Foreign Direct Investment flows

Marta Zadravec

During the time of COVID-19, Foreign Direct Investment flows are expected to fall by 30% in 2020. Despite the government support and policy measures to help against COVID-19 pandemic, FDI flows are expected to drop.

According to the latest report from OECD, FDI could play an important role in supporting economies during and after the crisis. The FDI help could include financial support to their affiliates, assisting governments in addressing the pandemic, and through linkages with local firms.

Public health measures have caused economic disruptions that impact the foreign direct investment decision of firms. We learned from the past crisis that small and medium-sized enterprises show greater resilience due to their linkages with the financial resources of their parent companies.

According to the OECD Investment Policy Response, FDI is expected to decline sharply as a consequence of the pandemic and the resulting supply disruptions, demand contractions, and pessimistic outlook of economic actors.

In addressing the medical supply shortage, governments should leverage investor networks and investment promotion agencies. Some governments have already embraced imports of essential good, while some businesses have started producing medical essentials such as medical masks etc.

Moving forward, cross-border partnerships and collaborations between companies can facilitate finding long-term business solutions, such as ways to resume production while protecting workers’ health.

FDI is expected to face major drops as the supply chains are facing disruption. Meanwhile, capital inflows will be impacted as companies put some mergers and acquisitions (M&As) on hold.

As an example of earning in 2020 of large MNEs are expected to fall. According to the latest statistics data gathered from Refinitiv, there will be large year-over-year drops in earnings in the energy, consumer discretionary sector, industrials, and materials sectors. On the other hand, it is expected that there will be year-over-year increases in earnings in the health care, technology, and communications sectors.

Source: OECD from Refinitiv M&A database

The latest data from Refinitis M&A database shows a significant drop in completed M&A deals in the first quarter. However, there is no evidence on the deals withdrawn. That leads to the conclusion that investors are focused on closing deals rather than withholding from it. In the short term, equity capital flows will fall due to so many deals being put on hold, but it could mean that there will be an increase in the future as these deals are completed as the economy recovers.

To read the full report and in-dept insight into FDI investments, please visit the OECD official website.