and communities could rethink investment incentives and seek more cost-effective solutions. Infrastructure subsidies and workforce training are just two examples. The former are usually implemented to increase the accessibility and attractiveness of a target location for investors. This may include the construction of roads, railways or ports that are designed to meet the investor’s needs. As for the latter, if a foreign investment brings a new type of operation to the host country, there could be potential problems with the supply of skilled labour.