Is There a Future for FDI?—Update

The Organization of Economic Cooperation and Development (OECD), which recently reported on foreign direct investment (FDI) in 2019, has released a new study on the impact of the pandemic on future FDI. The OECD points out notes that FDI flows before the pandemic have been on a downward trend since 2015, and FDI flows in 2018 and 2019 were lower than any years since 2010, suggesting that the decline in FDI will not be reversed when the pandemic eases. This comes as policymakers in the U.S. and elsewhere show concern over Chinese acquisition of domestic firms, and the Chinese government clamps down on Hong Kong’s autonomy.

The OECD report’s authors have optimistic, middle and pessimistic scenarios on the effectiveness of public health and economic policy measures, and their impact on FDI flows in the medium term. Under the optimistic scenario, public health measures are effective in controlling the spread of the virus and economic policies successful in restoring economic growth in the latter half of this year. FDI flows would fall between 30% to 40% in 2020 before rising by a similar amount in 2021 to their previous level. Under the middle scenario, public health and economic policy measures are partially but not completely effective, and FDI flows fall between 35% to 45% this year before recovering somewhat in 2021, but would remain about one-third below pre-crisis levels.  The pessimistic scenario is based on the need for continued measures to contain the virus and repair extensive economic damage, which would lead to drop in FDI flows of over 40% this year and no recovery in 2021.

The impact of an extended decline in FDI will be particularly severe for emerging market and developing economies, which have already seen the reversal of portfolio capital flows. The OECD report points out that the primary and manufacturing sectors, which account for a large proportion of FDI in these economies, have been particularly hard hit during the pandemic. Moreover, the corporate earnings that are a major source of the funding of new FDI expenditures by multinational firms fell in 2019 and will decline further this year.

The decline in FDI will be significant for these economies. FDI flows are usually more stable than other forms of capital flows, but even FDI collapses when it by global turbulence. The parent companies often have the financial resources to assist affiliates in troubled economies, but no advanced economy is escaping the downturn. The decline in spending not only affects the employees in the host country, but also harms domestic suppliers and others who benefit from the activities of the multinational.

The pandemic is also motivating governments to monitor and restrict the acquisition of domestic firms. Several U.S. Senators have urged Treasury Secretary Steven Mnuchin to limit the purchase of U.S. firms with depressed stock prices by Chinese firms. The U.S. has already limited Chinese acquisition of domestic firms in critical sectors, and that will now most likely be expanded to include medical goods and services. Portfolio investment is also under scrutiny. The U.S. Senate has passed a bill that requires foreign companies to allow their records to be audited by the Public Company Accounting Oversight Board in order to sell stock or bonds in the U.S., and the House of Representatives is considering a similar bill. While the bill will affect all foreign firms, it clearly is aimed at Chinese firms.

The U.S. is not alone in acting to restrict foreign investment. Several European countries have mechanisms to review foreign investment in order to protect critical technologies, as do India and Australia. These will now be extended to include medical goods and services. The European Union’s competition chief, Margrethe Vestager, has urged the governments of the EU’s members to purchase shares of ownership stakes in companies in order to prevent foreign takeovers.

FDI to China is also likely to suffer from the Chinese government’s enactment of a new security law for Hong Kong. U.S. Secretary of State George Pompeo’s response that the U.S. will no longer consider Hong Kong to have significant autonomy will not only imperil Hong Kong’s status as an international banking center, but also its role as the major source of FDI for China. The Chinese government’s willingness to forsake that source of funding suggests that it no longer believes that FDI has a critical role to play in the country’s economic development.

FDI, then, faces a range of barriers. The pandemic puts multinational plans for expansion, already scaled back, on hold. The division into a world of competing U.S. and Chinese spheres of influence further reduces the scope of foreign investment. Potential host nations can only hope to be viewed as a feasible site for production by multinationals once the world economy revives.

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4 thoughts on “Is There a Future for FDI?—Update

  1. ltr

    FDI to China is also likely to suffer from the Chinese government’s enactment of a new security law for Hong Kong….

    [ I would say, just the reverse. The new security law was necessary to protect against subversion in Hong Kong, and the protection will make foreign investment there more valuable and attractive. Hong Kong is part of China and always will be and as a Vanguard or Apple or Starbucks or Tesla have been and are showing investment potential is endless. The opening of China will not be reversed or slowed. ]

  2. ltr

    August 24, 2020

    U.S. abandoning globalization will hurt its businesses: Harvard Business Review
    “Deglobalization sounds good until you need to design a product in a competitive marketplace,” a report released by Harvard Business Review said, adding that globalization happens because it creates value and broadens a corporation’s capabilities.

    NEW YORK — U.S. multinational companies know that deglobalization of supply chains and de-coupling from China will affect their production capabilities in the United States and their competition with Chinese firms in the long term, according to Harvard Business Review.

    Though the COVID-19 pandemic has triggered calls for deglobalization, the fundamentals of the U.S. globalized economy — and China’s role within it — will not change, said a report * published on the magazine Thursday.

    The biggest tech firms in the United States rely on “a global scale of sales and operations to stay ahead of foreign rivals,” the commentary said. U.S. industries enjoying positive trade balances with China are high-value-added sectors, and China owns the world’s largest market for high-value-added industries, it added, taking the example of Apple, whose leadership would collapse if its business in China is stopped.

    “Deglobalization will not bring factories back to the United States,” as the products of most U.S. corporate foreign affiliates are sold where they are produced, the report said.

    “China is rapidly globalizing its industries by encouraging its higher-value-adding industries, such as power generation, construction equipment, and telecommunications systems, to supply overseas projects in the Belt and Road Initiative and to invest in foreign market operations,” it said.

    “Deglobalization sounds good until you need to design a product in a competitive marketplace,” the report said, adding that globalization happens because it creates value and broadens a corporation’s capabilities.


  3. ltr

    I do appreciate this short essay, since I understand properly now that what China has done in Hong Kong is decisively finish with the remains or really the illusion of Western colonial influence in China. As for China economically, just wander around eyes-wide as I try to do and the economic strength and vastness and potential will be evident.

    Terrific essay.

  4. ltr

    Xi Xinping has just made clear that China will insure high-level domestic investment from here no matter any foreign component.  From the beginning of Trump administration trade negotiations with China, what was clear to the Chinese was that the United States was going to try to limit Chinese technology development.  The Chinese dealt with this by not openly discussing the US intent, and US media gave this almost no attention.  The Chinese just quietly continued emphasis on technology investment and development.  Xi has changed the Chinese stance now, making open the emphasis on technology investment now and for years to come.  What the US intends will make no difference.

    There is a reason China has a space program, from landing on and currently exploring the far side of the moon, to having completed an advanced GPS (BeiDou) system, to positioning satellites nearly weekly, to readying a space station…  Shenzhen has just completed 5G coverage over the entire city, and city after city is building coverage and will follow in completion…


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