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How COVID-19 is negatively impacting global FDI – UNCTAD

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As the world reels under the spread of COVID-19 with more than 100,000 people infected, with forecasts that say the infection would get worse, global foreign direct investment is being negatively affected, according to the UN agency on trade, UNCTAD.

UNCTAD reports that the economic impact of Covid-19 will be uneven, with the effects caused by negative demand shocks concentrated in those economies most severely hit by the epidemic, and effects caused by production stoppages and supply chain disruptions felt especially in economies that are closely integrated in global value chains centered around China, the Republic of Korea and Japan, as well as South-East Asian economies.

It highlights among other things that the outbreak and spread will negatively affect global foreign direct investment (FDI) flows. With scenarios of the spread of the epidemic ranging from short-term stabilization to continuation throughout the year, the downward pressure on FDI will be -5 per cent to -15 per cent (compared to previous forecasts projecting marginal growth in the FDI trend for 2020-2021).

The investment impact will be even more concentrated, it noted, adding that it will be strongest in those countries that have been forced to take the most drastic measures to contain the spread of the virus.

“The outbreak of Covid-19 will slow down capital expenditures of multinational enterprises (MNEs) and their foreign affiliates. Production locations that are closed or that operate at lower capacity will temporarily halt new investment in physical assets and delay expansions,” UNCTAD said in a report copied to ghanabusinessnews.com.

UNCTAD notes further that greenfield investment projects that are already ongoing will also be affected by this.

“However, as new investment projects have a long gestation period and a lifecycle that can span decades, the immediate impact on existing investments and investment projects under construction is likely to be limited.

Announcements of new greenfield projects (normally reported in UNCTAD’s data for the purpose of projecting future trends) could be delayed. Similarly, mergers and acquisitions (M&As) could see a slowdown. Like greenfield projects, M&As are generally long-term commitments to overseas markets. Nevertheless, data for February show a significant drop in the completion rate of cross-border acquisitions, to below $10 billion from normal monthly values of $40-50 billion,” it said.

It indicates that the epidemic will affect market-, efficiency- and resource-seeking investment alike. Market-seeking investment and FDI projects in extractive industries could be delayed worldwide as a result of negative demand shocks. For now, the demand shock is most serious in China; for example, Toyota reported a 70 per cent drop in sales in China in February. But the impact is already visible in major markets beyond China as well, especially in consumer-facing industries such as travel and tourism, retail and wholesale, and other consumer cyclicals, it added.

UNCTAD stated that the negative effect on efficiency-seeking investment – in production facilities that are closely integrated in global value chains (GVCs) – will be concentrated primarily in China and East and South-East Asia at first.

“However, they could rapidly spread outside the region through GVC linkages. The transmission will concern both economies that feed intermediate goods and services into China’s exports, and those that rely on inputs of intermediates from China. For example, Fiat Chrysler Automobiles has temporarily stopped production of its Fiat 500L model at a plant in Serbia due to disruption in the supply of audio system components from China,” it added.

By Emmanuel K. Dogbevi

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