Letter IEDI n. 1004–COVID-19 Crisis and the Challenges of Foreign Direct Investment
In addition to the contraction in world GDP, the COVID-19 pandemic, along with the deterioration in the expectations of economic agents, has caused a delay and suspension in the implementation of investment projects worldwide, which will lead to a reduction in global flows of foreign direct investment (FDI), according to multilateral organizations.
Both Unctad projections, released in March, and OECD projections, made in May, suggest a fall in FDI flows between -30% and -40% in 2020, deepening the downward trend that has been ongoing for the last five years.
The main factor behind the 2020 downturn will be the decline in corporate profits, whose reinvestment has, since 2013, become an increasingly important component of FDI flows, accounting for more than half of 2018 inflows. According to Unctad and the OECD, the sectors most affected will be energy, basic industries, air transport and the automotive industry.
FDI flows may also be affected by actions to tighten the mechanisms for scrutinizing foreign investment in sectors and/or companies considered strategic for national security.
Previously concentrated in the defense and armament sector, ever broader mechanisms that authorize the screening and blocking of foreign investments now include, in a growing number of countries according to Unctad, areas of cutting edge technology such as: 5G, artificial intelligence, robotics and nano and biotechnology, as well as sectors like telecommunications, transport, energy, etc.
The pandemic has triggered warnings regarding potential acquisitions of sensitive assets in industries like pharmaceutical, biotechnology, medical-hospital equipment and devices, among others. Some countries have already started to take measures in this direction, reinforcing a trend under way since the second half of the past decade.
Some examples are: in the US, the approval of the Foreign Investment Risk Review Modernization Act (FIRRMA) in Aug/18 and of new rules by the Foreign Investment Committee (CFIUS) in Feb/20; and in Europe, since Apr/20, new regulation provides for the participation of the European Commission in the process of screening FDI in cases where it may affect “projects or programs of interest to the European Union for security or public order reasons.”
Germany, Spain, France and Italy have approved or are discussing additional restrictions, and so are Australia and Japan.
Faced with this movement, the OECD warns that tightening FDI screening mechanisms can increase uncertainty and costs and delay transactions, precisely when investment would be important to ensure countries' economic recovery.
Unctad argues that government packages should include investment support measures, such as the accelerated depreciation of capital expenditures in the post-pandemic period. The institution also notes that the COVID-19 crisis could speed up the loosening of links in global value chains and the relocation of activities to the country of origin (reshoring), driven by multinationals seeking to make supply chains more resilient.