Global foreign direct investment flows sank to their lowest level in 15 years in 2020 as the Covid-19 pandemic pummelled the world economy, according to the Organisation for Economic Co-operation and Development (OECD).
Global FDI sank 38 per cent year-on-year to $846 billion, the lowest since 2005, as the pandemic accelerated a steady decline, the Paris-based organisation said in a report. This represented only one per cent of the world gross domestic product (GDP), the lowest level since 1999.
“This decrease represents the lowest level of equity flows in OECD countries seen since 2005, mostly resulting from major divestments from Switzerland and the Netherlands, e.g. sales of existing stakes in companies residing in these two countries by foreign parents and to large decreases in FDI flows in the United States and other OECD countries,” the report said.
OECD economies contracted 4.9 per cent in 2020, the largest drop since 1962, as GDP slowed to 0.7 per cent in the fourth quarter. Almost all countries in the OECD suffered a fall in output last year, with declines ranging from 3.5 per cent in the US to 9.9 per cent in the UK.
China, one of the few major economies to register positive growth last year, overtook the US as the top destination for FDI globally as large swathes of the world’s biggest economy were shut down due to the pandemic, the report said.
China and the US received FDI flows worth $212bn and $177bn respectively.
India and Luxembourg, excluding resident special purpose entities, followed as the next largest FDI recipients.
Luxembourg, the US and Japan were the largest sources of FDI outflows, according to the report. The US has remained largely stable but Japan and China recorded a reduction of their FDI outflows in 2020.
A rebound in cross-border mergers and acquisitions activity, which started in the second half of 2020 and continued in the first quarter of 2021 in advanced economies, could boost FDI equity flows this year, the OECD said.
“Many companies turned to international transactions emboldened by lower borrowing costs, an expected drop in acquisition prices and rosier prospects with vaccines becoming available,” the report said. “This could boost FDI equity flows in 2021, unless the large divestments, which strongly impacted net FDI equity flows in 2020, continue in 2021.”
Last year, cross-border M&A deal values were driven by a few large deals in specific sectors: more deals took place in the healthcare and technology sectors in 2020 than in previous years, the report said.
FDI inflows to the OECD region decreased 51 per cent last year, partly because of significant divestments from Switzerland and the Netherlands, it said.
Outflows from the OECD area decreased 48 per cent to historically low levels not seen since 2005, also mainly due to major divestments by companies in the Netherlands.
FDI inflows to non-OECD economies in the G20 group of the world’s top economies only decreased by nine per cent, due to rebounds in China and India later in the year.
FDI outflows across a number of non-OECD G20 economies dropped by 49 per cent, the data showed.
The social and economic disruption wrought by the pandemic offers governments the opportunity to reset policy and push their countries on a more sustainable and inclusive path, the OECD said last month.
The global policy forum, which works with 100 countries around the world, said the crisis allows leaders to address the underlying challenges their countries face, such as income equality and economic regional divides, to deliver a vibrant economic recovery and promote higher quality growth.
The International Monetary Fund raised its global economic forecast for a second time this year as a result of quicker Covid-19 vaccination campaigns and fiscal and monetary support provided by governments and central banks, but warned policymakers about wider income gaps and an uneven recovery as richer countries rebound faster from the pandemic.
The global economy is now set to expand 6 per cent in 2021, compared with a previous 5.5 per cent estimate, the Washington lender said in its latest World Economic Outlook in April.